The naira, its traducers and defenders
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.