Rescuing and defending the naira – Part 4
Continued from yesterday
The case made against devaluation is often based on technical grounds, namely that: Nigeria is highly dependent on imports the demand for which is inelastic while the country’s exports are supply and demand inelastic. Thus, devaluing the Naira would not result in any significant decline in imports nor would it induce meaningful export growth. Furthermore, devaluation would result in imported inflation, with adverse consequences for the ordinary man.
In response to the above devaluation concerns, the following countervailing arguments may be made: First, although demand for basic imports may be inelastic, this does not hold good for luxury and non-essential items. In any case, when the prices of even basic imported items rise unduly high, there would be price resistance by consumers and greater incentive to look inwards and source locally for substitutes, thereby boosting domestic production and employment.
Second, the argument that devaluation would not have any meaningful impact on our exports may be faulted on the ground that devaluation would definitely enhance the price competitiveness of our export products. In this connection, it should be noted that various studies have established that our farmers and exporters do respond to price incentives. Thus, over time devaluation, combined with appropriate export promotion measures, should call forth a significant supply response.
Third, devaluation is being proposed here in the context of comprehensive policy reforms, encompassing not only official exchange rate adjustment but also the supporting fiscal, monetary and other measures highlighted below, to make devaluation work. Indeed, the approach here is dynamic as against the static and populist orientation of the anti-devaluation ideologues.
Adopt a flexible, market-oriented exchange rate regime based on the target-zone approach.
Create a truly autonomous inter-bank foreign exchange market whereby the CBN ceases to be the dominant player. Instead, the CBN would be more of a market referee and facilitator, intervening periodically to achieve certain strategic objectives and ensuring compliance with the rules of the game.
To ensure the depth and viability of the new interbank-based foreign exchange market, it should be funded not only with non-oil export proceeds and other private inflows but also funds sourced from oil-marketing and oil-servicing companies and remittances of oil-producing companies for payment of taxes and royalties while Government receives payments due to it in Naira. The implication of this scenario is that petro-dollar earnings would be kept by the CBN after monetisation and used to boost our external reserves, service our external debt and for occasional strategic intervention in the foreign exchange market.
Liberalise the prevailing stringent exchange controls and put in place a phased settlement of outstanding payment arrears in order to restore confidence in both our macroeconomic management and international payment systems. However, the requirement of appropriate documentation for end-user transactions should be maintained.
Undertake the full deregulation of the downstream sector of the oil industry.
Implement measures to further diversify the economy away from oil and thereby reduce our undue dependence on oil for government revenue and foreign exchange earnings. Similarly, reduce import dependency through meaningful import substitution initiatives.
Use tariffs to discriminate against luxury and frivolous imports. However, the temptation to resort to high tariffs and large-scale import bans should be resisted as such measures, apart from provoking retaliation by our trading partners, would induce importers to resort to under-invoicing, smuggling and other forms of duty evasion in order to remain profitable.
Block fiscal and other leakages that abound in the country.
Introduce a robust system of public assistance to the manufacturing sector in the form of various fiscal concessions and incentives, particularly to industries suffering from heavy and unfair import competition, such as textiles and clothing, pharmaceuticals, detergents, shoes, plastic products, food, beverages, etc.
Diligently implement the various export promotion incentives to boost production and generate exportable surplus. In this connection, the strategy of export-led recovery or the new “Zero Oil” Economic Agenda now being promoted by the NEPC should be diligently pursued.
Make concerted efforts to deal with the various infrastructural constraints in order to boost supply, enhance efficiency and reduce the high cost of doing business in the country.
Create a stable, business-friendly environment based on effective public-private partnership, with the private-sector as the engine of growth. Also deal firmly with insurgency, corruption and abuse of court processes by litigants and criminal opportunists.
Devaluation, therefore, if undertaken in the context of a comprehensive and robust policy reform, would yield the following significant benefits: arrest and reverse the depletion of our external reserves; discipline demand for foreign exchange and imports and reduce our vulnerability to external price shocks; induce net foreign inflows; enhance export-competitiveness and growth; enhance government revenue from petro-dollar receipts and taxes; check round-tripping and other rent-seeking behaviour; restore credibility to our international payment arrangements; and promote the diversification and growth of the economy. The important caveat here is that devaluation should be undertaken as a key element of a comprehensive and robust policy reform backed by diligent implementation.
Whether by design or by default, Nigeria is now approaching the dawn of the post-petroleum age. For a country so heavily dependent and for so long on petroleum, it is difficult to contemplate a future without petroleum – so pervasive and critical has been the role of petroleum in our national economy! However, this is the stark reality that we need to embrace. The post-petroleum age in Nigeria comes with both risks and opportunities which policy-makers and other key stakeholders need to be aware of and respond to by appropriately managing the episodic and traumatic transition from fossil fuels to renewables. It cannot be business as usual, with the typical lack of a sense of urgency.
Meanwhile, saving the Naira from its prevailing travails would require comprehensive and robust initiatives, some of which have been highlighted together with an identification of the forces at work. The measures mandated include the devaluation of the Naira but it should be reiterated that this is just one, albeit a key element, in the nexus of actions required to be taken. Some of the initiatives would have long gestation periods. However, coordinated and diligent implementation of these and many other initiatives by Government, working with key private sector stakeholders, should yield a realistic, unified exchange rate regime and restore confidence and stability in the foreign exchange markets in the short run. Long-term sustainability will require strong political will by Government and consistent efforts on an ongoing basis by all.
Above all, we need to embrace change, big change! One important implication of the creation of a new interbank foreign exchange market advocated above is that the private sector operators would cease to rely on the CBN for their foreign exchange needs, subject to a transitional phase of not more than six months. This would, no doubt, come as a shock and, for many businesses, it would mean “export or perish”! Although this appears to be a rather risky, even worrisome proposition, it is warranted and inevitable in our present dire circumstances. Indeed, “export or perish” is not a curse, a mere slogan or exhortation. It is a strategic imperative for our economic survival and transformation!
• Odozi, Financial Consultant and company Director, is former Deputy Governor of the Central Bank.