What do market forces promise?

A much better response to the naira’s price crises (both its external price — its exchange rate, and its internal price — inflation, are shot through completely) is to make domestic monetary conditions more attractive for holders of naira-denominated assets. And to do this through the institutions of the market. In our current monetary policy space, this as much a matter of ensuring that rates in the retail financial services space pay at inflation+X. As it is about removing existing barriers to competition in the foreign exchange (FX) markets.

“Market forces”, an axiom that describes the process through which prices change on the back of the interaction of buyers and sellers in a market for goods and services, without the intervention of government, looks destined for the intellectual dung heap — along with related fatalities from Nigeria’s endless economic experimentation. Yet, a few weeks ago, this did not look quite the case. When the Tinubu administration freed prices in the foreign exchange and retail petrol markets, the hope was that this will allow the domestic economy to allocate scarce resources more efficiently. It was also envisioned to free the exchequer from the dead-hand of suboptimal policy interventions. Along the line, successfully implemented, market-driven outcomes were to consign the idea of “subsidies”, “queues”, and “rationing” to the same dung heap that “market forces” currently tramps towards.

Also Read: Slower-paced inflation ― any lessons?

Anyway, the market-determined exchange rates of the naira have meant that it has lost value against most traded currencies. In turn, higher import/input prices have weighed on domestic prices. And our talking heads appear bent on blaming the “reckless” interaction of buyers and sellers in the market for the resulting troubles. Few have, thus far, been able to call for the return of government-administered rates. But all agree that, broadly, a very poor people have witnessed, over a short period, a very rapid erosion of their living standards, as prices rise relentlessly.

You wouldn’t tell from the nascent commentary on the state of the economy that the central bank, for instance, was struggling to meet the demand for foreign exchange long before the adoption, by the incumbent government, of new market-based reforms. Nor that the appearance of price stability in the official market for foreign exchange, as at the pump-station for petrol, was a poorly disguised concealment for a smorgasbord of rationing schemes. Nor does anyone in the increasingly critical part of the commentariat mention how the exchange rate is but a relative price reflecting the respective yields to investors in the different currencies that make up our market’s mix.

In this sense, higher (even rising) prices from the interaction of buyers and sellers in any market are no more malign than are the gauges on a vehicle’s dashboard. In the latter example, those gauges simply point to the existence of several service needs: fuel top-up, low radiator coolant levels, or even the need to add to the windshield wiper fluid.

If the real yield (that is, the returns you get from investing after you back out the effect of inflation) on US dollar-denominated assets is higher than that on naira-denominated ones, to hold assets in the latter currency wouldn’t be an act of patriotism at all. It would qualify as wanton value destruction, pure and simple. Put differently, if I had N1 million today, which I intend to set aside for the payment of my ward’s school fees come next session, my options include depositing it in a local commercial bank, where the ravages of inflation would mean that in the next three months, my naira deposit will be worth less than it is today. Or I could swap it into dollars, assured that in three months’ time, not just will inflation not have ravaged the value of my assets, but because of exchange gains, I will have more naira to spend. Sadly, the more domestic economic entities buy into this way of resolving the problem, the more self-fulfilling it becomes. i.e., domestic demand for dollars will keep pushing the naira’s exchange rate down. And expectations of a continuously depreciating naira will drive domestic demand for US dollars.

Also Read: Nigerian Markets Last Week: Oil Prices Rally Above $60

In this sense, higher (even rising) prices from the interaction of buyers and sellers in any market are no more malign than are the gauges on a vehicle’s dashboard. In the latter example, those gauges simply point to the existence of several service needs: fuel top-up, low radiator coolant levels, or even the need to add to the windshield wiper fluid. In the matter of the naira, just as no one rips out a car’s dashboard on account of the vehicle regularly overheating, it makes no sense to return to arbitrarily fixing the naira’s exchange rate because the markets would rather raise this.

Competition matters if the supply constraints that skew prices in favour of oligopoly suppliers are to be removed. And without competition at measurable levels, no regulator, no matter how savvy, may properly promote the welfare of consumers through markets. 

A much better response to the naira’s price crises (both its external price — its exchange rate, and its internal price — inflation, are shot through completely) is to make domestic monetary conditions more attractive for holders of naira-denominated assets. And to do this through the institutions of the market. In our current monetary policy space, this as much a matter of ensuring that rates in the retail financial services space pay at inflation+X. As it is about removing existing barriers to competition in the foreign exchange (FX) markets. That list of 43 items not eligible for foreign exchange, along with restrictions on how exporters (including international oil companies) may alienate their foreign currency earnings may have had its allure for our FX wallahs a few days back. But today, they are but hurdles in the path of building competition into the FX markets.

Also Read: Technology, change, and a culture of respect

Competition matters if the supply constraints that skew prices in favour of oligopoly suppliers are to be removed. And without competition at measurable levels, no regulator, no matter how savvy, may properly promote the welfare of consumers through markets. This is no less the case for the downstream oil and gas sector where for inexplicable, non-market reasons, the NNPC Limited remains the single largest importer of petrol into the country.