In the light of this piece of what I can only call an unfortunate speech by Godwin Emefiele, who is, by the will of some vengeful being whom Nigerians must have collectively offended, our CBN Governor let me remind those of us who read my blog of some of the reasons why Nigeria is in such dire straits (just the exchange/monetary policy aspect not the whole shebang).
First, as a country, we need money. We don’t make enough stuff at home, we don’t have power, we don’t have roads, we don’t have much in the way of production capacity, leading us to import most things. Only way to crack this is to have money, capital to build all these things. Unfortunately, we don’t have any of this money.
Now, we can get money from outside Nigeria but it comes at a price. Literally. Money, ironically has its own price. This is easy to understand when you go to the bank to get money as a loan. They will give you the money at roughly 20% interest rate which means you are buying N1 today with N1.20 of your own future money. So when the time comes, you pay. The N1.20 becomes the cost of that money to you. And it’s because you’re given time to pay it that debt is often also called credit.
When you want to put money in the bank, the bank essentially buys the deposit from you at an agreed upon price, which is around 5% interest. So they buy your N1 for N1.05 due at an agreed upon date.
Now why does the bank pay you only 5 kobo for every naira they buy from you while you have to pay them 20, 25 sometimes even 30 kobo for every naira you buy from them? Well because there are plenty more people who want to buy the same naira from them and also plenty more people willing to sell their own naira to the bank at little to no cost. Essentially, you need their naira far more than they need yours. It’s intuitively understood. So interest rates are one form of price for money and they obey the laws of supply and demand.
Now, when your bank wants to get money from the Central Bank, the CBN also charges it’s own price. It may be the overnight rate which has gone from 10% a night to 3% a night and then back to 25% a night depending on how badly banks want to buy to several other arrangements I cannot really detail here.
Now, since Nigerians buy and sell abroad and since naira is only used in Nigeria, for them to buy stuff abroad they have to buy it in dollars. And since we don’t make any of that stuff here, they do have to buy it abroad. So where do they get it from? CBN. How does CBN get the dollars? When Nigeria exports stuff, the buyers pay in dollars which ends up at CBN. When we import stuff, we go to CBN to exchange our naira for CBN’s dollars in order to pay the folks we buy from abroad. Now, if we import more than we export, we will need more dollars to buy abroad than we are getting from selling abroad. So invariably, the CBN will be forced to charge more naira to sell it’s dollars which is how your exchange rate gets pushed up. In order words, the exchange rate is a price, affected like all other prices by demand and supply.
So despite Emefiele’s rambling avoidances and outright fuckery, the so called “supply constraints” boosting inflation is caused by him refusing to let reality dictate the price of dollar but instead decides who to sell dollar to and who not to, and at what price leading to slumping importation yes, but also sky high prices and inflation as well as recession. Which would Nigerians rather have, a too low exchange rate or “stagflation”?
Also, rather than import substitution being the solution as he claims, throwing in Taiwan and South Korea as his blatantly false examples, the real solution and what those countries pursued was an aggressive export policy which boosted their dollar supply and ended up moderating their balance of trades. The beauty of a rational export policy is that most of it is backed by stuff you have in your own country which is relatively less affected by exchange rates and as you get better at exporting, you both expand your market and move up the value chain, growing your economy and reserves. Sure, import substitution will save the dollar you already have but it won’t help you make more.
I could go on and on but to summarize it all I’ll just put it like this: since any foreign debt will be exchanged into Naira to be useful, no one will lend Nigeria any serious money when Emefiele won’t sell the dollar at a freely determined rate to all buyers. No one is bringing their dollars back from abroad either for the same reason. No infrastructure spending is going to happen under those circumstances. Therefore little to no export is going to happen. So thanks to Emefiele, no one is going anywhere fast in that country.
If he gets fired today, dollar supply to Nigeria will go up unless a bigger bozo comes in to take his place. But if he actually cares about any of that crap he says, he should just resign.