Bravoes, Kudos to Soludo: On Naira Strategic Agenda

Professor Charles Chukuma Soludo deserves our collective rounds of national applause, for his bol...Read the full article.

[pappilo]

A re-denomination, or, a revaluation, will lead to a resurgent and resilient Naira

Can you please tell us how this will happen Paul.

I am really disappointed with the quality of your article not that I expect any better from you. It is evident from your article that you do not really understand what changes are being made to the Naira. The Naira is not being revalued but redenominated which means nothing really changes. I post an extract from Prof Soludo's article which was reproduced here on NVS which outlines the advantages of 'redenomination'. It obviously doesnt say anything about a resurgent and resillient naira.

Re-denomination and re-introduction of totally new currency structure (notes and coins) following the progress so far with other reforms and the enabling conditions in the economy today are designed to better anchor inflationary expectations, strengthen public confidence in the Naira, make for easier conversion to other currencies, reverse tendency for currency substitution, eliminate higher denomination notes with lower value, reduce the cost of production, distribution and processing of currency, promote the usage of coins and thus a more efficient pricing and payments system, and lay the foundation for the convertibility of the Naira as well as make it the ‘Reference currency’ in Africa
Charles Soludo

[I Love Nigeria]

I am personally impressed with his efforts at changing the way banks and other financial institutions in Nigeria do business; However, I am reserving my thunderous applause for Professor Soludo for a time when our national currency, the Naira recovers considerably and the exchange rate become or does better than what it was in 1980 or earlier.

The above paragraph is excerpted/culled from - Soludo Solutions & Economic Reforms in Nigeria

http://www.nigeriavillagesquare.com/...s-in-ni-3.html

[aguabata]

i think paul wrote an informative piece, a strong factor in economy is perception, when Soludo says people will gain confidence with the naira, there is a positive vibe in the nigerian economy, it may not be real but it works, if MEND makes a broadcast oil prices buckles, if we r lucky and inflation is better monitored it will enhace that positive vibe, why dont we take this chance.I am so happy we are now debating ideas in Nigeria, i hope we get more of that from other institutions.

[Enforcer]

Originally Posted by pappilo

Can you please tell us how this will happen Paul.

I am really disappointed with the quality of your article not that I expect any better from you. It is evident from your article that you do not really understand what changes are being made to the Naira. The Naira is not being revalued but redenominated which means nothing really changes. I post an extract from Prof Soludo's article which was reproduced here on NVS which outlines the advantages of 'redenomination'. It obviously doesnt say anything about a resurgent and resillient naira.

Re-denomination and re-introduction of totally new currency structure (notes and coins) following the progress so far with other reforms and the enabling conditions in the economy today are designed to better anchor inflationary expectations, strengthen public confidence in the Naira, make for easier conversion to other currencies, reverse tendency for currency substitution, eliminate higher denomination notes with lower value, reduce the cost of production, distribution and processing of currency, promote the usage of coins and thus a more efficient pricing and payments system, and lay the foundation for the convertibility of the Naira as well as make it the ‘Reference currency’ in Africa
Charles Soludo

pappilo,

If you did not expect anything better from Paul Adujie, how could you have been disappointed? Would it not have been better to write your own rejoinder to the article rather than resort to belittling someone's effort?

[I Love Nigeria]

Aluko Lauds CBN over New Naira Policy

http://www.thisdayonline.com/nview.php?id=87015

• MAN chairman calls for rethink
By Tokunbo Adedoja in Lagos and Ahmed ****tu in Ilorin, 08.22.2007

Foremost economist, Prof. Sam Aluko, has applauded the decision of the Central Bank of Nigeria (CBN) to shore up the value of the naira through redenomination commencing from August next year.
The Manufacturing Asso-ciation of Nigeria (MAN), however, called for a rethink of the policy.

Unfolded last week by CBN Governor, Prof. Chukwuma Soludo, the naira redenominaton policy has continued to elicit mixed reactions from Nigerians, raking in commendation here and condemnation there.

When the policy eventually takes off, N20 will be the highest denomination and exchange rate will be kept at N1.25 to the U.S. dollar.

Aluko, who reacted to the policy yesterday in Akure, Ondo State capital, through a telephone text message, said the policy was long overdue.

“I have been advocating for the fixing of our exchange rate system for a long time but the government has always preferred market rate,” he said.
According to him, the floating exchange rate system is responsible for the naira's current “sorry state”.

He said Nigeria's current level of development could not accommodate a floating exchange rate system, whereby the value of the naira would be determined by market forces.
“Fixing of an exchange rate for the naira has more advantages than disadvantages to the country’s economy,'' Aluko wrote in his text message.
Aluko said he would soon produce a comprehensive report and analysis on the fixing of the naira exchange system, stressing: “What I am saying now is just a tip of the iceberg.”

But the Chairman of Kwara State chapter of MAN, Mrs. Omolola Olobayo, said the naira redenomination policy would not help the masses but rather compound the nation’s economic woes.

She said it was high time the government provided an enabling environment that would allow the industrialists have access to loans to assist them establish cottage industries and thereby reducing unemployment rates in the nation.

Olobayo, who is the Executive Director Sales and Marketing, Doyin Group Companies, made the remark in Ilorin while speaking with newsmen on the state of the nation.
She called on the Federal Government to have a rethink on the policy so as to accelerate the socio economic development of the masses.

According to her, it is disheartening that poverty is on the increase in Nigeria on daily basis and therefore any policy that will not have any positive impact on the masses and leave them poorer should not be encouraged.

She asked, “What would happen to our income as individuals in this country? What will be the cost even on an average Nigerian? How will this reduce fraud? So many questions, to me, I believe the proposal will leave the economy worst than it met it.”

[Enforcer]

I love Nigeria,

Do not loose sleep over pappilo comment because majority of us can see through his hollow knowledge of basic economics. I believe pappilo is overwhelmed by Paul Adujie success in writing a series of articles, particularly in this forum.

What Soludo has planned is actually a revaluation of the currency in the sense that a reduced quantity of Naira will exchange for the dollar. The CBN will henceforth support the rate by selling and buying dollars from the foreign exchange market to maintain the required exchange rate. Soludo is being very careful that Nigerians do not grab the wrong end of the stick, hence he is mindful of his choice of words.

Soludo expects that at the end of it all the real value of the Naira will appreciate against the dollar to about N1.20 to a dollar. That I believe as well.

On behalf of my fellow countrymen and women, I thank Paul Adujie for all he has being doing to promote the interest of our country, in spite of the personal attacks that he has been receiving from some misguided few.

[RECK]

I personally think it is too early to thank anyone, including our economics professors, engineers, lawyers and the host of other professionals for anything for that matter. There is nothing worth thanking anybody for.

We clearly are not out of the woods, yet there is so much self adulation and feeling of accomplishment. Nigerians, and indeed the rest of sub-saharan Africans, should studiously and conscientiously get on with fixing, mending and revamping their battered, broken and desolate economies and cease from this endless worthless praise singing.

Nigerians are still suffering in their millions. The real sector and public infrastructure still lie comatose. POSTURING AND TWEAKING THE NAIRA TILL KINGDOM COME, will not fix the bad roads and supply the much needed electricity. We should only be saying bravo and kudos when the real deal is done!

[I Love Nigeria]

Enforcer, I thank you for your kind words of support and generous assessments.

RECK, what a wreck! The truth of the matter is that Professor Soludo policies are laying the groundwork, solid foundations for all the things you want for Nigeria.

A respectable currency achieves stability and resiliency. A worthless currency does not get respect.

SAP and its adverse effects led to the downward spiral and free-fall of the Naira and since September 1986, our national currency was devalued beyond respect and reason.

Americans and Europeans tweak their currencies more often than some Nigerians know or care to believe. THERE IS NOTHING WRONG WITH TWEAKING THE NAIRA. Ask Prof. Sam Aluko, a better economist than I am.

Good monetary policies, good fiscal policies.... will lead to sound economy, which in turn will facilitate repairs of our national infrastructure..... improve production capacity and increase employment etc.... these things are interconnected.... interwoven in factors and outcomes.

A respectable stable Naira, will buoy Nigeria's economy and, the suffering, hardships and wounds induced by SAP will dissipate.

[I Love Nigeria]

U.S. cuts interest rates to 4.75 per cent
By Ade Ogidan, Enitar Ugwu, Gbenga Agbana and Bukky Olajide

SHOVING its much-vaunted philosophy of market determinism aside, the United States (U.S.) government has made a dramatic intervention in lending rates by its banks.

The U.S. Federal Reserve (Fed), the equivalent of the Central Bank of Nigeria (CBN), yesterday slashed lending rates from 5.25 per cent to 4.75 per cent.

In Nigeria, the rates have officially hovered between 18 per cent and 21 per cent. But in reality, they are between 25 and 28 per cent.

Until February this year, it was 0.25 per cent and has remained 0.05 per cent for seven months in Japan, perhaps, the most productive nation in the world.

Lending rates are a key factor for business to thrive, especially in the real sector and the housing industry.

Until June 2004, lending rates in the U.S. were 1.0 per cent. From then till mid-2006, the rates were increased 17 times to arrive at 5.25 per cent.

The rate in Norway is 4.25 per cent and 2.5 per cent in Germany. It is 5.75 per cent in Britain, 12.5 per cent in Ghana and 11.5 per cent in South Africa.

The U.S. action has triggered ripple effects on economies around the world, having positive impacts on major global stocks, with shares shooting up to record high.

However, the rising profile of share prices eluded Nigerian stocks, as the All-Share Index and market capitalisation of the Nigerian Stock Exchange (NSE) dropped further.

Also, despite indication that other central banks, including Bank of England, would toe the Fed's line, interest rates in Nigeria may continue to assume their business-unfriendly high profile. There were no hints from the CBN yesterday that similar intervention would be effected on local rates.

The move by Federal Reserve, the first U.S. rate cut in four years, is aimed at restoring confidence in the housing market and preventing the turmoil from denting the economy.

The Fed move could help prevent the U.S. economy, which is already slowing down, from sliding into a recession, which could hurt economic growth prospects around the world.

And at close of trading yesterday, the Dow Jones industrial average was up 2.51 per cent at 13,739.39, the S&P 500 Index was up 2.92 per cent at 1,519.78, and the Nasdaq was up 2.71 per cent at 2,651.66.

It was the S&P 500's biggest percentage gain since March 2003, and Dow average's best one-day percentage gain since 2003.

By making money cheaper to borrow, the U.S. Central Bank is hoping that people will spend and invest more, revitalising the economy,

But the Fed faces a dilemma, with some commentators worried that too-big rate cuts could stoke up inflation.

A reduction in rates by 50 basis points would fuel inflation and lead to the "cheap money" conditions that have brought boom-and-bust to the property sector, Associated Press (AP) quoted some unnamed sources.

But in a statement, the Fed said that they needed to act before the credit crunch caused more damage to the economy.

It said that "the tightening of credit conditions has the potential to intensify the housing (market) correction and to restrain economic growth more generally".

The size of the cut - the first time that the rate has changed in more than a year - took many analysts by surprise.

William Sullivan, chief economist at JVB Financial Group in Florida said: "It's difficult to interpret what the ultimate ramifications will be.

"The Fed's rate cut could suggest that the stresses in the credit markets are larger than what people thought and that the Fed thought an aggressive move was needed now."

And Tim Evans, an energy analyst at Citigroup Futures in New York, said: "This confirms that the U.S. economy is fragile and attempts to avoid a full recession by cutting interest rates may or may not be successful, but this shows that the Fed is taking the possibility of a recession seriously."

But there was better news for those concerned about inflation with the Producer Prices Index (PPI) for August showing a bigger than expected fall.

The U.S. Bureau of Labour Statistics said that the measure of the prices paid to producers of goods and services in the U.S. fell by 1.4 per cent, which was the biggest fall since October 2006.

"The August PPI was good news," said Gary Thayer, chief economist at AG Edwards and Sons in St. Louis.

"There was a decline in energy prices that helped pull the overall index down and core inflation looks relatively modest," he added.

Indeed, interest rates in Nigeria differ from bank to bank.

As at last year, banks' interest rates were determined by the Minimum Discount Rate (MRR) decided by the CBN.

The MRR is the anchor rate from which lending and deposit rates are determined. It also defines the lower and upper limits of market rate.

In Nigeria during the MRR regime, the CBN mandated that banks' interest rates should not be more than four per cent above the MRR.

Prior to its abolition by the CBN late last year, the MRR was 13 per cent.

However, with the introduction of Monetary Policy Rate (MRR) to replace the MRR, the interest rates are now market-determined.

That explains the disparity in rates as charged by banks.

Harrison Owoh, Managing Director H. J. Trust and Investment Limited (Bureau de change, Lagos), commended the U.S. action to Nigeria.

He said: "The Federal Reserve Bank of the United States of America brought down the interest rates to draw the investors so as to make people borrow money, because the more money they borrow, the more they invest and the more the economy moves forward."

Owoh continued: "You will notice that any country that has less interest rates will always have a sound economy, this is because it also helps the infrastructure needed for a sound economy to grow."

He noted the U. S action is to bring down interest rate to be competitive in the global market. "For instance, Germany's interest rate is 2.5 per cent, so America wants to be competitive in the global economy," he said.

Owoh added: "Moreso, lower interest rates may want to translate to lower inflation rates as it could help in bringing down inflation rate.

"Look at Nigeria now, our interest rate is 18 per cent and 21 per cent plus charges. If you borrow at 21 per cent, what can you do with it? This is why the economy is not growing."

On the NSE, the All-Share Index, which measures the movement in share prices of quoted stocks fell from 51,547.81 point to 51,525.70 yesterday, while market capitalisation fell from N8.117 trillion to N8.071 trillion, indicating that the bears held sway.

To market operators who spoke with The Guardian, the development does not have any correlation with the Nigerian stock market because the market is not opened up yet.

According to them, Nigeria is operating from a jurisdiction that is different from that of the European markets.

However, they noted that if U.S. investors decide to borrow cheap funds from their country to invest in the Nigerian stocks market, they will likely get better returns, which would boost the local market by enhancing its depth.

For instance, the president of the Chartered Institute of Stockbrokers (CIS), Mr. Dipo Aina, said: "We are two different jurisdictions so their own market cannot affect ours.

"If the investors in the United States want to invest here, there is the tendency that they will get cheaper funds relatively, to invest here. The effect is basically that they will have high returns and that will deepen the depth of the market and renew confidence in the local market. Our stocks will be more attractive because of high returns."

The Managing Director of Goldman Assets, Mr. Olu Abayomi Sanya, corroborated the views of Aina.

His words: "Our market is not really integrated with the international market. People there will have cheaper funds to borrow in the market on Eurobonds. It will have positive effects."

Henry Olayemi, immediate past president of CIS also said there is no correlation between the U.S. market and Nigeria.

"There is no correlation. Our market is not opened up yet. The stocks here are only traded and rated here. It does not affect our market here."

[I Love Nigeria]

In the past several weeks (approximately five weeks) The American and European governments have collectively pumped $350 billion dollars into their economies... in complete disregard of market forces or demand and supply...

And now there is this major rate cut by the Federal Reserve ... a rate cut that has wide positive implications for the American economy

These government are working war-like to forestall inflation and economic recession.... So much for

:much-vaunted philosophy of market determinism aside, the United States (U.S.) government has made a dramatic intervention in lending rates by its banks

[katampe]

Back here the Canadian dollar has been predicted to be at par with US dollar before the end of the year, and it has the potential to be stronger than the US dollar. There has been intervention a couple of times to avoid the Canadian dollar appreciating against the dollar, but it appears the price of oil and other minerals and the slowing economy of the United States would not allow it.


The strategy has been different from Nigeria that seeks to appreciate its Naira. In Canada , an appreciating Canadian dollar affects foreign investments and the competitiveness of its exports. Car manufacturing plants within Ontario region are closing shops and tourism from the United States is taking a hit because of this appreciation.

[ozoodoo]

Does anyone have any rationale for Soludo's continued linkage of the Naira to the US dollar, a sinking currency, thereby resulting in serial devaluation of the Naira by stealth? Can those that glorify Soludo as a CBN governor please help with answer to the above question.

[ozoodoo]

VANGUARD NEWSPAPERS

That excess $400m mop up!

Monday, September 24, 2007 Rational Perspectives
Les Leba

The Late I. K. Dairo, one of the pioneer innovators of the Juju music genre observed in a popular melody that no rational person will ignore the bare waistline of his own daughter and eagerly adorn the child of another with his cultural beauty beads! A base expression of the same theme is that you do not take bread from your own hungry child to nourish an obviously better endowed stranger!

Anyone with a regular acquaintance with Nigerian newspapers would have come across the ubiquitous phrase, ‘mop up’, in relation to the efforts of the monetary authorities to remove presumably excess cash from the system so that too much money will not chase the limited goods and services available, thereby instigating rising prices, i.e. inflation, with a decreasing purchasing value of the Naira in your pocket.

In order to avoid such a dismal prospect, the Central Bank, in accord with its enabling Act, every month, embarks on removing excess cash and mops up billions of Naira by selling short term bills and longer term bonds. Interest alone on these government borrowings will eat up almost N300bn or about 18% of this year’s federal budget, as the pains of debt repayment become sweet gains to the banking sector!

Some analysts, however, argue that N300bn is the price we have to pay to avert inflation; besides, they claim, the Naira exchange rate will continue to fall with serious consequences if the huge monthly Naira allocations to the 3-tiers of government are left intact as part of money supply in the system! In this regard, ‘mop up’ may be seen as keeping faith with the objective of maintaining the value of the Naira at an exchange rate that is ‘conducive’ with growth of the economy.

Indeed, the CBN has often praised its own success in keeping the Naira rate stable within the N125-130=$1 range, and its gleeful reports of the slightest contrived minimal marginal gains may reflect its satisfaction that the current exchange rate is supportive of a revival of the economy.

The stark reality on the ground, however, is that inspite of the best efforts of government’s spin doctors, our people can see that industries continue to fold up and more people are forced into the already saturated job market; high interest rates continue to dampen investment drive and earned incomes purchase less and we have consequently become poorer, inexplicably, in the face of unprecedented external reserves!

It is self evident, therefore, that if appropriate exchange valuation can positively influence growth as anticipated in the spirit of the CBN enabling Act, the current exchange rate has failed to fulfill that objective and we may rightly conclude that a band of N125-130=$1 is probably inappropriate!


The apparent mindset of our monetary policy team has always revolved around the potential of cheap Naira in stimulating productivity and export competitiveness. The truth, however, is that inspite of the Naira falling from the exalted level of 50Kobo to N130=$1, our industries have collapsed and we are worse off today as exporters of both agricultural and processed goods than we were two decades ago, when the Naira was much, much stronger. It is surprising that inspite of this graphic correlation, the government’s economic blueprint, NEEDS, was predicated on further Naira depreciation to close to N200=$1, as the required level for economic take off!

Indeed, a close observation of CBN’s management of the Naira rate may suggest that Naira has been abandoned as an orphan child in favour of the foreign Dollar, as every effort has been made to protect the value of the Dollar against the Naira ; for example, while all major trading currencies, particularly the Euro and Sterling have gained over 30% against the Dollar in last six years or so, our Naira has actually fallen against the US currency, so that the optically stable band of N125-N130=$1 is indeed a de facto devaluation of the Naira against other major currencies, especially the Euro and Sterling, with adverse consequences for the cost of imported industrial raw materials and machinery, and the poverty rating of our people.

Our monetary authorities cannot give any explanation as to why the rate of the Naira has not obeyed the basic economic principle of demand and supply. No reason has been advanced for the Naira exchanging for N80=$1 when our external savings was only $4bn (4 months’ imports cover in 1996) and today for over N125=$1 when our reserves have increased over ten fold to above $45bn (almost 30 months import’s cover)! The rational expectation should have been a current Naira rate that is at worst a fraction of the N80 that it exchanged against the Dollar about ten years ago!

However, when the CBN recently announced its plan to share the monthly Dollar component of statutory allocation without prior unilateral conversion to Naira, some observers sighed in relief, that at last, the Naira will receive due protection, and become appropriately priced, as the table will be turned in favour of the Naira when increasing Dollar allocations chase existing limited Naira supply in the system. Undoubtedly, this would lead to a rapid appreciation of the Naira with attendant lower raw material and machinery costs for our industries, which would lead to lower product prices and increase in consumer demand which would in turn stimulate further investments and more jobs!

Surprisingly, a week or so after the announcement of the new payments system, in what appears to be a somersault, the CBN abandoned the object of a market determined Naira rate via payment of Dollar allocations and embarked on an unprecedented aggressive intervention to ‘mop up’ the sudden glut of Dollars in the forex market. Several newspapers, e.g. D.Independent 21/8/2007 carried reports with titles such as “CBN MOPS $400M FROM INTERBANK MARKET”. Part of the report reads as follows: “Dollars are being hurriedly disposed off on the inter-bank and autonomous forex markets in reaction to the policy shift of the CBN on the Naira…….

“The CBN intervention during the week resulted in the purchase of $400 million from both inter-bank market and autonomous sources. Consequently, the bank did not sell foreign exchange at WDAS window during the week. ……”

Two things emerge from the above report, (a) the banks obviously maintain dollar hoardings, and (b) the prevailing dollar glut would have led to a rapid appreciation of the naira based on demand and supply, but the CBN clearly does not want this to happen, and quickly moved to purchase $400m, at a premium rate of N127=$1, while it had earlier sold same dollars for below 126=$1! The question is, why would the same CBN, which decries the presumably ‘inevitable’ perennial excess Naira in the system, and which is always ready to borrow such excess cash at great cost, jump at the ‘opportunity’ to unleash a whopping N50.784bn into the banks in an unforced initiative, just to protect the prevailing lowly rate of the naira against the Dollar, inspite of the inherent loss in such transaction?

An independent observer of such odd behaviour may be forgiven for seeing the CBN as an agent of American interests rather than a true Nigeria patriot, as the US Federal Reserve Bank has never reciprocated such loyalty for our Naira!

SAVE THE NAIRA, SAVE NIGERIANS!

[I Love Nigeria]

Ozoodoo n'do!

If you have not noticed, our national currency, the Naira has been devalued, devalued, and devalued for more than twenty years... Austerity Measures of President Shagari to Mr. Babangida 's Structural Adjustment Program.

The Naira has been MAULED and allowed to remain in a free-fall for too long.... far too long

Some of us have keenly observed the tangible and intangible consequences of the near worthlessness of our national currency.

The Dollar is freely convertible worldwide.... whereas our Naira once was accepted in New York and London...but as I write this, some Nigerians and businesses in Nigeria are no longer excited accepting our national legal tender

Economists and those verse in current affairs would inform you, Ozoodoo that American and European governments frequently INTERVENE in the market to shore-up monetary policies (mopping-up-operations and and all!)as we have witnessed in the past several weeks in American/European reactions to the so-called mortgage meltdown


I therefore have no aversion, whatsoever, for Professor Soludo's active intervention in fiscal/monetary policies... I actually believe that he should have begun such, much earlier.

[ozoodoo]

ILN,

Please read Les Leba's piece quoted above in my post. The issue is not so much about the CBN intervention but about the cause of the need for the intervention. The article sufficiently addressed the issue; the CBN continously prints more Naira the more US Dollars we earn and similarly continously turn around to mob up the Naira it pumps into the economy in the name of excess liquidity mop-up, a non virtous circle. Why is the Naira still pegged to the Dollar, a sinking currency, thereby continously devaluing the Naira by stealth? What have we got to lose from a stronger Naira?