Soludo Again!!…Well?

Part 2-The Naira Agenda

The second Soludo Big Bang has become somewhat of a whimper with the suspension (or cancellation?) of the redenomination agenda on the ground that Section 19 of the CBN Act 2007 requires the approval of the President for currency redenomination. Nevertheless I believe discussions on the proposals should continue until an intelligent consensus is reached. There were four elements of the now stalled Soludo agenda-the proposal to re-denominate the Naira by dropping two zeros or moving two decimal points to the left with effect from August 2008; the adoption of inflation targeting for conduct of monetary policy from January 1 2009; sharing part of the Federation Account to the States and the Federal Government in US Dollars with effect from September 2007; and current account liberalisation/convertibility to commence January 2009.

The attempt by the governor to present these reforms as an extension of prior reforms in the banking sector and currency management were obviously very weak, the CBN having just introduced new N200, N500 and N1,000 currency notes as against N20 which would be the highest note in the new framework. It is apparent that the redenomination agenda emerged quite recently. Perhaps more tenable anchors for the governor’s proposals can be found in the autonomy over monetary policy which the bank has been granted, the bank’s legal mandate purportedly in the new CBN Act 2007 to ensure price stability, preparations by the bank for hosting the headquarters of the African Central Bank and most importantly the desire to become the reference currency in West Africa and Africa as a whole. It is in the context of these considerations, and the intent to be an international financial centre under the Financial System Strategy (FSS) 2020 that some sense can be made of the proposals. Some also insinuate that the measures had something to do with tenure and succession politics at the CBN.

The Governor premised currency redenomination on the need to better anchor inflation expectations; strengthen confidence in the Naira and on the experience in other countries such as Ghana, Afghanistan, Brazil and others. All things considered, the case for Naira redenomination is in my view not very strong. It is a purely arithmetic change that in no way affects the economic fundamentals, amounting to no more than psychological boost to the egos of Nigerians. The point has already been made that Nigeria’s currency is quite unlike that in Ghana or any of the other countries mentioned where the currency was unmanageable and simple transactions required thousands or millions of notes. In addition the example of the Japanese Yen confirms that it is possible to manage inflation and a strong economy even when your currency equivalence to the US Dollar is in the region of N128 to one Dollar.

The Governor says he has not made “an explicit commitment to revalue” the Naira. Reading his lips, the converse of this statement is perhaps that there is an implicit intention to revalue the Naira. If this were the case it is doubtful if such a policy-driven revaluation in the absence of stronger economic fundamentals and a diversified export base is even in the interest of the economy. On the other hand, the policy is not without costs-direct costs to the CBN in terms of logistics, public education, currency printing, and many system-wide costs. Like I mentioned on a Silverbird TV (STV) news interview some days after the policy was announced the banking and payments systems will have to bear some software and programming costs, and all businesses and firms will bear accounting and transaction costs directly attributable to the currency change. Weighed against the economy-neutral impact of the change, perhaps this cost was needless. On the other hand, perhaps re-denomination may aid the desire to be a regional or continental reference currency, but even this is not very clear.

I do not have any problem with the proposal to adopt an inflation targeting framework for the conduct of monetary policy. It is in line with the bank’s duty to pursue price stability, and re-enforces the desire to achieve lower levels of inflation which has been official policy for several years. It is also consistent with the practice of central banks in stable economies and is squarely within the province of monetary policy in which the bank ought to have autonomy. It is important to note also that inflation-targeting can stand on its own without the other accompanying policies.

It is doubtful if the CBN has the exclusive legal power to decide that part of the Federation Account will be shared to the States and Federal Government in US Dollars, in the absence of the agreement of the Federal Ministry of Finance, the Accountant-General of the Federation, the State Governments and the President of the Federal Republic. I mentioned in the STV news interview referred to above that autonomy (even where it is confirmed to have been legally granted) is not inconsistent with consultation, especially in matters of the significance of the measures proposed by the governor. It is surprising that the governor indicated that such a measure would take effect the very next month. With proper consultation, this policy can be reconsidered, but the views of the EFCC (regarding the impact on corruption in the states) should be obtained. On the positive side, the proposal may liberalize access to foreign currency, strengthen the US Dollar balance sheets of local banks and strengthen the Naira in a manner consistent with management of a market-determined exchange rate. It may also free the CBN from selling US Dollars to the banks through the DAS.

Ironically the least discussed of Soludo’s proposals was the one which in my view may have the most significant economic effects-full current account liberalisation and currency convertibility by January 1, 2009. This would entail the country eliminating all restrictions on current accounts and accession to Article VIII of the IMF. The Governor argues that 167 out of the 185 member countries of the IMF have acceded to the Article and that “the conditions are right for Nigeria to now join the world league”. I honestly do not think so. I think we have done well with macro-economic and banking reforms, but I think we are both over-celebrating and doing so too early! A large part of the macro-economic success has been “wind-assisted”, aided by extra-ordinarily high oil prices. We remain dependent on oil for export earnings, the economy is still import-dependent, infrastructure is still decrepit and domestic productivity is still weak.

In my view Nigeria is not yet ready for currency convertibility because our economy is still highly susceptible to internal and external shocks-stock market bubbles and high oil prices being my biggest concerns. But a timetable for currency convertibility is still imperative-with a target date somewhere around 2014-2015, well within FSS 2020 timelines.