Word recently filtered out that JP Morgan had finally carried out its threat which was issued around midyear that it was giving Nigeria a few months to correct some observable shortcomings with its management of the foreign exchange market or face being delisted from its Government Index for Emerging Markets (GBI-EM). The main complaint by the organization was that the market was illiquid but since then the issue of transparency at the market itself and the technical matter of lack of functional two-way foreign exchange market had been added to the list. And we may argue as we are now doing but the bank has a right to its decisions using its own templates and standards and there is not much any of us can do about it. But what is very certain is that the bank and most other stakeholders – particularly outside investors and, for that matter, including some notable bodies within the country, especially the Lagos Chamber of Commerce and Industry as personified by its director-general, my friend Muda Yusuf – would be satisfied with nothing less than allowing the naira to go on a free float. This agitation became loud and orchestrated following the decision of the Central Bank to disallow access to the foreign exchange market to some almost inconsequential items numbering about 41.
The argument is that it is difficult to sustain and even make effective for purpose the use of such administrative controls and therefore we should allow the market, that faceless and dispassionate resource allocator, do the job. But I thought that it should have been clear to all concerned that the market is so mindless that it neither respects sensitivities nor vulnerabilities. If we should allow the naira to be entirely market-determined, there is no prize for guessing what will happen as the dependency of some economic agents in the economy on the external sector is so total that to some of them denying them access to foreign exchange is tantamount to shutting out a living being from oxygen. The foreign exchange will therefore be taken at almost any cost except for the marginal few who would be deterred by falling exchange rate. And since there is little accretion to the reserves, it would under this scenario disappear before our very eyes and those charged with the responsibility of managing the foreign exchange will in turn be accused of being clueless and crucified on the altar of public opinion.
It makes common sense that no matter the circumstance, when one is challenged with dwindling income which dropped so precipitously as in this situation, there is no alternative but to have recourse to some rationing and that simply is what the CBN tried to do by refusing access to foreign exchange for the designated items. And I have been on record to have recommended engagement with the CBN where there is a good case of an item which has been denied access but which is genuinely an intermediate product for a manufacturing process. I am aware that such engagement had taken place and still there is ongoing persistent outcry that the recent policy of the CBN with regard to the management of foreign exchange is grinding manufacturing to a halt! And as we make these recommendations we forget the fact that there is no country in the world that allows the exchange rate of its currency to be completely determined by the market; not even the reserve currency of the world, the US dollar. Then why should someone in his rational and logical mind expect a country as handicapped as Nigeria to do so?
On September 1, 2015 I was the sole appointed discussant at a CEO Round Table organized by Hallmark Newspapers during which a paper captioned “Regional Integration and Sustainable Development: The Dawn of New Economies” was presented by Jubril Aku, managing director of Ecobank Nigeria Plc and I recall that some of the convergence criteria for the attainment of common market outlined in the paper included an inflation rate of not more than 3 percent, the ratio of budget deficit to GDP not exceeding 3 percent, and reserves that should enable the country to do at least six months importation. And in trying to portray how difficult it is to keep fidelity to such targets, I had argued that if Nigeria was faced with this scenario in our current circumstances whereby there is almost a consensus to reflate the economy, it was going to be very difficult and of course one would expect that decisions will be taken that demonstrate a mindset that will prioritize the interest of Nigeria first no matter the acknowledged benefits of economic union. Similarly, in this respect, inasmuch as it is regrettable for Nigerian’s bond to be delisted, we do not have any choice but to put the interest of Nigeria first and should not make any apologies about that.
Let’s take a cursory look at some of the reasons which JP Morgan says informed its decision to delist Nigerian bonds. It says that the foreign exchange market is illiquid. But the CBN is on record to have informed all concerned that there should be no panic whatsoever as it remains ready and is in a position to meet legitimate and effective customer foreign exchange demands. What sort of liquidity is the bank complaining about? Can someone please ask the bank to cite instance of any investor who encountered any difficulty as they tried to take their investments outside the country or had difficulties with the repatriation of earned dividend? It talks of lack of transparency and in the first place you will not help wondering why transparency has now become such an issue despite all the steps the CBN had taken to advertise transactions online on popular portals? I am still at a loss to understand what JP Morgan means by lack of functional two-way quote? If you work into any bank today you will find displayed buying and selling rates for foreign currency and this has been so for a long time now. Now because the CBN says it will not allow mere currency trading because Nigeria cannot afford it and therefore insists on demand-backed request, that now becomes an offence.
JP Morgan has on his books assets valued at $74.6 billion and recently made an earth-shattering loss of $2 billion as could be confirmed online. This extent of loss by this bank is clear indication that its ability to predict the direction of the market is not something to be taken for granted or for that matter an exclusive preserve of this organization. Yet the securities market is premised on the false assumption that its members can add value by stock picking, market timing and fund manager picking. This latest development confirms the fact that these so acclaimed fund managers and investment gurus are emperors with no clothes representing a significant but little understood peril to financial security.
We are not by any stretch of the imagination hereby celebrating the fact of the delisting of Nigerian bonds from the JP Morgan Index even as we remind ourselves that only two countries in Africa, Nigeria and South Africa, enjoy the privilege of having their bond listed. And the impact of this delisting is already being felt as the indices at the Stock Exchange suddenly went south reflecting reverse investment flows which really should not be surprising. But the interest of Nigeria is paramount and must not be sacrificed on the altar of any other consideration. And my take is that portfolio investors voted with their feet before the elections following the scary scenario that was painted as likely fallout and have not returned waiting for this long-expected freefall devaluation of the naira and recent developments should be seen in that context. And therefore the likely effect of this development is no doubt something we can take in stride and ride with and I do not think that in due course we will be the worse for it.