As a fan of the movie genre “Western”….which typically depicts the nascent stages of development of the western United States largely between the 17th to 19th century, the plot of these movies frequently involve a “principled and incorruptible” Sheriff coming to town to challenge robbers, miscreants, and fraudulent characters who are wreaking havoc in the town.
More often than not, these fraudulent characters create a situation of lawlessness and near anarchy from which only the most corrupt and violent folks and their crooked associates benefit whilst the rest of the law abiding town residents live in fear, desperation or sheer mistrust in the system.
For those who are neither familiar with the “Wild West” nor interested in watching Westerns, maybe you can read the book by Hine and Faragher published in 2000 (Frontiers: A Short History of the American West) which discusses creation and defense of communities, use of land, developments of markets and formation of states west of the Mississippi)
Either way, whether you watch the history of the wild west or read about it, one resounding theme is that in a situation of chaos and anarchy only a few benefit, whilst the rest of the law abiding citizens suffer.
However when a principled leader with strong affinity to discipline and process arrives in town to challenge the chaotic situation, a lot of fireworks abound and it takes perseverance and communal unity for the rules and processes of the town to prevail and be enforced.
So what is the point of the preceding paragraphs?
Well, in today’s Nigeria, the economy can be said to be akin to the wild west where the most corrupt and violent benefit and the remaining law-abiding citizens live in fear, desperation and sheer mistrust of the system due to the impunity with which crooks, miscreants and fraudulent characters have arguably created a situation of lawlessness
If not, how can you explain a nation where
1) Executive management of listed companies frequently treat the concept of “building shareholder value” like it only exists in textbooks or is a foreign concept. Persistently offering poor investor relationship protocols which includes an apparent apathy to publishing detailed and concise financial results or for some not even publishing results at all.
or 2) Where large banks frequently lend money to individuals with questionable characters resulting in bad debt provisions whilst paying lip-service to small business owners http://theunion.com.ng/business-economy/non-performing-loans-fraudulent-facilities-threaten-banks-recovery-pursuit/
or 3) The frustratingly slow and lackadaisical attitude to creating a robust and centralized credit referencing and monitoring utility which meets global standards and facilitates the process of extending much needed credit to productive and job creating sectors of our economy such as agriculture or small businesses
See the section on challenges facing credit bureaus in Nigeria….. http://www.mfw4a.org/news/news-details/article/2823/credit-bureau-association-of-nigeria.html
or 4) Where a few politicians think it is their destined right to misallocate (or is it misappropriate) the national resources at the expense of their wards (……too many links on this one please just read the national dailies)
or 5) Where people are so mistrusting of the ability of Naira’s to fulfill one of the basic function of a currency (i.e. function of serving as a “store of value”)
Nigerians and their business partners appear to be so distrusting of the Naira to serve as a store of value resulting in foreign currencies (USD$, GBP and Euros) being used with high frequency and widely circulated in our financial system that some basic transactions are actually priced in these currencies
(Note that after the CBN’s warning in March 2015, a lot of perpetrators have hurriedly re-stated their pricing, however I found a website still priced in dollars. http://www.hillcrestschool.net/tuition.cfm )
We could go on and on about the general state of lawlessness in the Nigerian economy, as well as, the lack of consequence for criminal economic actions which tend to favor a few individuals at the expense of the general citizenry …….but hopefully you get the drift about the Nigerian economy being akin to the Wild West
However for this article, let us talk about the last point of the frequency with which foreign currencies are in circulation in our financial system
Some people will opine that
- “We are a nation hell-bent on consuming imported goods” and
- “We also earn Crude Oil revenue largely in USD$”
- So why can’t we use those foreign currencies in day to day transactions in Nigeria?
In summary, the Central Bank of a country is charged with ensuring monetary stability and foreign exchange management amongst other key objectives.
The CBN Act outlines the objectives of Nigeria’s central bank and it includes similar objectives as other Central Banks (i.e. ensuring monetary and price stability, as well as, Foreign exchange management (see link http://www.cenbank.org/AboutCBN/…….)
The failure of any Central Bank to achieve its key objectives occasionally results in a lot of pain for that economy which includes the risk of a high inflation rate in that country.
I’m assuming we are all aware that high inflation creates a vicious cycle……… notably rise in cost of living for the masses, spike in cost of goods input for businesses, likely up-shoot in financing costs for businesses, tightening of profitability/margins, mass retrenchment of employees as a result of aggressive cost management exercise, reduced appetite from private investment due to high risk of loss or negative ROI etc)
However, our dear CBN faces a peculiar challenge!
Specifically whilst most nations are proud to consume domestically produced goods and export excess capacity, in Nigeria however the reverse is the case…..we are import dependent for the most basic of items
See a dated CBN list of items for which forex was purchased http://www.cenbank.org/out/publications/pressrelease/ted/2009/cbn%20forex%20sales%20to%20end%20users%2016th%20to%2027th%20march%202009%20a.pdf)
WAIT, in case you missed it, STOP and PRINT IT OUT and take another look……..Rice, Wheat, Fish, Airline tickets, Generators, even the damn handsets being used daily are on the list of items being imported !!…..
For TV buffs, item number 377 on that list gives an amount being paid a prominent TV company for satellite space. So when next you are watching Chelsea, Arsenal, Manchester United, please spare some thought for your CBN governor.
Our high dependence on imported goods means that any sustained and persistent depreciation of the Naira against foreign currencies, results in an almost immediate impact on our inflation rate (i.e. cost of goods and services) driven by obvious reasons……even the CBN governor admits this much (http://www.cenbank.org/FeaturedArticles/2015/articles/NoPanicOverExchangeRate.asp)
Therefore our insatiable desire to consume imported goods puts additional pressure on the CBN to manage our FX reserves and manage inflation SIMULTANEOUSLY
Furthermore, the behaviour of some government officials do not help the CBN’s objective (especially the politicians actually).
The CBN in a study of the valuation trends of national currency appears to conclude that the rate of government spending is correlated to the Naira devaluation (see page 20) http://www.cenbank.org/out/2013/rsd/cbn%20occasional%20paper%2041%20inner.pdf
Most observers of the published version of FG annual budget will note that
- between 70% to 90% of Federal Government expenditure is for recurrent items
- the FG has been running a budget deficit for a number of years now and
- our politicians (who are the direct beneficiaries of FG recurrent expenditure) have a strong affinity for import driven consumption…….Think about those private jets, overseas trips and or overseas real estate purchases, all those foreign school fees etc. or better still go back to the above CBN FX end user list)
So you can appreciate the CBN’s suggestion that the FG’s spending pattern via our politicians is partly contributing to the pressure on the Naira
OK, enough lecturing and back to the jist
This issue of use of Foreign Currency for local transactions is one area where Nigeria’s economy meets the Wild West of pre-19th century
In this case, the new Sheriff in town is the newly elected president who appears to be reticent to let the Naira continue its perpetual downward spiral due to the belief that Nigerians should not suffer harsh effects of inflation.
At least, not suffer in the short term, given the rhetoric that Nigerians suffering inflation effect whilst pending the completion of the new government’s assessment of the dire financial situation of dwindling revenue, unpaid liabilities and unprecedented level of economic leakage does not do anyone any good.
To fight this Naira battle, our CiC is being aided by his willing deputy (none other than the CBN governor)
Just to put the intensity of this Naira FX shoot-out into perspective,
CBN Trade and Exchange department has issued over 15 notices relating to foreign exchange management in the 10 months (October 2014 to July 2015).
- This compared to only 3 notices for the preceding period or
- An average of 1.5 notices per month!
At this rate, some Nigerian banks may start to consider employing a dedicated team to interpreting and implementing CBN circulars on foreign exchange activity.
However, just like in the movies, each time the sheriff (CiC) and his deputy (CBN Gov) appear to be winning the “Exchange Rate stabilization war” the fugitives and speculators find a different avenue/loop hole.
See below 18 month trend of Monthly average BDC rates showing MoM changes. Including volatility between October 2014 and June 2015 as circulars keep flying out of the CBN as part of efforts to manage the Naira
Just to be clear I’m fully supportive of the CBN in its efforts to cleanse our financial system and achieve price stability.
However, whether the fixed exchange rate mechanism is the way to go is a discourse for another day.
At this time, I’m just enjoying the ongoing movie of how our elected sheriff (CiC) and his deputy are trying to manage an arbitrary fixed exchange rate mechanism, despite an insatiable nation-wide demand for imported goods and a national infrastructure which is beyond dilapidated and in dire need of repair.
Of course we hope that at some point (after September 2015 as we’ve been told to wait) the real work of nation building will commence
But in the interim, let me grab some ewa goin and la casera and keep watching this movie
By the way, in most of the westerns I watch, good news is that the sheriff and his deputy usually win while the crooks get driven out of town, leaving the remaining residents to enjoy the benefits of inhabiting a town where occupants abide by rule of law and follow due process.
So here’s hoping for the same result for a better Naira