PRE-REQUISITES FOR AN EXCHANGE RATE MECHANISM
Charles Iyore argues the need to strengthen existing administrative structures and keep only those fit for purpose
We have as a nation, struggled with establishing an exchange rate mechanism without success, since 1980. The sudden large rise in our foreign reserves, built on oil (non-inclusive) receipts, gave us the notion we had plenty of money and that our only challenge was how to spend it.
Many cement armadas later and after becoming the import capital of the world’s brands of beer, we revved up that spending on an individual level by a salary award to a small slice of the population – (the civil service), in the “Udoji Salary award”. An award not tied to productivity and in disregard for strategic investments in assets at home and abroad, able to deliver returns for supporting a planned future. (Did we release the genie out of the inflation bottle?)
Those indiscretions were followed by an unplanned indigenization and the crippling of the civil service component of our bureaucracy, which all together, put us on a hiding to nothing.
Very many correction factors (civil servants stabbing perceived monsters in the dark) and decades later, the chickens have all come home to roost!
Our failures have come, not just in our wild forays into fancy methods of administration, but firmly lie with an elite, apparently incapable of constructional thought.
At the heart of our economic dis-equilibrium is the management of the currency, (which we create as a sovereign nation). It is no longer an impetus for increasing productivity, and has been in a downward spiral in global currency competitions (exchange rates) since 1988. It is perhaps now in free fall. Little wonder that our economy has become so amorphous without any firm reference points for domestic production planning, by whatever is left of our very diminished real sector – (Glaxo-Smith Kline gone. Next!)
All attempts at developing an exchange rate mechanism from import licensing, through second-tier (dual exchange rate), Dutch-auction and now in a multi-level allocation variant, of no clear description, we have always deployed solutions without planning and preparation.
It is pertinent against that background to offer ideas on rolling-off the many rocks which, over time, have made it impossible for Nigeria as a nation to breathe.
Rolling off those rocks must be the objective of “renewed hope”.
Planning: Planning and preparation is accepting that there are certain pre-requisites for establishing an exchange rate mechanism, which over time will make the economy competitive. To do otherwise will be living in denial.
Keeping it simple, these for me, are the key issues; One, it is critical that the component parts of our domestic production (the real reserves) are in such an inter-play and arrangement, that is able to deliver growth consistently ahead of inflation. (= husbanding of resources). Two, that the burden of domestic production (GDP) is evenly distributed between the public and private sectors, if the economy is to take flight and join globally competitive nations. To do otherwise, is attempting to fly on a wing (public sector) and a prayer. (= Financial System Stability). On that single-winged course, we would always wobble and not achieve fiscal consolidation.
The clarity that comes with understanding the interplay above, will determine the necessary interventions, their application timing (entry and exit), which will order the appropriate sequence of actions. Only such a disciplined approach will address the wide drift, reached over decades of poor planning and policy inconsistency.
No magic wand: There are no silver bullet solutions and progress is not an assumed position or a destination but a continuous journey, driven by consistent efforts. The cohort of economic regulators will need to come together and form a war cabinet. This is a war without a frontline, but with bullets that hit everyone, because the warfront is everywhere – livelihoods are threatened and disappearing.
Without addressing this currency challenge, all development programmes may be dead on arrival, and the cabinet (administration) would already be handicapped, because of paucity of funds.
The resources are actually there but often in the wrong locations, idling. The treasury must hence develop a keen eye for identifying those locations, in order to effectively inform the reserve board (CBN) on what “promises to pay” are entered into, for every spending round – (currency in circulation). Together, they must agree on how to manage over-supply or under-supply, using other creative exchange options.
The European experience in exchange rate mechanisms:
Europe went through a long period of trying to dominate each other, grabbing territories through wars, cornering resources around the world through colonies, becoming nationalists in country pride and attempting to grow through domestic slave farming efforts. All of these were clearly distractions, when we now see what they have achieved through pursuing programmes of shared prosperity. What about the many directives, (MIFID, etc.) that now order their economic linkages? The cross-border free movement of labour and integration of services? The most profound of them all, has been the transformation from an exchange rate mechanism (ERM) into a common currency of trade and exchange. And that is not ignoring the new global dominance of the European Airbus, in aviation.
Do we have to wait for a thousand years like them, or can we copy success?
As the kernel country of the sub-region, Nigeria can ill afford an unconscious bias in her choice of a winning team or run without properly laying-out her stalls. This is the time to strengthen the existing administrative structures and keep only those fit for purpose. The proclamation of “we are in this together” must open up policy conversations in a manner akin to “glasnost” (openness), before embarking on restructuring “perestroika”. This might be a strange analogy, but failure in that combination has come out of inconsistency not conception.
We must end the mutual exclusion of public and private sectors, home and away, town and gown in developing, through the rigorous analysis required for policy formulation needed to guide execution. That way we would be walking the right talk not the wrong talk. Take a look at Japan and her chambers of commerce.
Those with the skill-sets abound in large numbers, (within and outside the country), we must find a working formula for identifying them and putting them all into play, beyond appointing them into office.
Let the chains we have wrongly put on ourselves for so long, drop off!
Iyore is Partner, DNA Capital,
Darenth Kent, England +447932945002
