As Nigeria ushers in a new era with a fresh Central Bank team at the helm, it is imperative to reflect upon one of the most crucial policy decisions made by the team they succeeded—the floatation of the Naira. This decision, in my view, was deeply rooted in what Nobel Prize-winning economist Daniel Kahneman referred to as “Noise,” a concept from his seminal work, “Thinking, Fast and Slow.” Noise represents the unpredictable and inconsistent elements in human judgment and decision-making. In the context of floating the Naira, there are striking parallels to Kahneman’s insights into Noise.
First and foremost, the decision to float the Naira exhibited Noise through inconsistency. The exchange rate policy appeared to shift erratically without a clear, consistent framework. As Kahneman notes, humans tend to make different decisions when presented with the same problem under different circumstances. In the case of the Naira, the inconsistencies in exchange rate policies can be seen as a manifestation of Noise, where the same issue was addressed differently over time.
Secondly, the Noise in decision-making was evident in the lack of a systematic approach. Kahneman emphasizes the need for a structured decision-making process to minimize Noise. It appears that the decision to float the Naira lacked the depth of analysis and structure needed to make such a monumental policy change. Economist Dani Rodrik’s concept of “diagnosis before prescription” underscores the importance of understanding the root causes of economic challenges before implementing policy changes. Did the previous CBN team thoroughly diagnose the issues plaguing the Naira and the broader Nigerian economy before resorting to floating the currency?
Furthermore, Noise can also manifest in decision-making through overconfidence, where individuals believe they have more knowledge and information than they actually possess. In the context of Nigeria’s foreign exchange policy, it seems that the former CBN team may have been overconfident in their decision to float the Naira. Despite the nation’s limited foreign reserves and a persistently unfavorable balance of payments, they took the bold step of freeing the Naira without a comprehensive strategy to mitigate the risks and consequences.
Rationally speaking, the decision to float the Naira remains questionable. Very few currencies in the world are on a free float, apart from the internationally convertible ones like the U.S. Dollar, Euro, and perhaps the Japanese Yen. The Chinese Yuan is a managed currency, carefully controlled by the People’s Bank of China. This management allows China to influence the Yuan’s value to suit its economic objectives, a practice not dissimilar to what the former CBN team aimed to achieve. However, Nigeria, with its meager foreign reserves and persistent trade and balance of payment deficits, lacks the economic stability and strength to support a free-floating Naira. The decision seemed not only hasty but also potentially detrimental to the nation’s economy.
To paraphrase Dani Rodrik, a careful diagnosis should precede any prescription in economic policymaking. The former CBN team may have skipped this vital step when they decided to float the Naira. Nigeria’s economic challenges required a comprehensive understanding of their root causes, and a strategy to address them. A rushed prescription without a proper diagnosis may have worsened the economic turmoil, as we have seen with the erratic fluctuations in the exchange rate.
As the new Central Bank team takes charge, it is imperative that they address the backlog in the foreign exchange market. This backlog, estimated at approximately $6.8 billion, consists of swap deals, forward contracts, commitments by airlines, and other financial arrangements that have not been met. This backlog not only undermines confidence in the Naira but also hampers the efficiency of the foreign exchange market. Addressing and clearing these commitments is a strategic move to restore faith in the market’s integrity and strengthen the Naira’s value.
Moreover, restoring confidence in the currency market should be a priority. As it stands, the market dynamics lack clarity, which makes it challenging for participants to make rational decisions. Confidence is an essential factor in any currency market, and without it, participants become irrational, leading to erratic behaviors and undue speculation. Restoring this confidence should be a fundamental goal of the new Central Bank team.
To achieve these objectives, it is crucial to cease the unnecessary issuance of circulars and bans on various financial products. Such ad-hoc measures only create uncertainty and deter potential investors and market participants. Instead, the new team should work on implementing clear, transparent, and consistent policies that provide stability and predictability to the market.
In conclusion, the decision to float the Naira made by the previous Central Bank team needs to be revisited in light of the Noise, inconsistencies, and lack of a systematic approach in their decision-making. Rationally speaking, floating the Naira may not have been the best course of action given Nigeria’s economic conditions. The new Central Bank team must address the backlog in the foreign exchange market and work diligently to restore confidence in the currency market. By adopting a structured and systematic approach to policy decisions, they can mitigate Noise in their judgment and pave the way for a more stable and prosperous Nigerian economy.
As renowned economist John Maynard Keynes once wisely said, “The best way to destroy the capitalist system is to debauch the currency.” The new Central Bank team would do well to heed this advice and take measured, strategic steps to ensure the stability and integrity of Nigeria’s currency.