The Central Bank of Nigeria (CBN) often gets a bad rap by those who criticize its heterodox monetary policies that include not letting the exchange rate trade freely and emphasizing promoting domestic production over imports.
Perhaps the critics need to look no further than Nigeria’s West African neighbor Ghana to fully appreciate the perils of unbridled free markets for developing economies and how it could impoverish millions especially during global financial crises or economic shocks brought about by factors outside its control such as a pandemic (Covid) or war (Russia vs Ukraine).
Ghana is reeling from elevated prices for everything from food to fuel, and it doesn’t help that the Cedi (Ghanaian currency), which is free floating, is one of the worst performing currencies in the world versus the dollar so far in 2022.
Ghana’s cedi slumped as investors continued to pull foreign capital to the west African country. The currency traded as low as 14.50 per dollar on Friday. That took its losses this year to more than 50%, the most among 148 currencies tracked by Bloomberg.
The slide in the currency is bad for Ghana because it produces very little of what it consumes and imports virtually all its fuel.
Ghana’s consumer inflation topped 37% in September, a 21-year peak despite aggressive policy tightening. In Nigeria inflation is running at 21 percent meaning Ghana’s inflation rate is nearly double that of Nigeria.
Petrol prices in Ghana are also on a tear, reaching multi-year highs of $1.282 per litre, equivalent to N910 per litre in Nigerian Naira. Nigerian petrol prices are relatively much cheaper, selling at N175 per litre in Lagos. Foreign investors are fleeing Ghana despite ridiculously high interest rates for government securities.
Holdings by foreign investors in outstanding Ghanaian domestic government and corporate bonds fell to 12.3% at the end of August, the lowest ever, from a 2022 peak of 17.3% in April, according to Central Securities Depository Ghana Ltd. data.
The nation’s domestic bonds are currently trading at an average yield of 41.9%, the highest in emerging markets, according to indexes tracked by Bloomberg.
Nigerian 10-year benchmark bonds by comparison trade at 14.7%. Ghana’s gross international reserves declined to $6.6 billion at End-September, enough to cover only 2.9 months of imports. That’s down from $10.7 billion a year earlier, which gave 4.8 months of import cover.
The CBN on its part has skillfully navigated the twin shocks of Covid and Russia/Ukraine war, growing dollar reserves to $37.2 billion.
Nigeria’s Central Bank Governor Godwin Emefiele will also be vindicated by research by the International Monetary Fund (IMF), which suggests that the prevalence of dominant currencies like the US dollar in firms’ pricing decisions alters how trade flows respond to exchange rates, limiting the effectiveness of currency devaluations, in emerging markets.
The CBN Governor has resisted steeper devaluation of the local currency the Naira.
Faced with an unprecedented shock of collapsing global demand and commodity prices, capital outflows, major supply chain disruptions and a generalized drop in global trade, many emerging markets and developing economies’ (EMDEs) currencies have weakened sharply.
These currency movements may however not support the recovery of these economies, the IMF said in a new research paper.
“New dataset, research laid out in a new IMF Staff Discussion Note indicates that the short-term gains from weaker currencies may be limited. This is especially true for EMDEs where firms price their international sales and finance themselves in a few foreign currencies, notably the US dollar—so-called Dominant Currency Pricing and Dominant Currency Financing,” the IMF said.
Additionally, the global strengthening of the US dollar—which mainly reflects a flight to safe haven assets—is likely to amplify the short-term fall in global trade and economic activity, as both higher domestic prices of traded goods and services and negative balance sheet effects on importing firms, lead to lower import demand among countries other than the United States.
“Exchange rates still have a role to play to contain capital outflow pressures and support the recovery over the medium term, but sustaining the domestic economy in the short term requires a decisive use of other policy levers, such as fiscal and monetary stimuli, including through unconventional tools,” the IMF concludes.