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”The height of foolishness”: Financial Times report considers Nigeria’s monetary policy regime

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”The height of foolishness”: Financial Times report considers Nigeria’s monetary policy regime

”Copying Venezuela’s exchange rate policy and China’s failed equity market strategy might seem the height of foolishness. But, at least in the opinion of John Ashbourne, Africa economist at Capital Economics, that is precisely what Nigeria, the continent’s largest economy, has just done,” began a Financial Times report on January 21, 2016, concerning Nigeria’s current confusing monetary policy regime.

Mr. Ashbourne told FT that even though low oil prices are battering the economy, ”it’s the government’s market-distorting response that risks pushing the country into a Venezuela-style crisis.”

“Nigeria is sliding towards a Venezuela-style FX regime and adopting a Chinese-style stock market circuit breaker. Neither will reassure foreign investors, many of whom seem to be eyeing the exits,” he said, referring to the two controversial measures announced after markets closed on Friday, January 15.

READ: Apocalypse Wednesday on the Nigeria Stock Exchange: Here’s how market watchers reacted on Twitter

Here’s how the paper reported it:

The circuit breaker on the Nigerian stock exchange, one of the worst performing in the world this year with a fall of 17.7 per cent, will pause trading for 30 minutes if stock prices fall 5 per cent. Trading will cease for the day if it is triggered twice in a session, or after 1.45pm.

This month, Beijing abandoned a similar policy after just four days, concluding that in a falling market the existence of the circuit breaker encouraged more selling as traders rushed to exit while they could.

“The effect is akin to calling last orders at a crowded bar,” Mr Ashbourne says. “It is hardly confidence-inspiring that Nigeria is copying a Chinese policy that is widely seen to have failed.”

He accepts that Nigeria’s circuit breaker may not be as badly designed as the Chinese version. Whereas the NSE All Share index rarely falls by 5 per cent a day, the Shanghai Composite did so a dozen times in 2015. The NSE’s version has not yet been called into action.

Nevertheless, Mr Ashbourne says that using a circuit breaker to shore up the market, rather than to avoid volatility, is “deeply flawed”.

Simultaneously, the central bank has said it will stop selling US dollars into the interbank FX market.

Nigeria has operated a de facto twin currency system for the naira since February 2015, when the bank held the official interbank rate at N199 to the dollar to avoid a spike in inflation. The unofficial rate, available at bureaux de change, has plunged to N300/$, as the first chart shows.

However Mr Ashbourne argues the latest move takes Nigeria a step along the road to a Venezuela-style scenario, where the dollar now buys 913 bolívars on the black market, according to dolartoday.com, compared with an unofficial rate of 6.28/$.

You can read the rest of the report here.

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