The Naira – To devalue or not devalue?

By | 3rd April 2016

I was working on my computer when I noticed an email pop up; I clicked on it and behold, it alerted me to a situation I had dreaded. Observing my reaction, one would have been forgiven for thinking that I had lost millions in the stock market. Call my actions an overreaction, but reading on Reuters that the United States intends to press Nigeria into talks about the devaluation of the Naira brought forth the imminent reality that the Naira would be devalued sooner or later.

Since the fall of Brent Crude Oil price started creating pot holes in the Nigerian mono-product export driven economy, I have been a staunch believer that devaluation is not the answer simply because a look back at history and you get a feeling of ‘déjà vu’. What has the devaluation of the Naira brought us thus far? Nigeria has been devaluing the Naira from its official exchange rate of $1 to ₦0.75k in the 1980s to the current rate of $1 to ₦196, for broadly the same reasons as that faced today, yet there has been no economic prosperity. Another devaluation of the Naira to the parallel market rate of ₦325 – a whopping 60% fall in value in the space of 18 months – would continue the downward spiral of the Naira, the continual rise in the cost of imports and the corresponding rise in the cost of commodities. Inflation will rise and the adverse effects would be felt by the entire populace, most of whom (over 60% of the populace) earn below the $2 poverty line.

In the light of this,  one can be forgiven for sympathising with Muhammadu Buhari’s administration, which has fervently continued with its policy of fixing the exchange at ₦196. But who is benefiting from this fix? Most Nigerians currently buy and price their production at the parallel market rate as they generally do not have access to the official exchange rate. Only the privileged elites who have the wherewithal to gain access to dollars from the Central Bank of Nigeria (CBN) can benefit – and it has come to light that most of these privileged few have sought to make a quick buck and bet against the Naira, by engaging in round-tripping and price arbitrage. Therefore, all a trader needs is to have the connection at the CBN to be allocated dollars in the disguise of using their allocation legitimately, but rather than plough the money into their business, he or she can make a 60 percent return on their allocation in months as opposed to modest 5 – 10% bottom line revenues if they invested in their businesses. And if we are really lucky, such individuals might invest these funds in their business but rather than base their sales on the CBN rate, they sell their goods at the parallel market rate, or even higher when you consider the present uneven forces of demand and supply in the country. Meanwhile, some genuine businesses that desperately need this forex are closing down because they do not have similar connections; unemployment is markedly rising and social unrest compounding. So who is really benefiting from the current exchange rate?

When you assess the access of forex by the middle class in the economy, you quickly realise that they too have been scarred by the current forex situation. Nigeria’s middle class are those who can afford to travel out of the country, those who can send their children to schools abroad or even afford medical treatment in countries like Ghana, India and the like. However, since the CBN included school fees and medical treatment into the list of 40+ items prohibited from receiving forex, in a bid to salvage the plummeting foreign reserves, the middle class, which constitutes about 30% of the populace, have now been side-lined from CBN’s fixed exchange rate. Again, who is benefiting?

A holistic look at the economy and you get the picture that the future is dire. Foreign direct investments that are needed in an import laden economy are beginning to seize due to a drop in investor confidence over the nation’s dependence on one facet of the economy’s resources and the constant flip flops in monetary policy by the CBN. Add to this the structure of governance in the country and you start to get a sense of the problems that lie ahead.  The cost of governance in Nigeria is dramatically ridiculous – 80 to 90% of everything the country earns is used in maintaining public officers – ala Sanusi. Even if Nigeria borrows funds to jump start the economy in the hope of dramatically turning around its fortunes to become a net exporter, can she truly achieve this? Why should Nigeria borrow only to plug the hole in its budget, incur  more depth and plunge the nation into more misery? Again, who will benefit? Would it not be the overpaid governors, ministers and executive civil servants?

  • Emir Sanusi Lamido Sanusi

“If you really reflect on the problems of this country, it seems to turn common sense on its head. You sometimes wonder if anyone needs to tell any group of people that if you are a poor country, you do not need 36 governors, 36 deputy governors, with members of house of assembly, commissioners and advisers, Special assistants, a president, a vice president, 36 ministers, special advisers, federal legislature and so on. Simple arithmetic will tell you that if you have that structure, you are first of all doomed to spending 80 or 90 per cent of everything you earn maintaining public officers.  

It is really common sense but it seems to be a problem for us to understand it,” he added.

Moreover, when the dust settles on the volatile Brent Crude Oil price, does Nigeria really think that it can go to the negotiating table with foreign investors to buy their well refined goods at ₦196 to the dollar? Are the investors fools? Of course not! It is either the foreign reserve is used as a buffer or the Naira is devalued before negotiation commences, because for as long as Nigeria continues as a single product driven economy that is net import dependent, the country will continue to receive the short end of the stick in any negotiation.

So as the imminent calls of devaluation from some quarters in the country lingered on, I persevered in my little bubble, hoping and praying that in the current malaise, Nigerian’s and her political class would finally wake up – to the effects of the falling price of Brent Crude; the consequences of being a mono-product export driven economy; the lack of consistent and vibrant monetary policies; the unsustainable cost of governance; and the result of decades of corruption – and put in place corrective measures to strengthen the Naira. Surely, this time we would heed  the lessons from the mistakes of yesteryears and take corrective actions. If Nigeria were the sort of country that learnt from past mistakes and miraculously turned a new leaf, and if it were possible for the nation to harvest newly sown seeds tomorrow, then the textbook solution of not devaluing the Naira, as decisive measures are taken to become an export led economy would have been a truly worthwhile proposition.

Unfortunately, the country is in no position to take this stand. It is hence my opinion that Nigeria should devalue the Naira – not because I believe it is the best measure but because I believe that those currently benefiting from the current state of affairs are largely the corrupt few.