The naira, its traducers and defenders
Money
THERE is no refuting the fact that Nigeria is in the throes of economic hardship and creative ways must be found to save the country from further slide into woes. Over 26 states of the country are barely able to pay salaries of their workers while unemployment has remained on the rise. The value of the national currency, the naira, of course, has continued to plummet.
The year-long decline in the price of hydrocarbon, the country’s main foreign exchange earner, has told grievously on the value of the naira and the overall health of the economy. With a depleting foreign reserve, a rising debt profile and over-dependence on imports, the alarm bells are deafening and the government’s response so far has been one of desperation through administrative control of foreign currency inflow and outflow. The watchdogs of global financial health, namely, the International Monetary Fund (IMF) and the World Bank, are worried and have discountenanced Nigeria’s response to the situation. JP Morgan has moved to degrade government bond while the IMF is calling for further devaluation of an already weak currency.
The above conditions have remained of concern to domestic investors. Little wonder then that the naira came under scrutiny at the just concluded 2015 IMF/World Bank meeting in Lima, Peru where the IMF urged the country’s financial authorities to further devalue the currency This viewpoint was expressed by the Director of African Department of IMF, Antoinette Sayeh, who contended that the Central Bank of Nigeria’s administrative measures to limit access to foreign exchange were detrimental to the health of the national economy and unsustainable. This view, though important, is not new and is now being echoed by many so-called Nigerian financial experts.
It would be recalled that the naira was devalued officially by 28 per cent from N155 to a dollar in November last year to about N197 in the first quarter. Since then it has fallen further. The IMF had in its April 2015 Regional Economic Outlook for Sub-Saharan Africa predicted an economic growth of 4.5 per cent for the region but said fiscal adjustment through devaluation should be a priority for policy makers. From the foremost global financial institution whose mandate is to among other things promote exchange rate stability and deal with balance of payments adjustment, this is not surprising. However, these functions have not been exercised disinterestedly in ways that allow contexts to determine responses to maladjustments within economic processes.
In the face of these pressures from many powerful individuals and financial agencies, the Central Bank of Nigeria (CBN) and the Presidency have restated their resolve to defend the naira from further devaluation. President Muhammadu Buhari and Vice President Yemi Osinbajo have said that it would be unhealthy to devalue the naira and also made the point that the CBN was providing ample foreign exchange to sectors of the economy that are essential and productive. The CBN deserves commendation for the measures so far taken to control further devaluation of the naira and the integrity of the currency must of necessity be defended. Countries devalue their currencies for a number of reasons such as remedying trade imbalances, usually to boost export by making its products less expensive in ways that can become competitive on the global market and achieving an economy of scale. Ironically, Nigeria’s main contribution to the global economy presently is largely the export of hydrocarbon, denominated in the United States dollar.
Nigeria devalued its currency in the 1980s against the background of many imperatives, namely, a huge debt profile and oil glut. These factors created fiscal stress for the national economy and the country had to resort to borrowing for re-financing of loans and capital projects, making the country vulnerable to the conditionalities of international financial institutions. Despite adjustment policies, the economy never really improved until the fortune of oil improved in the last one and half decades.
Without any fear of contradiction, it can be argued that Nigeria is not exactly where it was in the 1980s. For Nigeria, therefore, the export imperative does not exist as a diversified economy remains a mirage.
The strength of currency is determined by national reserves of hard currency and gold, its international trade balance, its rate of inflation and interest rates and the overall strength of the economy. These fundamentals would appear unfavourable to Nigeria with a mono-product economy and its foreign reserve hovering around US$31.89 billion. What is needed first in this circumstance is actually depreciation which the naira has already gone through. Those against the current monetary framework have argued that government cannot carry on trying to maintain a fixed exchange rate, independent monetary policy and free movement of capital. It must be open to a choice among the available policy options.
Others have equally applauded the current position of government and praised the current regime of restrictions in the foreign exchange market which discourages Nigerians from wasting the scarce foreign exchange on frivolous items including those which can be locally produced. Notwithstanding, there is no fixed solution to all economic problems. A nation must be bold enough to think outside the box and take innovative measures to address distortions brought about by corrupt politicians other than market forces. And enough of the dictations from the Bretton Woods institutions and their domestic mouthpieces.
Nigeria’s current monetary framework is liberalised. It is not a fixed rate regime but a floating rate. The underlying reason among others is to check speculative demands for foreign exchange. Even at that, adopting a flexible rate regime whether of the Dutch option (DAS) or the Inter Bank Foreign Exchange Market (IFEM) which Nigerian economy managers have pursued since 1986, cannot bail Nigeria and other African countries out of their economic predicament. This country must get its economic fundamental right, engender productivity through diversification of the national economy, restore transparency and accountability to public expenditure and above all, promote self-reliance through creative exploitation of its abundant natural resources.
Related
Latest
Get the latest news delivered straight to your inbox every day of the week. Stay informed with the Guardian’s leading coverage of Nigerian and world news, business, technology and sports.
5 Comments
Interesting but rather disappointing piece. The editor’s seem keen to not offend the government, and so they praise the president and are very quick to attack the proponents of devaluation. But they do not show us exactly how the government’s ill-defended position is better than that of those who prefer devaluation. Furthermore, the editors seem to dodge the point that the refusal to devalue the naira has not been complemented by a robust economic blueprint complete with fiscal and long-term plans. The government’s position appears merely populist and fails to function as an option to the problems the economy is facing. This editorial smacks so much of what happens under a dictatorship where everyone (especially the press) is over anxious to praise and defend government, often at the expense of good governance and the populace.
Tell me, what would Nigerian gain from currency devaluation in a country of almost 180 million? What do we export? What do we gain if we lose the purchasing power of about 110 million Nigerians? For those who do not know the Advantages and Disadvantages of Currency Devaluation and what it is, below are the summary implications, both the advantages and disadvantages; courtesy of (www.economicshelp.org):
Devaluation is the decision to reduce the value of a currency in a fixed exchange rate. A devaluation means that the value of the currency falls. Domestic residents will find imports and foreign travel more expensive. However domestic exports will benefit from their exports becoming cheaper.
Advantages of devaluation
Exports become cheaper and more competitive to foreign buyers. Therefore, this provides a boost for domestic demand and could lead to job creation in the export sector.
Higher level of exports should lead to an improvement in the current account deficit. This is important if the country has a large current account deficit due to a lack of competitiveness.
Higher exports and aggregate demand (AD) can lead to higher rates of economic growth.
Disadvantages of devaluation
1. Is likely to cause inflation because:
Imports more expensive (any imported good or raw material will increase in price)
AD increases causing demand pull inflation.
Firms / exporters have less incentive to cut costs because they can rely on the devaluation to improve competitiveness. The concern is in the long-term devaluation may lead to lower productivity because of the decline in incentives.
2. Reduces the purchasing power of citizens abroad. e.g. more expensive to go on holiday abroad.
3. A large and rapid devaluation may scare off international investors. It makes investors less willing to hold government debt because it is effectively reducing the value of their holdings.
4. If consumers have debts, e.g. mortgages in foreign currency – after a devaluation they will see a sharp rise in the cost of their debt repayments. This occurred in Hungary when many had taken out a mortgage in foreign currency.
The impact of a devaluation depends on many factors:
The state of business cycle – In a recession a devaluation can help boost growth without causing inflation. In a boom a devaluation is more likely to cause inflation.
Elasticity of demand. A devaluation may take a while to improve current account because demand is inelastic in the short term.
If the country has lost competitiveness in a fixed exchange rate, a devaluation could be beneficial in solving that decline in competitiveness.
I have always advised the CBN and the FGN to consider redenominating our currency. Our currency lost almost 70% of its “internal legal-tenderness” from 1985 onwards; meaning the flow, portability and acceptability and so forth of our LEGAL TENDERS (Naira and Kobo) within the country. Think about all the characteristics of a legal tender(money) in simple economics and tell me how much of that is still left in our currency. Just common sense. The simple solution that might do wonders is; perhaps, limiting our highest currency denomination to either N50 or at most N100. In summary, copy the United States currency denominations (both the sizes and grades) and tell me what happens to our currency and even our economy within three months after this is properly done… Friends, we need to ensure that our 1 kobo, 5 kobo, 10 kobo, 25 kobo etc are being used again within a country that plans to keep them in circulation as legal tenders. Kindly eliminate 50 kobo since 25 kobo + 25 kobo would give us 50 kobo. Start our paper currency from N1 and quash that bulky and unnecessary N1 coin from our currency. Retain N1,N5, N10, N20 and N50 in paper currency and finally keep N100 as our highest paper-currency denomination, if possible. Previously( about a decade or more ago), it would have been inconvenient doing so but now it is far less inconveniencing because of the credit and debit card systems, online business transactions and the use of checks in other business transactions. Think about the denominations of our currency in the 70s when Nigeria was not producing anything and still not producing “anything” today. Even the US does not produce that much with the exception of defense materials and equipment. China, Japan and forth own most of the companies in the US… Yes, we definitely need to begin to produce something as well as boost agriculture and local services…to sustain our economy in the long term. So why are we still shying away from redenominating our currency PROPERLY? Do we lose anything from doing that? Has the US lost anything from doing so? Salvaging our economy and currency has to begin somewhere. If someone argues that the value of our economy or currency will not change whether or not we implement the above recommendations; then the answer is let us do it anyway unless we think and are sure that we will be losing something huge by doing so. But what is that?
Redenomination really doesn’t do much to improve underlying economic fundamentals behind our woes. If anything, redomination comes with a bit of inflation. To be clear, I am in favour of redomination, but it would not wipe off our economic problems. Ghana did so not so long ago, July 2007, and it hasn’t really helped much. In January 2008 I new cedi exchanged for $1.09; today, the same cedi exchange for approx. $0.27. It has lost 3/4 (75%) of its value. Within the same window, Nigerian Naira, lost only 40% of its value from January 2007
Have you visited this very popular site that reviews daily
business activities in Nigeria? It is called Tectono Business Review. You can
check it out: https://www.tectono-business.com/
We will review and take appropriate action.