Naira Devaluation: Not In Nigerian Interest
In an article published by The Guardian Newspaper on March 9, 2011, I advised against the devaluation of the naira. The backlog of chronic under investment in basic infrastructure and non-diversification of the country’s narrow economic structure despite its considerable natural resources endowment has created a dissonance between economic policies and ordinary life.
In a balanced economic environment, Central Banks could supposedly control credit by acting purely on borrower’s demands for credit. As long as the Central Bank was able to set the price of credit via policy rate, the quantity could easily be regulated by a forward looking independent and efficient monetary authority, which could second-guess the reaction of households and businesses to changes in policy rates. That was the theory. The experiences of the past years have shown that as is often the case in economics, theory was just one too many steps away from the reality. Due to chronic infrastructure deficit and non-diversification, the economy and society are currently facing extra ordinary times and extra ordinary measures are needed to fix them.
Currency devaluation is a conventional monetary instrument applied by a country to rebalance its economy to improve its competitiveness and expand its share of the world trade. In the process, exports will be boosted with a positive impact on the GDP. Rebalancing an economy via monetary policy (devaluation) is a short-term measure to enhance export competitiveness, boost local production and create jobs. It is a tool mostly used by developed and balanced economies that are facing serious currency appreciation, which in turn has made exports expensive and uncompetitive. In the process, increase in economic activities will lead to stable exchange rate and creation of jobs.
In the case of the naira, there is nothing to show that it is over-valued. For almost three decades ago, the naira has constantly been depreciated by successive governments. Nigeria’s main export is crude oil, which accounts for 90% of export earnings (highly skewed source of foreign exchange earnings). Nigeria depends heavily on imported goods, which range from industrial, household and agricultural products.
Currency devaluation is usually associated with issues like fuelling inflation, rising interest rates and high cost of servicing foreign denominated debts. Having said that, I believe the main concern is about the quality of life for Nigerians in the aftermath of naira devaluation. The naira is a store of value for an average Nigerian who does not own a foreign or domiciliary account. Devaluation reduces the value and erodes its purchasing power.
In the situation we find ourselves, I believe restructuring of the economy through diversification is the way forward and not naira devaluation. Crude oil is priced in US dollars. Naira devaluation will not improve export of crude oil. The devaluation effect will instead lead to increase in crude oil production costs (exploration, production, and refining overheads). During the 1997 Asian crises, South Korea and Thailand went ahead to implement IMF’s prescription while Malaysia rejected it outright and went ahead with its perceived solutions, which produced a faster economic recovery compared to South Korea and Thailand. Some of the measures Malaysia adopted were:
• Fixing the local currency (Ringgit) to the dollar (fixed the Ringgit at 3.8 to the dollar)
• Stopping overseas trade in Ringgit currency,
• Restricting the amount of currency and
• Investments that residents can take abroad, etc.
Austria fully liberalised its capital account movement in 1991 when it was already one of the wealthiest and most stable economies in the world. Its capital account was liberalised only when its GDP per capita reached some USD 24,000.00. In 2010, Indonesia took temporary steps to impose some constraints on short-term capital in-flows. During the 2008 financial crises some G20 members took some protective measures to deal with their individual financial crises. The Financial Times of January 27, 2009 reported that some G20 officials privately acknowledged that the group’s credibility has been hurt by its failure to live up to a promise not to undertake protectionist actions for 12 months. The Financial Times (FT) also reported that Five G20 Countries announced their intention to raise tariffs within a month of the meeting scheduled on April 2, 2009 in London. Barter for food amid credit crises were also noticeable practices during the financial crises. The emergence of G20 which was then regarded as the New Bretton Woods was an extra-ordinary measure meant to deal with an extra-ordinary situation.
In the situation we find ourselves, there is no harm in applying some currency controls on the naira. In the past, the governance system treated the naira as an orphan currency. In the face of deep structural weakness in the economy, I believe it was unnecessary to have carried out a naira devaluation policy considering that Nigeria is a net importer of industrial, household and agricultural goods. During the financial crises in Asia, Thailand rice and sugar, which depend on local raw materials fully benefitted from the devaluation of the Baht (Thai currency). This action was beneficial because the country’s export soared to the point that supplies were short at home. Unfortunately, in Nigeria, naira devaluation has continued to hurt our industries with zero benefits to the economy.
Frankly, I will believe that the patience of the industry operators is running out due to unproductive naira devaluation. The under listed official exchange rates of the naira dating back to 1972 tell the whole story. I will repeat the fact that the Nigerian economy and society are facing extraordinary times due to non-diversification and the sudden crash in world crude oil prices. Extra ordinary times demand extra ordinary measures.
The country’s foreign reserves have become inadequate to give the naira the needed support. This notwithstanding, devaluation is not the option. The naira should be given some protection until stability is improved. Avoidance of speculative capital inflow is also advised. If the President and the CBN governor continue to speak with one voice against the devaluation of the naira, it will send a strong message to speculators that it is no longer business as usual. The devaluation sentiment will go away at some point. Extraordinary times demand extraordinary measures.
• Naphtali Iringe-Koko is a Chartered Accountant, former Accounts Inspection Manager UAC of Nigeria, former Head of Finance and Accounts, OPEC, former GM Finance NLNG, former GM Budget and Projects NNPC and the Author of a book titled: “Balancing Commercial Interests with Environmental and Socio-economic Responsibilities in the Nigerian Oil and Gas Industry”.
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