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Devaluation not the panacea

By Boniface Chizea
03 July 2015   |   5:55 am
IT is necessary and indeed our patriotic duty not to keep quiet if we disagree when some recommendations are made particularly from very prominent and important quarters such as was recently reported to have been made by no less a personality than the Chief Executive Officer of First Bank, Mr. Bisi Onasanya, during a Bloomberg…
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IT is necessary and indeed our patriotic duty not to keep quiet if we disagree when some recommendations are made particularly from very prominent and important quarters such as was recently reported to have been made by no less a personality than the Chief Executive Officer of First Bank, Mr. Bisi Onasanya, during a Bloomberg event at the Stock Exchange recently in Lagos. In summary, Onansanya is of the opinion, which we must quickly admit he is entitled to; that the Central Bank of Nigeria will not be able to, given the complement of policies it has churned out recently, stabilise the rate of exchange but rather that such measures only end up piling up pressures on operatives and the market, necessitating that the banks in the country go out sourcing for foreign exchange to keep credit lines open and might actually lead to the undermining of the growth prospects of the economy as productivity is comprehensively negatively affected.

He believes and recommends that the Central Bank must not be afraid of devaluation but should bite the bullet and take that route which, in his reckoning, is the cure all solution for the current pressure which is being felt by all stakeholders not the least the regulatory authorities who have the primary responsibility of promoting schemes and adopting measures to underwrite financial and macro-economic stability in the country. He believes that if CBN relaxes some of the controls such as the recent exclusion from the interbank market of importers of some items into the country which to all intents and purposes the country if it had been properly managed should by now be self-reliant of; it will result in the Eldorado we have all been waiting for. But as the above caption indicates, we do not agree that this is a correct position and will proceed further by actually eschewing the sophistry surrounding the theory of devaluation and issues relating to appropriate pricing and price misalignment but draw from relevant experience in this country to debug this perspective.

Before I commence to look far back, it is a matter for the records that quite recently towards the end of last year, the CBN, contrary to the avowed and declared position of the Governor as included in his agenda for the Central Bank under his watch; allowed the Naira to devalue from 155 to 168 to the dollar and thereafter upon the closure of the Auction Window allowed the Naira to sell at 198. This is devaluation of about 30 per cent which is just beginning to reflect on general price levels in the economy after the lag for the pass through effect of such policy to register. And since then what has happened? Has this step which some of us considered ill-advised been able to make any endurable impact? Has it been able to reduce the dollar demand pressure and how many portfolio investors have since rushed in because investment options have now been made cheaper even if we acknowledge the fact that we enjoyed some respite via-a-vis the rate of exchange?

The point has to be made again that if you liberalize the Naira and relax controls to make the foreign exchange market more liquid, the country will run into real problems. The reserves will collapse overnight and credit risks will worsen and the much-touted growth in productivity will not result to impact the unemployment situation. In my well-considered opinion this country should do all it takes to avoid succumbing to the pressure of those who would preach devaluation but only do so as it is adjudged inevitable even then within the context of a mix of other supportive policies.

When the Structural Adjustment Programme (SAP) was introduced in 1986 under the Babaginda regime after we cowered to the pressure from the International Monetary Fund and then in our convoluted wisdom and logic decided to forgo the accompanying loan, the Naira was effectively devalued from 22 to 86 Naira to the dollar overnight even if to cushion the past through effect we disingenuously had what we called the first tier window with the rate left at the rate before the massive devaluation and the second tier for other economic agents creating a perfect scenario for round tripping. Since then, this country has not recovered from this measure. The extent of impoverishment was massive ramping up the misery index in the country.

Let us put this observation in context. A friend of mine, who is still very much around and was then working for one of the reputable international consulting Organizations in the country, bought a brand new Passat Volkswagen car and was able to pay back the loan he accessed to purchase the car within one calendar year from his salary. Contrast that with the prevailing situation when most compatriots will find it difficult to pay back loan for the purchase of second hand car over several years. I am also quick to recall a personal experience. My late father of blessed memory was at about this time renovating his house and I had assisted him with replacing the louvre blades downstairs with quality louvres; the type that will not cut you in case you mistakenly rub your fingers over the edge. By the time I had gathered some more funds and returned to attend to those upstairs, it was a different call. The budget I made going by my earlier experience was grossly inadequate and even when I managed to undertake the replacement, I could only afford an inferior version and we are talking of a few months later.

And that has been the story since then and accounts for the deterioration that is now witnessed across the country even if one is not forgetting the massive negative influence of that cankerworm, corruption which has eaten deeply into the soul of this country. And what is more; since then the Naira has never appreciated on the 86 Naira which was the rate which SAP heralded. Mr. Onasanya indicated that probably an exchange rate of around 210 is all that might be needed but that flies in the face of related experience. Devaluation is an ill-wind and a slippery slope which once you are unfortunate to encounter is difficult to know where it will bottom out; as a matter of fact it never does!

As has been severally argued and canvassed, we do not have the export base to enable the country take advantage of devaluation. We are not in a position today to make our non-oil exports more competitive by devaluation to give the needed boost to the economy and facilitate badly needed growth and provide employment opportunities. In point of fact, devaluation in the present Nigerian situation caters more to the interest of the external sector. The challenge confronting the country and particularly the Central Bank is that reserves are dwindling with little or no prospects for accretion and the vulnerability of Nigeria in its dependence on oil revenue is well known and therefore portfolio investors first voted with their feet by a reversal of investment flows suspecting devaluation and those outside are waiting for things to stabilize and the degree of freedom which the Central Bank enjoys is limited.

But the Central Bank cannot fold its hands to be dubbed clueless, particularly in the face of an estimated national annual expenditure of 1.3 trillion Naira mostly on frivolous importation. The Central Bank has to be proactive to initiate some measures mindful of the fact that whatever it does there are bound to be downside risks. What is therefore required is for the Central Bank to track developments to initiate corrective measures as they become necessary.

There could also be a silver lining from the recent developments at the foreign exchange market as it was reported that for the first time in a long while, revenue from non-oil exports trumped that from oil in May, 2015 when the revenue from non-oil sources accounted for 61.1 per cent of the total receipts with Value Added Tax and excise duties contributing the lion share. And this must be the focus for the future as inherent in the dependence on oil revenue is the perpetration of inter-generational inequity as this wasting asset is being consumed by the present generation mindless of the generation that is following.

We should ideally spend revenue from such sources advisedly on investments that will cater to needs of the present and the succeeding generation. To make sure we are not misunderstood, we have not completely ruled out devaluation as a complement of policy mix but it must not and should not be touted as the magic wand as it would appear we have attempted to do recently.

•Dr. Chizea wrote from Lagos