Tuesday, August 04, 2015

The Emefielization of Nigeria's Economy

It of course took the international media to alert always docile Nigerians to the destruction of their own economy, when the Economist called out our Central Bank Governor cum social climber , Mr. Emefiele, in a bye line titled Toothpick Alert . As shameless as Nigerian dead brained elites class could be, Emefiele's response to a reasoned Economic argument was political and nationalistic, and held no intellectual water. True to type, he was answering the question by insisting that his policy of foreign reserve preservation was actually driven by a new found mandate of import substitution!

In an article, I recently wrote - Our Central bankers Have Gone Mad, I of course pointed out the emptiness of adopting a new mandate of import substitution (something totally within the realm of fiscal policy makers) as a monetary policy. In that article, I showed how the CBN was negating its 3 core mandate by engaging in economic escapism of defending the Naira that needed no such type of defense (more on what should have been done later). My dear friend, @DoubleEph further took the cloak off the complex subject matter in this recent blog of his on Naij.  It is worth reading here . While Feyi was waiting for the next Act, I dare say he need not wait. It happened already. The policy was dumb! And this policy is not without consequence..like:

1. Inflation & Economic Losses

  • HyperInflation Looms - http://www.knottedpost.com/news/nigeria-hyper-inflation-looms-as-central-bank-intensifies-forex-curbs/
  • Retailers feeling the heat - http://www.bloomberg.com/news/articles/2015-08-02/no-access-to-dollars-imperils-nigeria-retailers-stokes-prices
  • Food prices are rising - http://af.reuters.com/article/nigeriaNews/idAFL5N0YX4A520150611

2. Cost of Defending Naira - All these as Mr. Emefiele presided over transfer of Nigeria's hard earned reserve to speculators, the very ones he hates but who are beating him in the game, all in the name of defending the naira. Is that money not better spent to stimulate the economy? Heck, even import and add value is better than wiring funds to speculators overseas!

  • http://pulse.ng/money/cbn-apex-bank-spends-4-7bn-to-defend-naira-id3684700.html 
3. Pushing more Actors to Black Market - As explained by Feyi, the effect of the Emefielization of Nigeria's economy is more black market actors not less. Hence, the CBN governor is unwittingly creating more speculators by his actions. How dumb!

4. Destroying Nigeria's standing as Continental Center of Banking long term, as this policy exposes the uneven ideology of our economic managers. For investors, it is pretty scary!

Like a man set on a path of destruction and/or sabotage, Mr. Emefiele recent insistence that he is not done with Emefielization even at the risk of being wrong,  and followed up with its policy of rejecting dollar deposits implemented through the back door, confirms why most Bankers have zero respect for the man. Mr. Emefiele is not only an intellectual lilliputian, he is also adept at being stupidly stubborn at the detriment of the common man. Here he is answering a question that was never asked! Even if he thought that Naira should not trade below 200 naira to dollar parity, has he seriously explored the possibility that it is the perception of lack of supply not so much of high demand for dollars (driven supposedly by speculators) that is pushing the value of the naira down? When did currency speculation (otherwise called trading) even become a crime? Is this not a cardinal principle of free markets that assets should trade up and down as demand &  supply balances out? What is the unknown consequences of his pedantry interventions? 

Lets assume for a moment that Nigeria makes available exact same proportion of her reserve to FOREX trading. If a resource that accounts for 95% of our FOREX earnings is down more than 60%, then it makes sense for our currency to lose 50% of its value at least unless we devote more of our reserve to support it. Guess what that number will be (Aug 2014 to August 2015, looking at crude oil prices & naira value)? Well that will be 320 naira! It appears to me then that the 240 naira black market value was still more than fair to the naira, and any action meant to go after speculators was just pure scape-goating! The CBN and the Government should focus on the supply side not the demand!

How would the corrective measure to reversing a perception of lack, be to take panic actions that sends the very opposite signal (of reserve inadequacy) and thereby invite the bond hunters that will have no need for his banks to deposit when they lay siege on his currency? Would the right policy steps not be expansionary and not contracting? If the world thinks we are running out of dollars, would it not make more sense to figure how to increase the influx of dollars into the economy not restrict it? How does restricting exchange rate flows help expand the economy and source of FOREX beyond oil? Is his policy not killing Banking the one source of diversification in our economy? Nigerian banks were emerging regional and continental players, how does Emefielization help advance this beyond making foreign investors scared of our banking system and fleeing from our capital markets?

Here is someone trying to hold on to his very last dime to death instead of sowing and investing it, or even going after new source of income- does that even make common sense? That is suicide! This is exactly what Emefielization is! Economic Suicide. 

And even if the CBN had succeeded in stamping out speculators, at what cost to the economy? Is the lower GDP, Jobs, Productivity and loss in a major source of diversification truly worth it? Do no Harm- Destroying Banking Industry of Nigeria & Jobs, Contracting Economy as a Result of this feckless policy worth all the trouble? 

There is no doubt in my mind that Nigeria would have been better off with a more reasoned policy that does not call the attention of speculators. This policy will make FOREX available, work with Customs and Other agencies to ensure prompt remittances and stamp out smuggling thereby increasing intake, encourage intervention funds in Manufacturing, Agric and Export Oriented businesses even while lowering rate that will be stimulative - sending signals to speculators that no subsidy from the national reserve will go to them and their fools game, but the reserve will rather be devoted to stimulate the economy to generate more dollars to make the nation impermeable. This is what smart economists would do, not raise rates and start FOREX wars! 

I have heard some people blame the president because he did not have an economic team and Finance Minister. I say this is not too reasoned, because  this CBN Governor would have destroyed the best economic policy and his role is to stand in the gap while the President deliberates, not create a gap and make the economy worse. Look to Greenspan and Bernanke for example, as to what they did in the 2000, and 2008 recession even when the government was transiting from one party to another even as we just did in Nigeria. It is natural for appointments to take time, but it is not an excuse for the Central Bank to be stupid.

Conclusion: I know that the disciples of Emefielization are breaking out the glasses this week on the momentary crowning of the naira, as it contracts back to 210 naira on the parallel market, I will advise them to quickly file those glasses away! The market is about to exacts its revenge and it won't be pretty! And by the way, just about the time of publishing this, the reality was already dawning! Emefielization is a failure! May be the key lesson here is to never appoint a banker as a central banker, put an economists or a real business man in there, at least they understand how the world works beyond some phantom reason.

Shameless Plug: Interview on Impact Africa Radio, was released on Sunday. Thanks to TFAJ. Of course, I touched briefly on Mr. Emefiele's buffoonery! 


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