February 28 this year, the IMF posted a public information notice (PIN) on its website, to the effect that its Executive Board concluded the 2011 Article IV consultation with Nigeria on February 22, 2012. Thebilateral discussions with the country (held annually under Article IV of the Fund‘s Articles of Agreementduring which the Fund staff visited the country, collecting economic and financial information, and discussing with officials the country’s economic developments and policies) took place between October 17 and 23, and December 1 and 8, last year. Three months, six months after the PIN’s release, the Staff Report on these meetings (apparently completed on February 8), still had not been published. Something was evidently amiss, especially when the timelines for other countries (from country visit to the publication of the Staff Report) were shorter.
When finally the Staff Report was published (in the second half of July), it made sense to scour the report for contentious areas to which the authorities here may have objected, and the finessing of which was responsible for the delay. Alas, no such “grey areas” were readily discernible. The report containedserious worries about the exchange rate, true. But it was just as concerned about this in 2010. Despite the Central Bank of Nigeria’s (CBN) massive intervention in the official foreign exchange market last year in support of the naira (to no avail, really) and with the implied risk to the economy’s pool of foreign reserves, the CBN’s rate-setting committee only recently had to tighten monetary conditions, again over concerns that the naira may depreciate further as demand pressure builds. The Staff Report’s insistence on classifying our exchange rate regime as “other managed”, and its worries over the multiple currency practices that may arise from the CBN’s Dutch auction system only further reinforces the not too bright outlook for the naira.
The concerns over how much more pressure the naira could come under before something gives, how much the economy will have to haemorrhage precious foreign reserves before this happens, and the net effect on the rest of us, lead on to an old question. One that the CBN, under Professor Soludo, put to the fore and centre of monetary policy discourse in the country. Does anyone understand how policy-induced changes in the nominal money stock or the CBN’s monetary policy rate (MPR) affect real sector variables, especially aggregate output and employment? During Professor Soludo’s governorship of the CBN, the bulk of what had to be done apropos of this question was to understand how the monetary transmission mechanism worked. However, once consensus shifted in favour of the exchange rate as the major variable in the working of the mechanism, it has become important (if the central bank is to have a proper handle on the management of monetary policy) that it dimensions the degree to which domestic prices, employment and aggregate output respond to changes in the exchange rate.
Down this route, ought the central bank to consider the IMF’s suggestion that it concentrates on the design and pursuit of a clear inflation objective, while “allowing gradual adjustment of the naira over time, in response to market conditions”? The import intensity of domestic economic activity is regularly held up as constraint to the latter course of action. A too rapid depreciation of the naira, devaluation, even, could see prices rise so fast that it becomes a social problem, or so the argument goes. But how come this position against rapid price rises is not valid in the debate around the pump station price of petrol, or electricity tariffs? Conversely, it could be contended that the efficiency gains that we seek from freeing prices in the downstream oil and gas sector, and for electricity are equally available in the foreign exchange market. The problem here is that the CBN having softened the band around the naira’s exchange rate in November last year, and successively tightened monetary conditions over the last 18 months has managed to reach that point where the Fund thinks the naira’s exchange rate is “broadly in line with fundamentals”.
None of this, of course, yet speaks to the fiscal side of the management of this economy. In all honesty, a concern with the proper husbandry of the economy raises several other questions touched on by the IMF’s Staff Report. Why for instance should the public sector’s borrowing requirement be headed in the wrong direction, if the same public sector holds up to 8% of the economy’s gross domestic product in commercial bank deposits? In whose interest is it to keep public funds in banks and then have governmentgoing cap in hand to the same banks to borrow funds (to pay salaries, largely)? Obviously, not in my interest. Because, this way, we stifle private credit creation, while the cost of servicing the public sector’s domestic debt threatens to pass through the rafters.