Naira Redenomination: The FEC/CBN Face-Off

It did not sit very well with me when I heard earlier this week that the CBN Governor Charles Soludo (yeah, that’s him on the pic) was called before the Federal Executive Council (FEC) by President Yar’Adua to ‘explain’ his policy of naira redenomination. The Naira is Nigeria’s currency and only just shrugged off the inflationary pressures of a debt-ridden, flux-susceptible economy. At the moment the country is practically debt-free and remarkably solvent, with a dollar reserve of over US$40 billion, but the value of the Naira hardly reflects this. Meanwhile market transactions in Nigeria are still predominantly paper-based, entailing that the Central Bank is constantly burdened with the printing of fresh bills to sustain market liquidity, shrinking the monetary base as a result and making it harder to keep inflation at bay or revalue the nation’s currency. A possible solution would be to raise interest rates, effectively dampening loan requisitions, but this move would discourage investors, whom the Nigerian economy rely to supply the much-needed foreign direct investment (FDI). At any rate, a cessation of cash flow would be counterproductive, retarding economic growth and bringing back the lean years when Nigeria crawled, begging bowl in hand, to the Paris Club. But where the status quo to be maintained, the economy would’ve suffered the self-same outcome. Charles Soludo figured it was time for what a certain pastor I know would call “a paradigm shift”.

Last week Tuesday he unveiled his plan, which was essentially a fixed exchange rate policy. He announced that by January 1, 2009, two zeros would be knocked off the naira, placing it at ballpark parity with the dollar (N 1.25 per US$1.00, more precisely), a move that would simultaneously raise its currency value and effectively staunch the mint ‘bleed’, as it were. This is something the Chinese have already done (with resounding success, I might add), and I hear the Ghanaians executed the same play last month, but Soludo’s strategy implementation comes with a twist. He stated in addition that, effective from said date, federal and state government extra-budgetary allocations would be paid out by the CBN to respective parties in dollars. Now that even more drastically diminishes the need for minting vast sums of the naira, being that government is the country’s biggest spender, inducing scarcity of the local currency and fortifying its revaluation. One consequence is that as money is expended at the federal and state levels of government, it is the dollar that gets dissipated, not the naira; this reduces the economy’s monetary base, which has what economists call a ‘contractionary’ effect and lowers inflation, without having to raise interest rates or adversely affecting the spending habits of the capital market. Another positive impact is the attraction of foreign investors, who will reckon the added value of the local currency as a sign of growing market stability, encouraging them to ‘pitch their tents’ more permanently, if you will. Already, the robust fiscal structuring of Nigeria’s banks is well-known by now, a feat made possible by the forward-thinking CBN Governor.

Interestingly, there are other implications drawn from Soludo’s statements which may have stirred quite the hornet’s nest. One inference is that in order to avert the dangers of over-dollarisation of the money market, the CBN may be compelled to regulate both budgetary and extra-budgetary cash flow issued to the federal and state governments. This has raised a few eyebrows in these circles, and there are concerns that, while the government maintains that the autonomy of the CBN is not in question, calls by the economic advisers of the FEC to ‘fine-tune’ the plans might conceal concerted measures to reverse it. At any rate, implementation will require a delicate balancing act, and it is my hope that the need for clarification is the only reason the FEC summoned Soludo to its fortnightly session. But I strongly doubt that yesterday’s courtesy call by the IMF and World Bank emissaries on the CBN Governor were equally innocent. In their statement, they are also here for ‘clarification’, but “methinks more ominous business is afoot”. Here’s why. If my inferences from Soludo’s press statement are accurate, another goal of naira redenomination is to raise its value as a reserve currency in the West African sub-region and across the Sub-Sahara, entailing that countries in these areas will increasingly find it more convenient to compose their currency reserves in naira, alongside the US dollar and the euro. As momentum ramps up in this direction, the naira could fulfil AU visions of a single African currency, at least in contest with regions where the South African rand holds sway, and the hegemony of the dollar could be gravely at risk. Evidently, the IMF and World Bank, minions of the G7, have also been looking into their crystal balls like Soludo, and are here to see if they could not persuade our Nostradamus in other less …‘baleful’ directions, as it were. Hmm…I wonder if such hurried meetings were scheduled when Ghana toed the fixed rate line.

Now the FEC has been advised by its Economic Team, a state brain-trust, to review the date of implementation, i.e August 1 next year, and to reconsider the gradual phasing out the old currency, citing concerns of cost incurred in the process, which admittedly is sound logic but tantamount to a ploy of dilatory tactics. Naysayers like Comrade Abiodun Aremu of the UAD party (never mind what that means), are equating Soludo’s plan with the infamous Structural Adjustment Programme (SAP), forecasting doomsday if executed. My opinion? The FEC’d be better off not to meddle with the autonomous affairs of the CBN. And might I respectfully suggest that the Comrade shut his pie-hole? Much obliged.