Naira Devaluation: Matters Arising - THISDAY
OCTOBER 13, 2021
BY Obinna Chima
The perennial debate over naira devaluation was resuscitated on Monday, during the two-day Mid-term Ministerial Performance Review retreat, presided over by President Muhammadu Buhari, when the Vice President, Prof. Yemi Osinbajo openly advised the Central Bank of Nigeria (CBN) to adjust the naira exchange rate to be as reflective of the market as possible to boost supply.
According to Osinbajo, the naira exchange rate was artificially low, even as he lamented that this was discouraging foreign capital inflow to the country. The vice president also called on the CBN to review its strategy on forex and ensure that the naira value reflected the market reality in order to encourage inflow of forex.
He stated, “As for the exchange rate, I think we need to move our rates to be as reflective of the market as possible. This, in my own respectful view, is the only way to improve supply.
Indeed, Osinbajo’s call for exchange rate adjustment was necessitated by recent pressure observed in the forex market which has seen a wide gap between the official and parallel markets for forex in the country.
But the CBN Governor, Mr. Godwin Emefiele has always maintained that the rates in the tiny parallel market (only 7% of Nigeria’s FX market), which according to him, serves many corrupt and illegal activities should never be used to determine the exchange rate of the naira.
Analysts on their part believe the situation was a reflection of broader economic challenges in Nigeria, such as the country’s high appetite for imports, lack of a trade policy, among others. Clearly, Nigeria’s heavy import dependence is majorly responsible for the high forex outflow and the perennial weakness suffered by the naira.
This explains why the exchange rate is often the bellwether for Nigeria’s economic health, and why there is a swift pass-through of exchange rate movements to inflation.
A major chunk of Nigeria’s forex outflows are due to invisibles, which refers to services. These include inter- national payments for services as well as movement of money merely for transfer payments. Also, the country’s infrastructure deficit explains the huge level of importation of processed and final goods.
It is important to note that a devaluation is the easiest thing for the CBN to deliver to Nigerians but that is not what Nigerians need at the moment. For instance, if the central bank decides to bow to pressure from politicians and adjust the naira/dollar exchange rate to around N550 to a dollar, it would have a knock-on-effect on the federal government’s debt service which is presently more than 75 per cent of its revenue. Adjusting the exchange rate might move debt service level to over 100 per cent.
Additionally, fixed income earners, which include all government workers, could see their real wages evaporate into thin air and this might ignite calls for salary increases and could cause social unrest, in a country where tensions are already high.
Also, inflation in Nigeria is presently at 17 per cent and a devaluation to about N550 to a dollar might push the consumer price index to over 25 per cent, which leads to income redistribution and brings about weak purchasing power. Likewise, rising prices neutralise the money that one earns from investments. That is why central banks globally, are never comfortable with a rising inflation rates usually seen by them as ‘evil.’
Similarly, if the central bank decides to devalue the naira today, loans that were sourced by the country and indexed on forex would be immediately repriced (higher interest rates) and terms would be made much tougher. This could lead to widespread defaults, higher NPLs and financial system instability.
In the same vein, with further devaluation, imports would become much more expensive, translating into higher production costs. Producers who can would pass the higher costs on to consumers, who would pay more for the same goods. Producers who cannot pass on the cost would shut down their operations over time, due to the pains of devaluation.
Likewise, Nigerians who buy forex for school fees, medical bills, Business Travel Allowance, Personal Travel Allowance, among others would have to pay more in naira.
However, in order to address the perennial pressure in the country’s forex market, there is the strong need to move away from the country’s flawed pattern of economic management of the past. That is, there is the urgent need for the revival and rebuilding of the productive sectors of the economy to achieve higher capacity utilisation and productivity, and competitive manufactured exports; strong government encouragement of local refining of petroleum products for both domestic consumption and exports; as well as strong and effective surveillance of the forex market by the monetary authority to check round-tripping of forex from the deposit money banks to the parallel market.
To a Professor of Economics and Chairman, Goldmark Education Academy, Prof. Mike Obadan, the federal government must ensure that during oil booms, it saves forex and build fiscal buffers; increases sourcing of local raw materials and revival of the capital goods industry; promote fiscal and monetary discipline and harmony; create an enabling environment for productive capital inflows, especially foreign direct investment; and actively promote restoration of confidence in the economy to check capital flight.
Government must also pay greater attention to Nigerian Export-Import (NEXIM) Bank in order to drive its economic diversification agenda and enhance forex earnings through non-oil sources.
According to the economist, a good handle on the current insecurity challenges along with macroeconomic stability would also be very helpful in this regard, just as he stressed the need for the government to rationalise imports structure to manage demand for forex; as may be permitted by supply considerations, use external reserves stock to support the exchange rate through increased funding of the foreign exchange market; and use moral suasion to encourage Nigerians to patronise home-made goods and reduce their high propensity for disruptive trade and commerce.
“Import only when it is absolutely necessary. They should also eschew unhealthy speculation in foreign exchange as well as rent-seeking behaviour and adopt positive attitudes towards ensuring a stable exchange rate for the naira,” he added.
On his part, a former Director General of the West African Institute of Financial and Economic Management, Professor Akpan Ekpo, noted the nexus between a country having an effective trade policy and forex inflows.
He stressed that trade policy was very crucial for any economy to enhance forex inflows. Unfortunately, the country does not have one presently.
“The country needs an updated trade policy as soon as possible. But one thing is having a trade policy, another thing is implementation. So, we need a trade policy that will take into account the present situation in the economy,” the economist added.
Also, Senior Lecturer at the Department of Economics, Pan-Atlantic University, Lagos, Dr. Olalekan Aworinde, emphasised the need for the federal government to have a practical trade policy in place.
Aworinde said, “When you have a trade policy, the implication is that the direction as well as the volume of your trade will go to a particular country or a particular part of the world. This has a lot of implications on the forex market.”
Presently, reports indicate that Nigerian parents spend over $10 billion annually to educate their children in all parts of world and at all grades of education from primary, secondary and university levels. If the education sector is developed and up to half of this huge annual drain is preserved, the naira would enjoy a great level of stability.
Another avenue for forex leakage is on medical tourism. There is need to improve the country’s healthcare system in order to preserve the huge amount of forex Nigerians demand to seek medical treatment abroad even for routine examinations.
Given all these, it is really difficult to see why the naira should be devalued at this time. If one examines the situation from the context of a country that is import dependent, whereby there is 80 per cent foreign content in anything that is bought locally, devaluing the naira will not be the best policy at this time.
It might serve the forex speculators and those that had hedged and are looking for opportunity to go out.