A former Deputy Governor of the Central Bank of Nigeria (CBN) and ex-presidential candidate, Pro. Kingsley Moghalu, has called on the central bank to stop subsidising Naira.
Moghalu explained that Nigeria has a big, profitable economy and market, dollars will likely swamp the market seeking profits for investors.
According to him, when this happens, the laws of demand and supply will work in favor of the Naira. Alongside this, maintaining different exchange rates for different kinds of transactions must end. This is called rate convergence.
He said: “What should we do about all of this? As I have said before, and say again, we have two options. One is to let the Naira find its level in the market. In order, words, the CBN should stop subsidizing the currency.
“While there will likely be an immediate spike in the price of the dollar, this move will have two advantages. The first is that, because Nigeria has a big, profitable economy and market, dollars will likely swamp the market seeking profits for investors.
When this happens, the laws of demand and supply will work in favor of the Naira. Alongside this, maintaining different exchange rates for different kinds of transactions must end. This is called rate convergence.
The second, and more important benefit is that, since the current practice of the CBN pumping dollars in the FX market (from the reserves, which also depleted them) is essentially a subsidy for imports, which has made Nigeria more and more import dependent, letting go of the subsidy on the Naira will refocus the economy towards exports.
This will create an incentive for complex production of a quality that can be competitive in the international market. Accompanying this must be the right trade policies to support and create such incentives for massive exports of finished, value added goods from Nigeria.
If we don’t want to go this way, perhaps because of the political risk of an immediate further drop in the Naira value (which will recover in the medium to longer term if the right policies are pursued), we can consider dollarization of the Nigerian economy.
Here the dollar officially becomes a legal tender in Nigeria, either replacing the Naira or alongside it. Countries such as Panama, Liberia, Ecuador, Zimbabwe have done this. This’ll lower interest rates and help deepen the financial sector because we are a high inflation country.
But this carries serious consequences too. Nigeria will lose monetary autonomy (our central bank will no longer be able to take independent decisions on interest rates for example).
The CBN will lose seigniorage, the revenues it earns from issuing currency from the difference between the face value of the Naira and its production cost.
Speaking about the objectives of the CBN, he said: “This is why, among the five main objectives of the Central Bank of Nigeria we “issue the legal tender currency in Nigeria”, and “maintain external reserves to safeguard the international value of the legal tender currency”.
“So if we don’t diversify but continue to rely on crude oil as a mono -product economy, the Naira crisis will get worse, not better.
Unfortunately, achieving a diversified, complex economy, especially in a resource dependent economy, is not easy. It requires a a high level of knowledge, political will and consistency in economic policy and takes decades to achieve. This was the subject of my lecture a few months ago to the 2021 Annual Conference of the Nigerian Economics Students Association (NESA) held at the University of Port Harcourt, and will feature in my forthcoming book in 2022, The Pundit’s Mind.