The Crave For Dollar, And Naira Devaluation Saga

The debate over devaluation of naira will continue to generate reactions from Nigerians given the level of dependence on foreign exchange to drive businesses in the country. Bamidele Ogunwusi, examines the controversy on naira devaluation and the position of government.

President Muhammadu Buhari’s ‘no retreat no surrender’ stand over naira devaluation clearly shows that the president’s position informs a similar one by the Central Bank of Nigeria (CBN) which demand management measures instead of having a third bite at the devaluation cherry.

Overtime, dollar demand has been rising on account of growing import demand of goods and services. On the deficit side, Nigeria is a net services importer which given that the largest sector of our economy is services suggests a lot of that growth has been largely from using foreign inputs.

On the supply side the dominant force is exports and the periods of drops in 2009, 2014 and 2015 coincide with naira pressures.

Just recently, the naira changed for N400 to a dollar and had been fluctuating between N300 and N395 ever since and as at Tuesday was changing for N280 to a dollar at the parallel market, and N199 to a dollar at the inter-bank rate.

An official of the nation’s apex bank, the Central Bank of Nigeria (CBN), attributed it to the mop-up operations of the CBN which had reduced excess liquidity of Naira in circulation and made it relatively scarce.

Experts Speak
Foremost economist and founder of the Lagos Business School, Professor Pat Utomi is of the opinion that the ongoing conversation for and against the devaluation of Naira is wrongly premised, asserting that the Nigerian currency had already been devalued.

Utomi said that the Nigerian government could not shy away from the rate of the currency at the parallel market and insist on selling naira at the interbank rate, thereby giving room for some Nigerians to continue to benefit from the situation.

His words:  “The whole exchange rate conversation is wrongly premised. Some want the currency devalued, others do not. The Naira is devalued already. It is those who do not understand the issue that are creating the problem. The value of the Naira is known to everyone. What matters in this conversation is not the nominal value of the currency, what matters is the stability of the currency such that people can anticipate, plan and engage accordingly”.

He reasoned that administrative control of the currency rate by the Nigerian government was difficult because of high cost, adding that Nigerians did not possess such high level of discipline for such control to be workable in the country.

“I have heard people say that it is importers that want the naira devalued, that it is those that patronise local products that do not want the Naira devalued. I have never seen that kind of illiteracy in public conversations. It is the direct opposite. It is those who import things that will not want the Naira devalued, so that what they import can be cheap; if the Naira is devalued, what they import will become expensive,” he stated.

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While hoping for an oil price rebound, he called for more shrewdness in the management of revenues derived from oil.
His words, “This is a temporary blip. Nigeria will not permanently be in a situation where it cannot afford to pay for its imports. Nigeria has experienced a sudden drop in its foreign income. What Nigeria can do is to cut its cost dramatically. When Nigeria experienced similar economic challenge in 1976 during Olusegun Obasanjo’s regime as Head of State, Obasanjo quickly did what we called low profile. The Head of State’s official car was a Peugeot 504, and nobody in the whole service drove a bigger car. So, we trimmed our sales”.

In his own view,  Emir of Kano and immediate past Governor of the Central Bank of Nigeria, Muhammadu Sanusi II, described the monetary policy regime of the CBN as not practicable and wrong.

Sanusi was quoted by Financial Times as saying that President Muhammadu Buhari risked exacerbating the country’s economic woes and undermining his government’s achievements on security and corruption by endorsing exchange rate policies that were doomed to fail.
He said he was disappointed to see Buhari’s strong security and anti-corruption efforts overshadowed by a monetary policy regime with “very obvious drawbacks that far outweigh its dubious benefits”.

The CBN, with Buhari’s public endorsement, last year imposed tight capital controls and pegged the naira at an official rate currently 35 per cent stronger than the black market rate. The policies sparked capital flight and hurt Nigeria’s reputation as a frontier market investment destination.

“Unfortunately, because the exchange rate is right out there in front now, monetary policy is being seen as the barometer for broader economic thinking,” Sanusi was quoted to have said in an interview at his palace, adding, “It is sad that on this one policy, you get it so wrong that you risk taking away attention from everything else you are doing”.

The country’s economic woes are now being exacerbated, Sanusi argued, with the currency peg and restrictions in the foreign exchange market creating “a lot of speculative and precautionary demand”.

Exporters and investors “are holding on to foreign currency, as no one would sell at the rate the government is setting,” while “the government does not have the reserves to keep the exchange rate at its official level in the market,” he said.
“These policies have been tried in different parts of the world and in this country before, and they have just never worked. No matter what the stated intention behind them, they are wrong,” the emir added.

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He pointed to a number of early victories for the Buhari administration, including a military offensive that had put Boko Haram insurgents, who have ravaged the North-East, on the back foot, and the President had begun root and branch reform of the NNPC, the notoriously opaque state oil company.
“These measures are good for the economy and display strong political will to change the system. But getting monetary and fiscal policies right will be crucial for broader progress in structural reform,” the emir added.

The President’s anti-corruption stance was “totally inconsistent” with the foreign exchange regime he supported, Sanusi said, pointing to the arbitrage opportunities this had created.

IMF’s Antidote
A Lagos based economist, Henry Boyo, said the recent consultations with relevant government agencies by the team of International Monetary Fund (IMF) led by its Managing Director, Christine Lagarde, to assess the economic impact of the crash in oil revenue and the planned responses for addressing those fundamental reforms required to sustain inclusive economic growth and reduce poverty is not only timely but important.

“The team’s recommendations reflect the self-evident need for reforms, which would improve fiscal discipline and reduce imbalance between our export and import values. Also, the report of February 24 re-echoed the need to broaden the tax base and implement measures to boost the ratio of non oil revenue to Gross Domestic Product.

The IMF advised that sustained private sector-driven growth requires a competitive economy, which can evolve with an exchange rate policy that is allowed “to reflect market forces”. It recommended that “restrictions on access to foreign exchange” should be removed.

Although the IMF acknowledges that the Central Bank of Nigeria “lately eased monetary conditions,” the team, however, observes that there is still a “need to ensure a strong and resilient financial sector that can support private sector investment across production segments (including SMEs) at reasonable funding cost,” these recommendations simply repeat the same old self-evident prescriptions without defining the appropriate supportive medium that would guarantee a cure.

However, Boyo said “if you have not identified the antidote to the poison of systemic surplus naira, how can you restrain inflation and bring down the cost of funds from a clearly prohibitive 20 per cent plus to “more reasonable’’ and supportive 4 -7 per cent interest rate levels that would facilitate industrial consolidation and rapid job creation.