Proposed New Nigerian Naira (NGN) Policy: 

CBN Governor, Prof. Chukwuma Soludo's Leadership. . 

 - Cletus Olebune

            courtesy of nel-mag.org

    On August 14, 2007 the Governor of Central Bank in Nigeria proposed a new monetary policy that will pair exchange rate of 1.00USD to 1.25NGN beginning August 1st, 2008. As expected there have been considerable commentaries on the new proposed Naira Policy—coming from selfish economic illiterates and from those that know something about global economics in accounting, finance, international trade, and monetary policies and their impacts on economic growth of a nation.

In considering various components, which connect exchange rates to economic growth process, particularly how it affects entrepreneurship endeavors in manufacturing employment, one would have to look at the basic properties of exchange rate flexibility effects on economic growth.

One key feature of flexibility exchange rates is that they are highly volatile and such volatility may affect growth through the channels of trade and investment. I am sure Soludo and his team before undertaking this monetary policy change did their homework on the proposed exchange rate arrangements and how it will likely stimulate economic growth—it is left for the team to convince Nigerians. The way to go about it is not to allow selfish interests to carry the day. Already, these economic illiterates with selfish agenda are calling for the removal of Soludu without even understanding the general and long-range impact of the new proposed monetary policy. These criticisms without fully understanding of the concept, or proffering of alternative is a bane of selfishness. We still have eleven months before the new naira policy will take effect. Reasonable, unselfish and economic commentators still have time to study this new development as Soludo explains the new naira policy. The federal government working in collaboration with the CBN should engage in public enlightenment and sensitization of the new naira policy. This was the situation with the debt forgiveness undertaking. While I may not be a professional economist, my study of economics during my pursuit of MBA degree puts me in a position to better understand what Soludo is trying to accomplish. Just as many commentators lacking in finance and economic background commented negatively on debt forgiveness, shortsighted commentators are at it again. Both the debt forgiveness and the new proposed naira exchange policy have long run success.

The role of exchange rate in the economic growth process is not immediately apparent from cursory glance. The idea that a financial price can have real effects would at first seem to be an odd idea. However, the likely effects of exchange rates on growth are on the behavior of exchange rates when they are flexible, or volatile (detail involves mathematical algorithm that is beyond the scope of this article). The point I am making here is that once Soludo’s leadership is able to manage exchange rate flexibilities, it will positively affect economic growth. If we believe that Soludo has the capacity and the ability to manage exchange rate flexibility and volatility, then we should give him the chance to explain this Big Harry Audacious entrepreneurial idea that he has undertaking. 

Not knowing the details of the new monetary policy, and based on the concept of strengthening naira against other African currencies, I think the importance of this new monetary policy is its effects for the African economic area.

In focusing on the impact of real exchange rate on manufacturing employment, one can look at several real appreciations: switching factors from workers to imported inputs; decreasing exports; and exerting pressure on efficiency improvement. While these three impact channels are significant, the most important is the switching factor from worker to imported inputs—the technological channels. I will discuss these three impact channels in future articles.

In one commentary, the author’s point of view is that keeping the exchange rate as it is now at 1USD to 129NGN will encourage foreign investment in manufacturing as seen in China. While this point may seem reasonable at first instance, but 1USD is currently exchanging at 7.600CNY (Chinese Yuan), and at 7.814HKD (Hong Kong Dollar), and at 114.180JPY (Japanese Yen). How does one reconcile the fact that cheaper products come into US mostly from China than from Japan? From the inception of Nigerian Entrepreneurial Leadership, I have been expressing concern about the manufacturing sector and manufacturing entrepreneurship in Nigeria.

Exchange rate and price paid for labor are two different economic policy variables—currency supplies, wages, prices, and exchange rates are monetary variables; employment, output, interest rates, and trade balances are real variables. In the classical, long run view, monetary variables do not affect real variables. Monetary policy, for example, can be used to increase employment and exchange rate policy can be used to change the balance of trade.

Exchange rate arrangements in transition countries, such as Nigeria can be used to assess the prospect for the use of exchange rate policies as a vehicle for stabilization and as a permanent system of monetary control. The appropriate role of exchange rates in economic policy is one of the most complicated issues in intellectual economics. Much of the controversy is on differences relating to: the mechanism for changing exchange rate in a flexible exchange system; the effect of devaluation on absolute and relative prices; the relation between the exchange rate and trade balance; the relation between changes in the trade balance and relative prices; the role of exchange rate in general equilibrium theory; the link between the international monetary system and exchange rate changes; and, the relation of national currencies to the international standard.

Side Note:

We need a sense of urgency in developing a manufacturing sector strategy, and an early response from government on the “Manufacturing Vision” should include complete overhaul of the energy sector. Without steady electrical energy, manufacturing vision will be dead at start. There is something horribly wrong when bank profits are soaring while manufacturing is struggling to meet production do to lack of electric power. The need is to build value into manufactured export irrespective of the exchange rate. But this requires an environment that is supportive of manufacturing. Long range, in relative labor productivity and the real exchange rate, the rate of movement in terms of sector productivities, there are two components at play—relative price of non-traded goods, should reflect the relative productivity of labor in the traded and non-traded goods sectors; the assumption that purchasing power parity (PPP) holds for traded goods in the long run. Studies have shown that the evidence on purchasing power parity in traded goods is considerably less favorable.

Looking at the US dollar exchange rates, PPP does not appear to hold for traded goods, even in the long run. While the US has argued that its decline in manufacturing employment is a result of movement to low cost manufacturing destinations, such as China, and had in 2003 proposed legislation H.R. 3058 and S. 1586 to increase tariffs or another form of barrier against Chinese imports if China did not agree either to allow the Yuan to float on foreign currency markets or to revalue it relative to the US dollar, the specific impact of such measure depends on the magnitude of the exchange rate or tariff.

My take is that, it depends on how Soludo manages exchange rate flexibility, volatility, or floatation. If Chukwuma Soludo believes he can successfully manage exchange rate volatility to spur economic growth, we should support his efforts, and focus on capturing the African market and not worry with exporting finished products to the western countries for now. Cheap labor works for Chinese export to the US for some other reasons and not purely because of cheap labor.

Soludo has put himself in the chopping block, and we are yet to see whether we need to chop him or not, but until then let us comment from unbiased position. We are developing a monetary policy that will be favorable for the Nigerian and African environment. The growth in imports among African economies is due to the inability of the domestic producers to keep up with demand. The mistake we don’t want to make is the mistake of the 1970s, with the boom in commodity prices, which drove up the exchange rate, thus encouraging consumers to switch from domestic consumption to foreign producers. It was not capacity constraints that hindered output then but overvalued currency.

Our experiments in the economic laboratories toward economic relevance in the year 2020 is definitely not same as experiments in science laboratories, where in chemistry laboratory, sodium plus chlorine give you sodium chloride. In business and management (government or non-government), one is never sure what the outcome may be, even with all the proper analysis; there are various environmental forces at play. How will this new proposed naira policy affect entrepreneurial venture, particularly, our global competitiveness in manufacturing is what Professor Soludo has to explain.

Our competitiveness and the proposed monetary policy. (Read)

Cletus E. Olebunne
Executive Director
www.Nel-m.org 
September, 2007

Please visit nel-m.org to learn more about Nigerian Entrepreneurial Leadership, and its activities. Every month we’ll send out our e-mail newsletter with a note from Cletus, the latest updates from the organization, and profiles of other NEL leaders. If at anytime you’d like us to remove you from our mailing list, simply send us an email with the subject: Remove. Also, those who made financial contributions to nel-m.org will receive a quarterly financial updates

Together we can build a nation where its economic strength is comparable to its individual citizen's capabilities. A 2020 Nigeria economy where manufacturing is the driving force. We are always glad to hear from you. 

LEAVE COMMENT ON THIS ARTICLE

ABOUT THE AUTHOR: Cletus E. Olebunne, Is the Executive Director of Nigerian Entrepreneurial Leadership (www.nel-m.org ) An accomplished scientist, and entrepreneur in the global healthcare product distribution. He is the founder of Eastern Pharmaceuticals (www.easternpharmaceuticals.com), a global distributor of healthcare products based in New Jersey. An active member of Regulatory Affairs Professional Society (RAPS), the global pharmaceutical regulatory body, the American Chemical Society, and the American Management Association (AMA).
The NEL organization seeks to:
1 Support and promote a community of entrepreneurs
2 Promote public understanding of manufacturing entrepreneurship
3 Promote and enhance the role models that reflect the ideals of manufacturing entrepreneurship
4 Be the source for information about best practices in business leadership.