•CBN may invite EFCC to probe allegations of round
tripping
•IMF relaxes stance as more countries adopt capital
controls
By Obinna Chima with agency report

With the clamour growing everyday for the Central Bank of
Nigeria (CBN) to devalue the Nigerian naira and relax
foreign exchange controls, THISDAY has learnt that a
number of factors, chief of which is the lack of conviction
that a devaluation would not improve dollar supply in the
economy, are some of the reasons President Muhammadu
Buhari and the CBN have adamantly refused to endorse the
devaluation of the nation’s currency.

However, Buhari’s stance has led to a division in his cabinet
and among some party leaders in the ruling All Progressives
Congress (APC), some of whom believe the president should
be more pragmatic in his dogmatic stance against
devaluation, arguing that by not devaluing, there will be
more money for the three tiers of government to share from the Federation Account to meet their obligations.

As one government official, who did not want to be named,
explained to THISDAY: “Yes, there are those in government
who want it, but there is stiff resistance from Buhari and the
CBN. “But those who are pro-devaluation have argued that with oil prices at a 12-year low, our foreign earning have declined to less than a billion dollars a month. To top it, we have no buffers to shield us from the oil price decline.
“So they believe that if we devalue, the three tiers of
government, especially states with a cash crunch, will have
more money to share from oil earnings going to the
Federation Account.
“And this will enable the three tiers of government to meet
their obligations to their workers, contractors, and help to
reflate the economy which is literally comatose at the
moment.”

However, the flipside to this line of argument is that whilst
the three tiers of government may stand to gain from
devaluation, in real terms, they could also lose it to inflation.
According to a director of the CBN who spoke on the issue:
“Yes, we understand that devaluation will create more
money for all the tiers of government, but what we stand to
gain from one hand, we will lose on the other hand due to
inflation.”

The director, who preferred to remain anonymous, pointed
out that the enforcement of transfers of federal government
funds to the Treasury Single Account (TSA) has led to the
accumulation of N2.8 trillion in the CBN, part of which will
be used by the government to fund the 2016 budget.
“Given the experience of the federal government, states will
be well advised to adopt the TSA to plug leakages, as hidden
state funds in commercial banks could help them to meet
their obligations also,” he said.
He added that there was no guaranty that by devaluing the
currency, there will be an improvement in dollar supply
through foreign portfolio investors, “whom the markets have claimed have been sitting on the fence”.
“This is hot money and there is no guaranty that devaluation
will attract them to the country. Besides, even if they come
back, whatever cash they inject will just be a drop in the
ocean relative to the demand requirement for dollars in the
foreign exchange market,” the central bank official said.
When reminded that the forex restrictions have led to a
massive widening in the gap between the official rate of the
dollar and the parallel market rate, resulting in rent seeking
in the market, he said the CBN was not unaware of this
problem and was considering inviting the Economic and
Financial Crimes Commission (EFCC) to investigate banks,
companies and individuals who might be engaged in the
illicit practice.
“We are aware of this problem and have received some
reports that some banks may be colluding with customers to engage in round tripping. Owing to the reports, we are
currently considering inviting the EFCC to investigate banks
and anyone caught will face the full wrath of the law,” he
said.

The director added that it was for this reason the Bankers’
Committee agreed to start the publication of forex
allocations to bank customers in newspapers on a regular
basis.
Surprisingly, Buhari and the CBN’s anti-devaluation stance is
getting support from the most unexpected of quarters, as an
article published recently by the Wall Street Journal (WSJ)
has shown that some global analysts, including the
International Monetary Fund (IMF), are gradually accepting
the argument that capital controls could serve as a shield
against destabilising investment flows from foreign
investors.

According to the report by WSJ, the response to turbulent
financial markets might be a dose of “unorthodox thinking”,
which is in line with CBN’s position in the last few months.
For instance, the central bank officially stopped the sale of
dollars for 41 items, as it sought to reduce pressure on the
naira and preserve external reserves.

It also cancelled the sale of dollars to Bureau De Change
(BDC) operators and the use of electronic naira cards
abroad, just as it has continued to resist pressure to further
devalue the naira.
Dissatisfied with the central bank’s forex policy, a lot of
foreign portfolio investors have continued to divest from the country’s equities and bond markets, with their exit
accounting for one of the largest chunks of forex outflows
from the economy.

However, the WSJ report pointed out that amid the turmoil,
financial and economic policy makers are advocating a tactic once anathema to all but the most mismanaged economies: capital controls.
Governor of the Bank of Japan, Haruhiko Kuroda, it stated,
seemed to deviate from standard economic thinking late last month when he suggested that China might benefit from stricter capital controls.
“Both India and Nigeria tightened restrictions on their
citizens’ access to foreign currency in recent months, battling to limit capital outflows caused by the winding down of the Federal Reserve’s bond-buying programme. Controls are making an intellectual comeback, too,” the New York-based financial paper added.

Also expressing his support for the policy, Olivier Blanchard,
who arrived at the IMF as chief economist in 2008 and left
the fund last year said: “The general presumption was that
capital-account liberalisation was always good, and capital
controls were nearly always bad. I’ve seen the thinking
change, partly because it was already wrong then, and
because it was particularly wrong in the crisis.”

Similarly, IMF’s Managing Director, Christine Lagarde, at a
speech in Maryland recently, cited “a growing recognition
that the short-term nature and inherent volatility of global
capital flows are problematic”.
She said emerging markets and countries such as the US that are the largest sources of international capital flows should consider new regulations and tax policies that curb short- term debt flows and stimulate longer-term equity
investments.

The current support for capital controls builds on a change
of course at the IMF half a decade ago. After long urging
countries to free the movement of capital, the fund
surprised markets and economic policy makers by endorsing and even recommending the use of controls in
some cases to slow destabilising inflows of investment.
The fund was in part influenced by the lessons of the
financial crisis, when a handful of advanced economies that
were entirely open to global capital flows were hit hard.
Iceland and Spain both experienced deep recessions when
the foreign investment that had driven booms in their
economies evaporated.

According to WSJ, similar lessons were drawn by some
observers during the Eurozone crisis. Greece and Cyprus,
both facing sudden outflows over fears their banks would
fail, put strict restrictions on bank transfers to stop money
from leaving. Switzerland, meanwhile, has struggled to keep its economy balanced amid massive inflows. Those flows put pressure on the Swiss franc to rise. A stronger currency pushes down consumer prices that have been falling for most of the last four years, making it harder for the Swiss National Bank to fend off deflation.

A strong franc also hurts Swiss exporters by making their
goods less competitive in global markets. The central bank
sold huge quantities of francs to keep the currency from
appreciating until deciding a year ago it couldn’t sustain the
effort, allowing the franc to rise sharply.
Capital controls have major downsides, nonetheless. For
one, they can make it hard to attract inward investment,
because investors may fear they won’t easily get their
money back out. They also can be hard to kick.
After its collapse in 2008, Iceland imposed capital controls
that helped stem colossal outflows, but also crimped
investment and financing for Icelandic companies. Seven
years later, the country only now is inching towards
eliminating them.

But there is growing support for the idea that limits on
money flows may be necessary. Any economics student will
have read about the so-called impossible trinity that
supposedly binds policy makers’ hands.
It holds that a country that wants to control its own
monetary policy, such as interest rates, can’t also have both
a fixed exchange rate and a free flow of capital. Financial
and economic orthodoxy thus held that countries should
allow exchange rates to float and keep themselves open to
movements of international capital.
Helene Rey, an economist at the London Business School,
believes the trinity is actually even more impossible than
has been thought. In a 2013 paper presented to the
influential Jackson Hole, Wyoming, gathering of monetary-
policy makers, she argued that the tumultuous global
financial cycle showed that countries hoping to control their
monetary policy could have neither fixed exchange rates nor a free flow of capital.

That view appears to be spreading. Benoit Coeuré, a
member of the European Central Bank’s executive board,
has referenced Ms. Rey’s work in two speeches over the past
year. Last November, Mr. Coeuré said capital controls were
“once again part of the policy discussion”.
Some of the change is evident in the financial policy already.
Poland, for example, has effectively halted new lending in
foreign currencies for most people. Many Poles had taken
out mortgages in Swiss francs and were badly hurt by the
franc’s striking appreciation a year ago, which made their
loans more expensive to pay off.
The increasing focus on those sorts of “macro-prudential”
measures to limit financial instability can have the same
effect as capital controls, Mr. Blanchard said.
“If you forbid someone in your country from borrowing in
another country’s currency, that’s macro-pru,” he said. “But
stopping a foreign bank from lending in your country is
called capital controls.”
Expectedly, the debate has come to a head with China,
reported WSJ. In the past, policy makers in high-income
countries could argue somewhat dispassionately about
fluctuations in capital flows that rocked emerging markets.
But now that the swings in flows are hitting the world’s
second-largest economy, how China responds is the rest of
the world’s problem, too.
“There is a real contradiction between what China needs for
internal balance—lower interest rates, significant credit
easing via unconventional channels—and what the
exchange-rate consequences of such easing mean for both
Chinese and global external balances,” said Karthik
Sankaran of the Eurasia Group, a consulting firm.
Capital controls could help Chinese authorities use
monetary policy to stimulate the economy without causing
the exchange rate to tumble.
“This makes it a lot easier to deal with those situations
where the demands of internal balance and external
balance point in opposite directions,” Mr. Sankaran said.
Recently, Beijing imposed some added controls in an effort
to halt a huge outflow of funds from China. The moves
include curbing the ability of foreign companies in China to
repatriate earnings, and forbidding foreign asset managers,
including hedge funds and private-equity firms, from raising
yuan-based funds aimed for overseas investment, people
with direct knowledge of the matter said.
History has also shown that capital controls played
significant roles in stabilising economies centuries ago. For
instance, the Border Guards 1300 Act made it increasingly
difficult to export metals from England. A 1381 King Richard
II statute condemned “the great mischief which the realm
suffereth when gold and silver leaves the country”.
Prohibitions were lifted in 1538 by King Henry VIII.
Also, between 1914 -1944 when World War I and the Great
Depression disrupted the international order based on the
gold standard, John Maynard Keynes argued for permanent
restrictions on capital flows.
Then between 1968 – 1971 when the Bretton Woods system
collapsed, fixed exchange rates were abandoned and the
IMF enforced a new orthodoxy: money should flow freely
across borders.
But between 1997-2016, as Asian currencies plunged during
the region’s 1997 financial crisis, Malaysia spurned the IMF
and slapped capital controls. Iceland followed suit in 2008 as investors tried to yank their monies from the country. This was followed by Greece and Cyprus, forcing the IMF to state in 2010 that controls could be useful.

Source - www.thisdaylive.com/articles/why-the-president-is-reluctant-to-back-devaluation/231973/

Okay

When someone is confused what do u expect.

wow

This man lacks what it takes to lead in any capacity. Wonder how he managed to rise to the post of a general.
Immediately you were sworn-in in May, you were suppose to appoint your economic team to shortly after swearing in. But you waited till foreign investors like JP Morgan and co dumped Nigeria because of uncertainty in policy.

Now you are asking that why you are always so unlucky to take over government when economy is on the downturn. Have you taken time to do a holistic analysis of how things were before your taking over, and months after?

In my opinion, you are the problem we are having in Nigeria presently. Aside the world economic meltdown, you do not understand how economy works and you have refused to let the technocrats around you do their job because YOU DO NOT TRUST ANYBODY.

You are too analog to handle this Nigeria that has gone digitally 6D.