… Says forex policy regime inconsistent with the objectives
of creating jobs, growing income, reducing poverty
Former CBN Governor, Prof. Chukwuma Soludo, Speaking at the
Public Hearing by the House of Representatives Ad-hoc Committee investigating
the near collapse of Nigerian Capital Market in Abuja on Tuesday (15/5/12).NAN
Photo
Former Governor of the Central Bank of Nigeria, CBN, Professor Charles Soludo has faulted the implementation of the Treasury Single Account, TSA by the Federal Government as well as the policy regime of foreign exchange restrictions of the CBN.
Soludo who was speaking Thursday as a guest lecturer at the third anniversary lecture of online magazine, Realnewsmagazine.net in Lagos, stated that while the TSA could restore sanity and transparency into Nigeria’s financial system, the initiative could be better deployed as according to him, “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, worsening unemployment and
increasing poverty level.
He
said: “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.”
According
to him, “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.”
He
added: “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 per cent 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.”
According
to him, “Policy choices entail costs and benefits, but the preference of one to
another should be based on the “net positive effects”, depending on the stated
objectives. To sustain the current arbitrarily pegged exchange rate will
require a steep rise in interest rate and squeezing of bank credit to the
private sector. Alternatively, intensifying the ever opaque and distorting
controls and ‘bans’ will also severely harm the private sector. I will be
surprised if the productive sector is not already feeling the heat. The irony
is that it is the small businesses (which have no voice or power) that are
suffering the most. Many are simply being choked to death by the ‘controls’. To
repeat, the current policy regime is inconsistent with the objectives of creating
jobs, growing income and reducing poverty”
Source: vanguard
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