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The Odds Against Naira Devaluation

Public forex holdings should be channeled to manufacturing, education, infrastructure, transportation, healthcare and youth empowerment, etc

-Emmanuel Nwosu 

Foreign ‘experts’ and most Nigerian intellectuals have been conditioned to post-industrial, competitive, free-market, economics, in which changes in price are automatically compensated by changes in demand and supply, such that a desirable equilibrium is quickly attained – because the means of production and distribution of goods and services abound, patriotism and allegiance to the State are great, resources are efficiently allocated and income is normally distributed. It is in this light that they see devaluation of the Naira as the panacea to our cashflow challenges. But our case is different.

Dearth of domestic production aligns with cultural and structural distortions to render the system unresponsive. Any condition that diminishes domestic production of needed goods and services is antithetical to devaluation. And we have many of them, from predatory federal structure and fiscal irresponsiblity to lack of infrastructure. In the long run, this unresponsiveness must be addressed before devaluation can be beneficial. In the short run, it rules out free-market devaluation because the re-alignment or response equation of demand and supply, for a desirable equilibrium, is bound to fail.

To devalue the Naira is to officially reduce the equivalent amount in other currencies for which it can be exchanged. Devaluation is, essentially, an export-oriented measure, intended to correct declining reserves and balance of trade. It is aimed at flogging the system back to the truism that money is a measure of value and that value comes from the production of needed goods and services.

Devaluation should encourage other countries to invest more and buy more from Nigeria (as Nigerian goods become cheaper to them) and, concurrently, discourage importation (as imports become dearer) while motivating domestic production (as buyers turn to local substitutes) As the re-alignment intensifies, the Naira, in particular and the economy, in general, bounces back in a new equilibrium! Conversely, if the adjustment fails to materialize, the Naira will not find a timely berth and may spin into a free fall with the economy. It is an adjustment that leverages on the availability and flexiblity of domestic means of production and distribution, patriotism and efficient resource allocation.

The converse is more likely in our case. We lack all the leverages for timely post-devaluation adjustment. Devaluation would trigger a run on the limited foreign exchange (forex) reserves at the expense of critical imports (e.g., petrol and raw materials) Access to the limited forex by preferred end-users will not improve by the mere fact of devaluation as it precludes prioritization. And there will always be speculative demand and acceleration in the same direction between the official and the parallel-market rates such that the two may never merge (as long as forex scarcity lasts) devaluation or not.

We have devalued the Naira for 30 years. It has not triggered quantum increased production of locally needed goods, not to talk of exports. It has not triggered the critical mass of foreign direct investment (investment by foreigners in local production as opposed to portfolio investment in securities which can be liquidated precipitously, with capital flight) It has not led to the rebound of the Naira. Only the fortuituous rebound of crude oil price always wedged the Naira from a free fall. We are also largely unpatriotic and prefer imports to the limited local substitutes. Our attitude to the State and to one another is predatory. And resource allocation is inefficient, even in the present dispensation.

Moreover, the political risk of free-market devaluation is too high. As we run out of reserves sooner than later in the deregulated forex market and the going gets tougher, the docility of the people, which had been taken for granted, is bound to snap (there is always a tensile limit) and anything can follow. Just imagine the hyper-inflation, labour unrest and social upheaval of devaluing the Naira from, say, N197.50 to N300 to the U.S. Dollar, as petrol consequently escalates from N86.50 to N130 per litre, spilling over to pervasive transportation and food prices, instantly. In contrast, forex restriction can extend the life of declining reserves while cashflows and domestic production are being restructured.

Yes, there is the issue of doubtful capacity for objective and transparent allocation of forex and for stringent enforcement of measures against arbitrage, round-tripping and smuggling by the CBN, the financial institutions and all other government agencies concerned under the CBN conservation strategy. Also, the reaction of international financial institutions, rating agencies and the foreign press as well as foreign investors and currency speculators could be quite unsettling. But social unrest dwarfs these concerns which, with tenacity, are largely controllable and rebuttable.

For example, prevailing parallel market rates are known to be spurious and asymmetrical to the normal forex demand profile. If the CBN stayed its course, domiciliary account holders and speculators who bought up foreign currencies, in anticipation of devaluation, would be bound to offload. The CBN could also tinker with policies on export proceeds utilization as well as autonomous sales by oil service companies and the like to bureaux de change and third parties, towards unravelling the market.

The CBN strategy also connects well with the primary purpose of State which is to protect the weak and to galvanize the economy towards inclusive growth and development for all citizens. The poor and under-privileged (the overwhelming majority of the population) do not import luxury vehicles, do not school their children overseas, do not go abroad for medical treatment and holiday and do not buy champagne or red wine or even caprice. All those hooked to imported luxury goods and services should drawdown their offshore and domicilliary accounts or look elsewhere for forex other than the CBN.

Public forex holdings should be channeled to manufacturing, education, infrastructure, transportation, healthcare and youth empowerment, etc, that can facilitate import substitution and are largely shared by all the people. In this sense, the current range of restrictions is inadequate and should be extended.

Free-market devaluation had never paid off in the real sense or the economy would have been diversified by now, unemployment would have declined and the Naira would have been stronger. Let us try a different approach, retake bearing and redirect the economy. Free will has failed and there is need to nudge Nigerians to discard their false sense of prosperity, look inwards and produce needed goods.

– Emma Nwosu, a business, training and research consultant, wrote in from Lekki Scheme 1, Lagos. Tel: 08100071656

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