Says concentrating cash at CBN when the economy needs reviving not
sound economics
Former Governor of the Central Bank of Nigeria (CBN) Professor
Charles Soludo has shown over the years that he is never scared to air his
views. He has spoken again, now faulting the implementation of the Treasury
Single Account (TSA) by the Federal Government and the policy regime of foreign
exchange restrictions of the CBN.
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| Prof. Charles Chukwuma Soludo |
Soludo spoke on Thursday as a guest lecturer at the third
anniversary lecture of online magazine, Realnewsmagazine.net in Lagos. He
stated that while the TSA could restore sanity and transparency into Nigeria’s
financial system, the initiative could be better deployed. He stressed that
“concentrating the cash at the CBN when the economy needs reviving is not sound
economics.”
Speaking on the topic: ‘Can the New Buharinomics Save Nigeria?’
the former CBN boss also faulted the policy regime of foreign exchange
restrictions being implemented by the CBN including the ban on 41 items on
foreign exchange access and the debate on whether to further devaluate the
naira or not, arguing that such policies will actually cause the economy to
implode, worsen unemployment and increasing poverty level.
“For the better part of this year, the external shocks to the
economy have been complicated or accentuated by a gamut of the “tried and
failed” command and control policy regime: de facto fixed exchange rate,
largely fixed CBN monetary policy rate, crude capital controls, veiled form of
import bans through a long list of ‘ineligible for foreign exchange’, de facto
scrapping of domiciliary account established by law, etc. At first, I thought
this was the usual kneejerk response of policymakers to a ‘sudden’ shock. We
tried a milder variant of this for a few months during the 2008/2009
unexpected/unprecedented global crisis (with global liquidity squeeze and
massive capital flight) but even then, it was communicated as a ‘short-term
crisis response’ and it was quickly dismantled. We now know what works and what
doesn’t even at a time of crisis.
“As one reads the
confusing statements from government in the media: ‘We won’t devalue’, ‘we
won’t devalue for now’, and the emotional debate about ‘nationalism’ around
issues of import ‘bans’ and capital controls, one wonders whether it is still a
‘short-term crisis response’ or a permanent shift back to the old policy regime
of pre-1986. Even if the government initially intended it as a short-term
measure, interest groups have emerged and are lobbying to make the policy shift
permanent. To add to the confusion, the policy is communicated as a “directive”
from PMB as widely publicised in the media.”
“In the specific case of Nigeria currently buffeted by a terms
of trade shock with micro imbalances especially fiscal and current account
deficits as well as supply side constraints and with the economy skidding to a
halt with rising inflation and unemployment, the question is, how should
relative prices or asset prices including exchange rate and interest rate
adjust to reflect as well as shape whatever economic fundamentals? External
shocks do not kill an economy.
“How you respond will determine whether you worsen it or
meliorate the terms of trade shocks. That is what we are facing, the classic
one. And how you respond to terms of trade shocks depends on whether the shock
is from the monetary, nominal shock or whether it is from the real side shocks.
And I would say on this micro economic theory and evidence around the world are
pretty much unambiguous. That faced with terms of trade shocks, countries with
flexible exchange rate regime adjust faster and adjust better with less
negative impact on growth and employment than those with fixed exchange rate.
This is global evidence, pretty much unambiguous for countries facing terms of
trade shock, that countries that allow relative pricing including exchange
rates to become the key adjusters when faced with terms of trade shock have
always almost done better than those than resorted to exchange rate fixing and
distorting controls.”
“In theory, if you don’t
allow prices to adjust, quantities will adjust and the quantities that will
adjust are output and employment. That is the experience we have had in Nigeria
over the years. And that is what is happening today. Output and employment are
adjusting with vengeance. My thesis is that from Nigeria’s own evidence, that
the current policy regime is inconsistent with the objectives of creating jobs,
growing income and reducing poverty. Nigeria since 1973 can become a
laboratory. Since 1973, we have become episodes of positive and negative price
shocks. If you divide the episodes of positive oil price shocks, episodes of
negative price shocks and also match them with responses of policy regimes, the
evidence is that, in all cases, fixed exchange rates with controls, the economy
has always done worse in that regime than in under flexible regime.”
Speaking further, he said: “From Nigeria’s evidence, current
policy regime is inconsistent with objective of growth, job creation and
poverty reduction. The current economic hardship is largely our choice and not
just oil price shock: The current slump of the economy was predictable and
largely avoidable. Just as it happened in 1981-85, the economy has been on a
tailspin. There is now about 4 % growth shortfall relative to past trend, and
this cannot be explained by fall in oil prices alone. For the first time since
1990s, per capita growth rate (on annualized basis) is now negative implying
that poverty is also escalating; capital market has lost trillions, inflation
and unemployment are on the rise. JP Morgan has delisted our local currency
bonds and Barclays is threatening same, while the cost of borrowing for Nigeria
rises. Foreign capital is on the run, while domestic savings is miniscule. It
was ‘headline news’ when FG paid October salaries, while states are steeping in
massive debt.”
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Source: Daily Post
