Moghalu: Monetary Tightening Should Have Preceded FX Rate Unification

A former Deputy Governor of the Central Bank of Nigeria (CBN), Dr. Kingsley Moghalu, has declared that although the policy reforms by the Bola Tinubu- led administration were, “bold and correct,” it erred by removing fuel subsidy, implemented exchange rate unification and a further effort to float the naira in an environment awash with naira liquidity without first taking necessary steps to rein in the fallouts.

In a keynote address titled, “Nigeria’s Distressed Economy: Which Way Forward?” which he presented yesterday, at the 2024

Leadership Group 2024 Conference and Awards, in Abuja, Moghalu admitted that the reform policies introduced by the Tinubu’s administration were bold and correct, stressed that the first error was the precipitate nature of the introduction of the policies without a thorough preparation for the implications.

According to him, some of the pitfalls were the failure to first educate Nigerians on why the subsidies had to go and on what steps the government was taking to mitigate the anticipated impact; lack of prior and in-depth consultations on the forex reforms with institutional investors who are movers of global capital and in the absence of robust revenues from oil, influence forex liquidity through capital importation.

He maintained that the exchange rate unification and a further effort to “float” the naira in an environment awash with naira liquidity was a mistake, adding that this contributed to the naira’s race to the bottom.

Moghalu said: “The first error was the precipitate nature of the introduction of these policies without a thorough preparation for the morning after. Nigerians should first have been educated on the economics of why these subsidies had to go, and on what steps the government was taking to mitigate the anticipated impact, e.g., with a subsidised mass transportation system across the country.

“The forex reforms at the central bank should have benefitted from prior, in-depth consultations with institutional investors who are the movers of global capital and in the absence of robust revenues from oil, influence forex liquidity through capital importation.

“Second, exchange rate unification and a further effort to “float” the naira in an environment awash with naira liquidity (a loose monetary environment) was a mistake.

“This contributed to the naira’s race to the bottom. The policy should have been accompanied, or preceded by, immediate monetary tightening. But we know that a substantive Governor of the CBN was appointed only several months later, and the Monetary Policy Committee was only just appointed and confirmed in office-last month, I believe.

“That these two important institutional props of Nigeria’s economic policy making were not in place for several months after the new administration was sworn in, created policy uncertainty and damaging gaps in investor confidence – even as investors were broadly in support of the reform direction.

“The CBN’s recent increase of the MPR (Monetary Policy Rate) by 400 basis points and the cash reserve ratio by 12.5 per cent, from 32.5 per cent to 45 per cent, although belated, is appropriate in our circumstances today. Better late than never.

“Third, the appointment of the President’s cabinet took too long in a sensitive period of transition. When the appointments were finally made, the cabinet’s composition turned a predominantly “political” one instead of a strong bench of apolitical technocrats to address the economic crisis, which investors had hoped for.”

He added: “This was a lost opportunity. It is always the case that when a government inherits an economic mess of humongous and fundamental proportions, the wiser course of action is to invest in the confidence of both the investor community and citizens with a clear departure from politics as usual in favor of a stronger technocratic quotient (TQ) in constructing the highest echelons of the executive branch of government.”

Moghalu, who is the Chairman, Advisory Board & Board of Directors, Africa Private Sector Summit (APSS), explained that the past years of the Nigerian economy were particularly ruinous.

But he noted that there were also some immediate causes of the present economic mess traceable to significant strategic errors by the present government early in its seven months in office, adding that he was pointing these out not as a form of recrimination, “but only so we can learn lessons for the future.”

“Nigeria’s economy today is to use the title of the classic novel by Gabriel Garcia Marquez, the ‘Chronicle of a Death Foretold.’

On whether there will there be a rebound of the economy or not, he expressed optimism, saying that this would depend on fixing the fundamentals.  “There is nothing that is happening today – hyperinflation, the crisis of the value of the Naira, debt distress and the revenue challenge, unemployment, and extreme poverty etc – that should surprise any thinking citizen or professional observer of how our country’s economy has been mismanaged for a long time.

“Choices have consequences, there is hunger and anger in the land. The past 10 years were particularly ruinous. They were the years of the locust, marked by unprecedented mismanagement of fiscal policy, unproductive external borrowing, unnecessary budget deficits, illegal Ways & Means lending by the Central Bank of Nigeria to the federal government to the tune of N30 trillion, and unprecedented corruption.

“Earlier, a combination of oil price shocks and an incompetent policy response from the CBN, in the form of an attempt to fix the exchange rate, all helped give us two recessions within seven years.

“Many of these things happened because as we witnessed, there was a successful political assault on the independence of the central bank, with the storekeeper willingly handing over the store keys to the marauders.

“We are in a crisis regardless of whatever short-term measures that are taken, and the success of those measures or lack of it, this crisis and its effects will be with us for a minimum of 3-5 years,” he said.

Drawing an example from Mexico, he argued that although the Mexican peso crisis lasted for two years from 1994 to 1995, the effects lasted for about six years.

He also alluded to the Asian crisis of 1997-1998, which was relatively brief, adding that that crisis originated in Thailand after the Thai government floated the country’s currency, the baht, owing to a shortage of foreign currency to support its peg to the US Dollar.

“As with Nigeria, the Thai central bank stopped defending the baht after some months of pressure on the currency, and the baht fell quickly and deeply in value. The contagion spread to other South-east Asian countries.

“But the increasingly strong economic fundamentals of these countries helped their relatively quick recovery.

“We must not waste the present economic crisis. While we attempt to tackle our immediate problems, we must understand that these challenges today are simply symptoms of root causes we have long ignored.

“We should not repeat the cycle of past crises that did not force us to fix our economy for good, to be productive and create wealth and jobs for the average Nigerian. It is time to reposition our economy for the long term, out of the lessons of today’s challenges.

“I maintain my position, which is a matter of record, that the decisions to remove the petrol subsidy and forex subsidy were bold and correct.

“We have lived a lie for 40 years and the chickens have come home to roost. Given the country’s revenue challenges in the crude oil production and export sector, Nigeria could no longer afford to subsidise the importation of refined petrol, at least fully, and could no longer afford to defend the value of the naira artificially,” he stated.

Moghalu, argued that Nigeria was too important to fail, adding that if the country fails, “we all have failed.”

On the way forward, he called for the roll out of a bold, visionary and engineered strategic project for “fundamental economic rebirth.”

In addition, he called for a reform of the Nigerian National Petroleum Company Limited (NNPCL) to promote transparency and accountability in order to battle oil theft at source.

The company, he argued, was too opaque, adding that the level of oil production in Nigeria must be measured with the necessary meter equipment and transparently published, along with revenues received from crude oil sales.

Also, to get out of Nigeria’s foreign exchange crisis, he suggested that the federal government must be very carefully in considering whether it should take a formal stabilisation package of $20-30 billion from the International Monetary Fund (IMF).

This option, he noted, should be subjected to a thorough analysis by experts, as opposed to any knee-jerk action or uninformed public opinion.

“While there is typically a strong emotional and substantive argument against this approach in our country, it has clear pros and cons.

“Regarding the pros, a substantive IMF facility (it would have no impact if it is not a big package) would markedly increase forex liquidity and our forex reserves in a more transparent manner,” he explained.

While calling for a revamp of fiscal policy making, he noted that fiscal policy in Nigeria has been extremely weak for many years.