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On devaluation of the Naira

By Editorial Board
15 February 2016   |   2:17 am
There is no doubt that the Muhammadu Buhari administration’s resolve not to devalue the naira is the correct position to take in Nigeria’s circumstance. Since the downturn in the price of crude oil in the international market, Nigeria’s foreign exchange earnings and reserves have been adversely affected. Consequently, there have been calls for or against…
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currencies

There is no doubt that the Muhammadu Buhari administration’s resolve not to devalue the naira is the correct position to take in Nigeria’s circumstance. Since the downturn in the price of crude oil in the international market, Nigeria’s foreign exchange earnings and reserves have been adversely affected. Consequently, there have been calls for or against the devaluation of Naira, with each side of the divide providing reasons for its position.

In far away Nairobi, Kenya, President Muhammadu Buhari settled the issue. He told a group of Nigerians in that country, that his administration will not devalue the Naira. The President gave the informed reasons that nothing will be gained from devaluing Naira since Nigeria is not export-driven. He also stressed correctly that poor Nigerians will suffer more as devaluation will fuel inflation in the economy.

Currency devaluation is usually carried out to achieve some economic and social objectives. The ultimate ones are to make a country’s exports more price-attractive while making imports more expensive and thus, less attractive. Thus, trading partners are encouraged or influenced to buy more of the country’s export products and services while its inhabitants are discouraged from importation of foreign goods. In so doing, while foreign exchange earnings increase, they are also conserved. Thus, from both sides of the trading relationship, the country’s foreign reserves will trend upwards.

As it is well-known, Nigeria is a mono-product export country. Apart from crude oil, there is nothing to export to earn handsome foreign exchange. On the converse, the country is import-dependent and any attempt to further devalue the Naira will lead to massive importation of goods and depletion of foreign reserves perhaps, to a level that can hardly support further imports. Such a situation will automatically result in hyper-inflation and aggravate poverty, civil unrest and criminality across the country.

However, a mere decision not to devalue will not lead the country out of its present dire economic circumstances. As emphasized in basic economics, what makes an economy thrive is its level of productivity – both for internal use and exports. Based on this, the Nigerian government should urgently embark on actions that will reverse the current trend of a low level of production or productivity in the country.

Towards this end, there are quick wins accessible to government. For instance, government and its officials, together with leaders across board and the entire citizenry, should curb their appetite for non-essential imported goods and those that can be produced domestically. Another is to focus on and unleash productivity in agriculture, mining, manufacturing, tourism, information and communication technology, etc. For a re-incursion into agriculture especially, it must be remembered that agriculture was the mainstay of Nigeria’s economy prior the advent of crude oil.

It is still the hub of most economies as substantial industrial raw materials come therefrom. A re-enactment of the years of the groundnut pyramids and cotton in the North, cocoa in the West and Palm oil and kernel in the East, will portend growth for the economy. With modern technology and advanced processes, much value can be added to the products before exportation in order to attract handsome revenue. In addition, quick stimulation of activities in the small and medium scale enterprises sector of the economy is very essential.

Nigeria, with an estimated population of 170 million, has a substantial number in the youth category that are, either unemployed or under-employed. These are readily available for government’s deployment in order to activate and realize the productive potentials of the country. Utilised aright and along the paths that will assure comparative advantage, the country will be on its way out of its present precarious economic situation.

The case of providing and up-scaling infrastructure such as power, roads, etc is a sine-qua-non. This has been one of the greatest challenges the country has in taking advantage of its potentials. Without adequate and functional infrastructure, the economy will not operate at its optimum and expected productive results will be a mirage. Further, it is high time standards similar to, or better than, those in the countries from which Nigerians import their goods were set. Where the standards already exist, adequate quality control and monitoring are called for to ensure that products from Nigeria can compete favourably.

The need for operational efficiency in all public and private sector endeavours – a sure way to eliminate waste, be cost and price competitive is an urgent one. Making sufficient and affordable credit available to the real sector to catalyse the economy also needs to be emphasized. Of importance also is that specialized government institutions, such as Bank of Agriculture, Bank of Industry, Nigeria Export-Import Bank, Nigeria Export Promotion Council, Standards Organisation of Nigeria, etc, set up to positively impact the economy, must scale-up their acts for a quick turnaround of the economy. Finally, fiscal and monetary policies as well as their implementation frameworks, need to be fine-tuned towards fast-tracking the achievement of improved productivity and consequently, a stable and sustainable Naira exchange rate.

5 Comments

  • Author’s gravatar

    WHEN FOREIGN RESERVES FINISHES THEN NAIRA WILL DEVALUE ITSELF

  • Author’s gravatar

    An old grammar, haven’t we read and hear all these stories and grammars before. Lets face it, nothing tangible will ever be obtained in Nigeria with the current structure of Nigeria. The editors pointed the era of Cotton, Palm oil and Kernels, and Cocoa revolution but it however failed to inform his readers that these revolution and achievements were accomplished under regional governments, and the nation was not so divided and so polarized as they are today under Buhari divisive government. Nigeria is better divided into different nations, or at least revert to regional governments if the dream of a better Nigeria can ever be achieved. I don’t see any hope or future for Nigeria under this repressive system or by its current arrangement. We have a nation plagued by real anger and resentments fueled by neglect and obvious discrimination, and marginalization. We have a nation with many states that is a channel for waste, instead of accumulation of wealth and utilized for giant projects, we have divided resources among states, then further divided among local governments, and again further divided among councilors, and then state assemblies, so nothing is ever accomplished because the money end up for consumer purposes instead of building projects. The Federal resources is further divided among senators and hundreds of house of representatives share in the loots, what else is left for development? I don’t see any hope for the nation but either complete division or resorts to regional government if we hope to achieve acceleration of developments as a nation. But we must first heal the wound of division that has paralyzed the unity of this nation, starting with apologies for the killings that took place against the Igbos during the war. Unconditional release of Nnamdi Kanu, reparation for victims of the civil war. Federal infrastructures earmarked for the development of South-East and South-South regions, and Truth and Reconciliation Commission instituted to make mend, then Nigeria will come alive again and may be fulfill its destiny.

  • Author’s gravatar

    Dear Editorial Board,

    While you have listed some credible points on how to help the Naira/$ exchange rate – consuming locally made goods, encouraging agriculture, mining, deploying unemployed youth etc., I see that you missed a critical aspect of exchange rates. That is the supply and demand of the US$ itself. I also see most of your suggestions as medium to long-term solutions. Such solutions can hardly resolve the short-term situation of the N/$ exchanging for N350+ and rising. Let’s take a look at just a few of your suggestions.

    i) Increasing consuming locally made food- Our consumption of imported rice and wheat will probably constitute some of the highest drain on our forex reserve. I read somewhere that we only produce about 2% of the wheat that we consume. I also know that previous administration made some effort on promoting cassava bread. Efforts to scale up the local production has so far yielded nothing much. On rice, forget all the rhetorics of locally produced rice. I have not seen any credible statistics on local rice production, but I know there are talks of banning imported rice. This probably suggests that we produce something close to what we consume. I am a great lover of rice, but I don’t think my local rice consumption is up to 10%. In fact, on “special” occasion when I eat the locally produced Ofada rice (oh I love the swampy taste of this rice!!), it is relatively more expensive. I believe any serious effort to increase local rice production will not take less than 3 years to begin yielding fruits. I am not an agric expert, but I sometimes take what those so called expert saying, in news media, that we are self sufficient with a pinch of salt. We simply don’t have the capacity to ramp up production in the short term.

    ii) Increase consuming locally made goods – I fully agree that we need to moderate our consumption of some foreign goods. Foreign goods can be subdivided as essential or luxury goods. It is much easier to influence the consumption of luxury goods than other essential foreign goods like drugs, phones, computers atc. We however have to know that this cannot be achieved by a ministerial or presidential proclamation. We have to know that it is now a very connected world thanks to the internet and television. Our tastes, whether good or bad are influenced by what we see. I think heavily taxing such goods will do a better job of moderating their consumption without hurting the middle class. Afterall, I don’t see many elders having a village meeting with chilled bottles of Moet rose or breaking kolanut with a nice bottle Hennesy XO!

    iii)Increase consumption of locally made fuel – Now, this is the elephant in the room. It is probably one of the highest drain of our forex reserve. If government want us to consume only locally made goods, why are they not including fuel? Why have they not been able to put the refineries in good order afterall there are only four of them? Afterall more than 90%(??) of our fuel consumption is imported. I ask these questions not because I want an answer. I ask because I know the solution, though simple, is not achievable in the short term. How much money have we sunk into reviving our moribund refineries over the years with absolutely zero result? It brings me to the point above, When the government cannot, in a short term, revive four refineries that employ only a few thousand workers, how should they expect millions of farmers and manufacturers to produce enough locally made goods and food. I’m not being pessimistic that being self sufficient is infeasible (in fact I’m very optimistic it is feasible), Im only pessimistic this can be done in a short term to salvage the value of the Naira. No matter how much effort and manpower you put into it, it still takes 9 month to produce a baby from the womb!

    A quick mention on exchange rate of the US$. I think the CBN is doing everything the very wrong way. I however think most of the argument on devaluation vs no-devaluation are not apolitical. I think some people a feeding fat on the huge gap between the official and the black market rates which is N150 (or 75%) as I write. As Emir Sanusi rightly said a couple of weeks ago, President Buhari should be aware of the counsel he takes on this issue. This huge gap in the exchange rates is feeding corruption. This is a disconnect with the fight against corruption and terrorism. The forex market now present a profitable playing field for criminal elements and terrorists to make money. Remember Al Capone came into prominence in the US mainly for only selling booze. Yes booze! Because during his time, the US government prohibited the production and consumption of alcohol into the country. So these mafia and criminals were making huge bucks by importing booze from neighbouring Canada. After the prohibition was lifted, have you heard of any mafia boss boasting of selling beer?

    I was listening with silent amusement when one of the officials of the CBN was clarifying that they have not yet included school fees and medical into the list of 41. The CBN spokesman said something like “allocation of US$ to school fees and medical is not banned but take lower priority to ‘tangible goods'”. I think this is an escape clause in case it is discovered that some senators, directors of banks, CBN etc are still getting forex to pay for the school fees of their wards in foreign primary (yes, primary!), secondary schools and universities while the “common” man who sold his house to be able to finance a better education for his children in Ghana, Hungary, Canada or US cannot get the same privilege.

    Your editorial did not address the supply and demand of the US$. It probably assumes that the CBN is the only source of the US$ via the weekly forex auction. Yes this is correct at this time of the official N/$ peg of N199. But this will definitely not be true when the Naira is devalued and individuals and foreign investors will flood the market with US$ if they think they can get Naira denominated assets at bargain prices.

    My personal opinion is that we are slowly but steadily getting to the tipping point. At that point we will realise that exhausting our valuable forex reserve in defending the Naira is a fool’s errand.

  • Author’s gravatar

    Another long essay and grammar for secondary school student learning English. Academic and text book theory does not work with markets. Listen to Ken Fisher a renowned American market commentator and author. The market also does not care about past event. It is practical, forward looking but not too far to the future beyond 20 to 30 months which is within a presidential term . Also there is a lot to do with emotion and human behavior in investing. As I wrote in my mail to ‘Our Country Nigeria, it is the market that fixes the price of anything including currencies. Otherwise why can’t PMB peg the price of Nigerian crude oil to say $90 per barrel (crude oil sold for that at some time. But if he does so, no body will buy from him.) Same thing with the naira. He and his central bank should allow the naira to float and he will see the magic to the economy. Global investors will start buying the naira to invest in Nigeria, this in turn will firm up the naira as demand increases and stabilizes it rather than it being ‘murdered. It will also provide the need be cash to pay the minimum wage and also increase salaries of the poor workers. Investible assets are cheap in Nigeria relative to global markets and Nigeria has a good skilled and dedicated work force. This is what PMB should be letting the world know.

    I am a medical Doctor by profession, and you don’t have to be an economist or a financial guru to know this basic practical fact.

    Most if not all the challenges mentioned by the author need practical investments by the private sector, not the government. A lot of money that could be invested in Nigeria is stacked away abroad and in Nigerian banks in dollars. So allow the Naira to float and Nigeria will be flooded with investment dollars. A market driven devalued naira will also make import more expensive contrary to what the author is implying in the short term.

    If PMB does not know, I can tell him that he is currently murdering the naira which he ironically says he does not want to murder. From the first week of February when he made this statement (about 2wks) the naira has depreciated by 20% to date, and 41% from first week of December 2015.