Soludo Is on Point But Must Go Farther

Since Soludo’s announcement of naira redenomination, amateur economists and arm chair financial experts have had a field day; reminiscent of the lay men legal experts that flourished in the run up towards the 2007 elections. This season has been spurred by the second phase of the “Soludolization of the Nigerian economy”, with its main policy thrust being the redenomination and full convertibility of the Nigerian naira. Many commentators who have been around much longer than I have since predicted impending doom, but I beg to disagree. May be my inexperience fuels my optimism (albeit cautiously); beyond that though, I have since learnt not to bet against Soludo. Soludo represents an emerging and rare trend in government: a seasoned professional with a solid team.

Critics of the new policy direction have compared Nigeria to Japan, and have wondered why Soludo will seek to reverse the exchange rate relative to the dollar. However, they are off the point. Japan is not Nigeria. Japan is an export driven economy and benefits from cheaper and increased volume export (aided in part by the exchange rate), which in turn drives its economy. Nigeria does not export anything substantially but oil. Crude export prices are not driven locally but internationally. IBB’s devaluation of the currency was moronic in the first instance and is it not ironic that the same people that pilloried IBB seem to be heckling Soludo? Nigerians, how can one please them? Soludo is simply reversing the disaster of IBB devaluation by face value not even intrinsically. He is not artificially manipulating naira but returning it to its original position where it traded strongly against other currencies. The policy is not “imperialistic” as those Northern Dinosaurs or dummies called NU or whatever the outspent, out of date, out of ideas politicians go by. They should concentrate on increasing the productivity of their perch in the desert instead of attacking Soludo.

For the most part, this policy will force Tafa Balogun copycats to part with their hoarded naira notes or the stashed loots will become worthless. Indeed, it could help mop out excess liquidity, inflation, and “dirty” money from the system. Soludo should employ the help of EFCC & FIRS to put the ears and noses of the anti-corruption and tax agencies out there to sniff out potential criminals and tax cheaters as the conversion process is implemented. Certainly, the savings on printing unnecessary notes will be substantial going forward. A better-valued naira, tied to a basket of currency, reasonably and rationally valued in relation to export or performance of the internal economy is better suited for a mix economy seeking to grow via foreign direct investments, Diaspora capital inflows and value added exports.

Full convertibility of the naira will allow CBN focus on actual monetary policy, instead of acting as a super FOREX trader; a function most central banks have since ditched, in favor of dealing with inflation and spurring growth (this doesn’t bar intervention during crisis). However, the distribution of FOREX earnings to states should be taken further politically by turning states to original income earning centers (by becoming stakeholders in basic industries currently centrally controlled). States should instead make tax payments to national authority – settling the fiscal federalism debate.

However, the Central Bank and government at all levels must go farther to harvest the full benefits of this policy. Among many other things:

1. Regardless of this policy, low productivity, inflation, limited export base and growth, is still a reality. Hence, the value of the currency should be tied to a basket of currency proportionate to our foreign exchange earnings- preferably Euro, Dollar, Yen and Pounds. This will limit future fluctuations of value and make future redenomination unnecessary. It also dangerous to look at currency valuation purely from the dollar perspective; especially as it appears that the dollar is in for a hard time going forward as China rises, US deficit balloons and the strengthening of BRIC (Brazil, Russia, India and China) & EU causes the recalibration of world power.
2. The establishment of a foreign reserve management and investment board to invest portions of reserve in various instruments internally and externally. Currently most of these monies are hardly yielding interests for the nation- as confirmed by the value of the seized LG allocation returned to Lagos state.
3. The nation should also consider saving certain percentage of revenues for the future generations. Oil will not last forever and we can look to Norway, United Arab Emirates, and even tiny Bahrain as countries that have started planning for the drying up of this non-renewable resource. Excess crude revenues above annual projections should be excluded from distribution to all levels of government. This will also help curtail inflation. The current executive fiat used to save these monies will not be sustainable if it is challenged in court.
4. The poor infrastructure and security situation does not bode well for industry and enterprise. The strengthening of the insurance sector and deploying pension funds (mostly lying dormant) as cheap sources of capital to drive infrastructural development will go a long way in putting our infrastructures right.

Above all, the CBN must remain resolute in realizing the full benefits of the bank recapitalization exercise. Banks must be encouraged to improve capital investments and credit levels to business. Also, would-be-participants in foreign reserve management amongst them must commit to minimum lending levels to SMEs. A pro-employment fiscal policy directed at infrastructure (repair, maintenance, and expansion) and agriculture would drive growth, innovation and ultimately grassroots level impact of the new fiscal policy regime. Soludo have great ideas on how to better our monetary policy, it is left for the president & his cabinet to have great policies (and politics) to encourage job growth, ensure national security, and put infrastructures in place. The absence of these will make nonsense of all monetary policies emerging from the Central Bank.

The CBN is supposedly independent, and must be allowed to do its job. The lessons to be learnt from “Soludoistic reforms” are not the greatness of the ideas themselves (be it recapitalization or currency re-evaluation), but how admirable leadership exponentially increases the effectiveness of government. For the first in Nigeria, public policy is being driven by experts, who know what they do, why they do it and how to do it. The why, when and how has now been taken away from the territory of the marabouts, political jobbers, and half-baked consultants. That is why the erstwhile owners of Nigeria are shitting in their pants, running around making noises about “imperialism”. What a bunch of jokers!

Addendum:

1. Two main options are available to the CBN in implementing the redenomination policy. One is to have a new currency and cause hundred units of the naira to be exchanged for such and another is to print new naira notes. A middle of the road route that will cause the new and old naira to circulate for a transition period will probably be better suited for the mixed informal economy of Nigeria.
2. The Securities and Exchange Commission has two routes in denominating the stock exchange traded shares after this policy is implemented. First is to simply value public shares in the new naira, the other is to cause a hundred to one reverse split of publicly traded shares allowing shares to keep their pre-redenomination prices while reducing the number of publicly traded shares by a factor of hundred. For the stability of the market, the second option is probably a better idea. Less shares traded could also be a psychological boost to the market, and sustain a boom that is dangerously tail ending to a disastrous boom-burst threshold.