The quest for naira revaluation (1)
TODAY, most developing countries suffering from high unemployment or aspiring to achieve a policy of export-led growth are advised by the International Monetary Fund (IMF) to resort to devaluation. IMF feels that a lower value for the domestic currency will increase the price for imports and at the same time making exports cheaper.
This ultimately encourages increase in domestic production, which through the economic multiplier effect creates more employment and increases the gross domestic product (GDP) though not immediately. The idea behind pushing developing economies to embrace the IMF prescription is that maintaining a relatively low exchange rate helps them to build up foreign reserves, which can serve as a cushion against future financial shocks.
However, devaluation can lead to a reduction in citizens’ standard of living as their purchasing power is weakened both when they import and when they travel overseas. It can also promote inflation. More so, it can make interest payments on international debt costly if those debts are denominated in a foreign currency, and it can repel foreign investors because profits would be valueless when converted from Naira to foreign currencies for repatriation.
Furthermore, the developing economies relying on exports of raw materials and imports of necessities automatically fall victims of economic stagflation heralded by the co-existence of inflation and unemployment once they devalued their currencies. Hence, a strong currency remains a mark of prestige while devaluation is linked to economic policy slip and a signal to a catastrophic economic depression. In any case, Nigeria has been devaluing Naira from its official exchange rate of $1: N0.75k in 1980 to the current rate of about $1: N200 yet there is no economic growth and development. In fact, a devalued naira means prosperity of our trading partners because they can purchase our crude oil and other raw materials at give-away prices. What should be beneficial to a country like Nigeria is Naira revaluation.The fundamental question of interest before us is that how can we revalue Naira amidst the depressed foreign reserve?
Measures to revalue Naira
In economic practice, a country may revalue its currency higher by achieving positive economic conditions and lower inflation. We can improve the economy by restoring balance of payment equilibrium especially through an increase in the value of our exports, import reduction by using the local industrialisation policy, and a severe custom duty on undesirable goods and services. This would imply that existing currency increased in value as opposed to the defeatists’ case of devaluation or redenomination. Specifically, government should consider intensifying action on checking corruption, security, productive sectors and exchange rate, and economic growth guided national reorientation.
Corruption has been the major factor responsible for the Naira crunch. The hard-earned foreign reserve in the CBN vault has been quenched and scrambled by official looters. This is evidenced by the huge amounts of recovered loots. The current naira slide is attributed to the reserve mismanagement. As a result, the government is incapacitated in ensuring stable supply of the foreign exchange for import of necessities. This might be the major reason for foreign exchange scarcity and rationing. Worse, the looted foreign reserve and much other national wealth stolen were invested abroad for the employment benefits of foreign countries and to the detriment of our economic growth and prosperity. It is, therefore, obvious that due to the effects of corruption, demand for foreign exchange for viable imports always lagged behind its supply thereby causing the continuing naira depreciation and the series of devaluation.
Although the current war against corruption has received mix reactions, we believe that the more we fight the epidemic, the more we can learn about it to fight it better. For example, we have now learned that even the hard-earned foreign reserve safely in the custody of CBN can be stolen. We can fight corruption by blocking all possible economic leakages especially through the use of the single treasury account, an effective project monitoring mechanism, close monitoring of public officers’ bank accounts, transparent procurement measures, and stipulating good rewards for whistle blowers. More so ‘the habitually corrupt persons’ should be discouraged from seeking or being in charge of “tempting” public offices.
Since the creation of man, the first death was caused by a fight not diseases. Insecurity is more damaging to any society than the outbreak of diseases. Absence of security means no health facilities, no education, which translates to no production of goods and services, no exchange of goods and services, and no economic growth save destruction of the existing infrastructure, killing the productive segment of the manpower and stagnating general economic activities. In fact, insecurity is a sure way to poverty, diseases, stagnation, deprivation and lack of human dignity. Low productivity, poverty, and economic stagnation are the factors responsible for the weakening of the Naira.
The fact is that the incidence of militancy and rebellions experienced in Nigeria and many African countries are post-economic downturn issues. It could be that some depressed foreign countries are trying to balance the economic equation by ‘stirring the water to catch the fish’ through manufacturing violence in the economies of their victims. Whenever a country lost an enabling economic environment it automatically becomes import dependent and must have high unemployment rate. This wanes the Naira. Hence the primary responsibility of government has remained the maintenance of law and order, rehabilitation of the displaced, and the reversal of the infrastructural decay caused by violence in the affected areas to at least a minimal comfort level. Achieving security and fighting poverty are the principal measures in creating an enabling environment for production and business that lead to boosting the Naira strength.
The productive sectors and exchange
The government can reinvigorate the productive sectors through instituting the appropriate measures on especially, industries and agriculture. Strength of Naira depends on the value of our exports which should be more than the value of our imports. If export made attract lower foreign exchange than is required to import, the value of the Naira shrinks.
A cursory look at the Nigerian economy today reveals that we export crude oil and other raw materials to foreign markets. These commodities fetch less foreign exchange compared to finished products.
Unfortunately we import mostly finished industrial products with the scarce foreign exchange at high cost. This means that imports and exports sink the Naira because available foreign exchange is always less than what is required to make our numerous consumable imports. Technically speaking, the demand for foreign exchange always exceeds its supply and by the law of demand and supply the Naira must fall.
It is common in Nigeria today to hear and celebrate the news that ships laden with petrol and food items have arrived Nigerian ports. The meaning of this is that our raw materials exported at low prices are processed abroad which we have now imported at high price. This imbalance guarantees continuous Naira weakness, unemployment, and the import dependence disorder.
• To be continued tomorrow.
• Professor Magaji is of the Department of Economics, University of Abuja.