How Not To Go Back To Yesterday’s Halcyon Days, By Uddin Ifeanyi

In the wake of the Tinubu government’s removal of subsidies from the pump-gate price of petrol and deregulation of prices in the foreign exchange market, the economy has witnessed a rapid rise in the price of petrol and an economy-bending devaluation in the naira’s exchange rate. One reason successive governments held off from pursuing these initiatives in the past was the understanding that the people were going to suffer from diminished purchasing power, as the economy adjusted to these signals. Both initiatives were always going to lead to higher prices for just about everything. But with the vertiginous increase in petrol prices and the devaluation of the naira, the contingent response of prices across the economy has been swinging. The people appear to have come off these reform efforts far more poorly than the worst-case scenario most analysts had forecast.

Unsurprisingly, doubt is increasingly being expressed, especially amongst our intellectual elites, as to the propriety of the policies. On the positive side of the conversation, is the worry that whereas those who pushed for market-determined rates in both sectors had argued from an economic orthodoxy that sees freer price discovery processes signalling appropriate supply responses, a cheaper naira is yet to attract the inflow of dollars that this orthodoxy promised. Ignore for the purpose of this conversation the question as to why anyone will want to keep their savings or investments in naira-denominated assets, given the relative rates of inflation and the interests that banks currently pay on deposits. Consider instead why anyone contemplating the reforms recently enacted by the current Federal Government would rush to convert their dollars to naira — whether as portfolio investment or as direct investment.

If nothing else, the history of the Nigerian economy is spoiled with policy flip-flops: a whiff of root-and-branch reform initially threatens to propel the economy forward, only to be setback by a pining for yesterday’s stench. So, the savvy investor will take his/her time before being persuaded that the journey down the current reform path is irreversible. Investors will need to see that the additional reforms needed to reinforce freer prices are put in place. In the case of the naira’s exchange rate, this includes, as a matter of urgency, re-linking the Central Bank of Nigeria’s policy rate to retail rates in the financial services sector. In pursuit of this goal, we have seen the Central Bank narrow the spread on the rate at which it lends to and receives placements from banks. However, until the Central Bank removes the cap on how much banks may place with it — currently no more than N2 billion — the monetary policy rate cannot serve as an anchor for the economy’s cost of money.

Whether it is about the subsidy on petrol prices, or the removal of the cap on the naira’s exchange rate in the official market, previous policies had just about bankrupted the country. The Federal Government’s finances remain in tatters. But they were that way all through the Buhari years. As it has become obvious to just about everyone, the numbers on the Central Bank of Nigeria’s gross external reserve balance are a work of magical realism fiction.

Now given that banks will be better off warehousing their liquid funds at the MPR-300 lower rate of the apex bank’s asymmetric corridor, a removal of the cap on how much banks may place with the Central Bank will balloon the latter’s balance sheet. We saw this happen in those economies where quantitative easing was resorted to in compensation for lower bound interest rate regimes. Today, we are seeing inflation taper off in those jurisdictions, while their economies continue to chug on nicely. The Nigerian problem is that in pursuit of heterodox policies, the Central Bank here has already burdened its balance sheet and may not be able to bear additional costs. Just look at the numbers coming out of its audited account for 2022.

And this is where those who rail against the Tinubu government’s current initiative, from the position that previous policies are to be preferred, do the rest of us grave injustice. Whether it is about the subsidy on petrol prices, or the removal of the cap on the naira’s exchange rate in the official market, previous policies had just about bankrupted the country. The Federal Government’s finances remain in tatters. But they were that way all through the Buhari years. As it has become obvious to just about everyone, the numbers on the Central Bank of Nigeria’s gross external reserve balance are a work of magical realism fiction. Did it supports the official rate that Mr Godwin Emefiele advertised? No. It instead created the vulnerabilities that we are having to deal with today. Are we able to go back to that era? Yes. But only because we remain a dishonest folk.

Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.