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Economy, Opinion

Amid Global Headwinds, does the Current Naira Policy Serve Nigeria well?

Rap star and Philadelphia native Beanie Sigel’s smash 2004 hit single “feel it in the air” about a man with dark foreboding signs of some negative event about to take place, reminds one of happenings in the global and Nigerian economy lately.

Escalating U.S.-China trade tensions threaten to worsen global growth after President Donald Trump threatened to impose additional tariffs against China, last week.

President Trump also added for good measure on Friday that planned talks with China next month could be called off.

As the showdown between the U.S. and China persists, investors and emerging to developed markets, are struggling to gauge the likely outcome on the global economy and potential impact on asset prices.

Oil prices have already entered a bear market (defined as a 20% drop from recent highs), while global stocks have also sold off. Gold often seen as a safe haven however, is being bid as well as its digital counterpart Bitcoin.

Some countries are choosing to shoot first and ask questions later.

Three central banks across Asia Pacific delivered surprise interest-rate cuts decisions last week as policy makers took aggressive action to counter a worsening global economy.

The Reserve Bank of India lowered its benchmark rate by 35 basis points to 5.4 percent, its fourth cut this year.

New Zealand reduced its rate by 50 basis points to 1 percent; economists had forecast a 25 basis-point reduction, while the Bank of Thailand’s cut rates by 25 basis-points to 1.50 percent, the first in more than four years.

The U.S Federal Reserve’s rate cut last week paved the way for much of the easing by Central Banks in Asia, even as markets are pricing in the chance of another cut by the Fed in September.

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So why are these Asian countries so eager to have weaker currencies implied by the rate cuts?

For Thailand its surging currency brought about by a deluge of portfolio inflows, is hurting exports and tourism as the Thai baht (currency) has gained about 8 percent against the dollar in the past year.

In India, the fiscal authorities had earlier called for “significant” policy easing from the central bank to help revive growth, while New Zealand’s policy actions were in response to weakening domestic demand amid global trade tensions that threaten to curb exports and commodity prices.

Conventional monetary policy would suggest the Central Bank of Nigeria (CBN) would be in lock step with its Asian counterparts and begin an easing cycle in earnest given all the headwinds described so far.

However like with all things Nigerian, it is not quite so simple.

The CBN is strongly committed to a stable Naira policy, and as such has: kept its benchmark policy rate elevated at 13.5 percent, tightened liquidity through the cash reserve ratio (CRR) which is at 22.5 percent, and periodically sold Open Market Operation (OMO) bills at high yields to mop up excess liquidity and attract foreign portfolio flows.

In essence a mirror opposite of what the mentioned Asian countries are trying to engineer/achieve.

To understand the dilemma of the CBN it will help to pay attention to the structure of the 4 economies.

Exports of goods and services as a percentage of GDP in Thailand was reported at 68.9 percent in 2018, New Zealand 27.6 percent, India 19.7 percent and Nigeria 13.2 percent, according to the latest World Bank data.

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In essence Nigeria had the lowest export base among all four countries and even at that its exports are the least diversified with a single commodity oil responsible for some 95 percent of all export dollars earned.

So in essence Nigeria is using the proceeds of a single export commodity (whose price is becoming increasingly unpredictable amid a supply glut), to prop up its currency (the naira), in a battle it surely will not win in the long run, but clearly cannot afford to lose.

Perhaps it may make more sense to begin to nudge the country into becoming an export base for global manufacturers, which would probably entail a free floating naira trading closer to its Real Effective Exchange Rate (REER).

If that were to be the case then the CBN would not find itself in the current situation where it has been stuck in a tight monetary policy stance for much of the past 5 years, even as Nigeria entered and exited a recession, while remaining trapped in a low growth trajectory.

Larry Summers, a Harvard professor, and former U.S. Treasury secretary and White House economic adviser during the global economic crises of 2007/2008 sees a less than 50/50 chance that the U.S. enters a recession in the next 12 months.

Such a scenario if it comes to pass would likely clobber commodity prices from copper to crude, with a negative fallout for emerging markets like Nigeria.

In the last verse of “Feel it in the Air” a clearly paranoid Sigel asks “Can you feel the grim reaper floating’?”

For Nigeria, which is perhaps in a worse fiscal and monetary shape since the last recession in 2016, perhaps it’s time for the authorities to get paranoid, and begin to pull out all the reform policy stops.

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Source: businessdayng

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