Thursday, 25 February 2016

Operation Save the Naira (2)


Les Leba

Even those Nigerians who do not believe in the virtues of a stronger naira rate of exchange will be unable to deny the strong correlation between deepening poverty of our people and a dwindling naira value over the last three decades.  On recognition of this ugly trend, we should wonder why any government should facilitate poverty in the land by what it brazenly admits as a deliberate and strategic further devaluation of the naira, particularly in the recent past!  In order to unravel this paradox, it will be appropriate to examine the merits of a weak naira against the merits of a stronger naira.


Admittedly, the qualifying adjectives, weak and strong are relative, but in spite of the mix of various determinants of the exchange value of a currency, the most significantly valid factors continue to remain demand and supply.  Thus, if for example, our dollar earnings double, triple and quadruple overtime, such that our increasing reserves provide an extended cover for imports payments, then our naira exchange rate should be expected to be stronger.  If on the other hand, our imports payments continue to outstrip our export revenue, then we would expect the naira rate to be under pressure and consequently depreciate overtime.  I expect that a discerning reader may immediately ‘cry foul’ that such expectation was not supported by our national experience in the last three years or so, as a fortuitous rise in crude oil prices ensured that not only did our foreign exchange earnings quadruple our bourgeoning dollar, reserves extended our demand cover (read as imports payment capacity) from less than eight months to over 36 months at one time according to CBN claims.


Inexplicably, the naira rate remained stuck around N117/$1, and the naira was officially described as stable, when a rational observer would have described the rate as rigid or resistant to change with such a healthy dollar reservoir.  Perhaps it needs to be explained here that a 36 months imports demand cover implies that even if we do not earn a single additional dollar to existing reserves at the same exchange rate, we could continue to enjoy the same level of imports consumption for at least the next 36 months, as the demand cover is based on the average monthly expenditure on imports!  Thus, the demand cover may be shortened if we increased our imports well above the monthly average and may also be extended if we consumed less imports!  Consequently, it would appear that the huge devaluation of about 25% on the value of the naira between November 2008 and January 2009 would appear to be out of sync with the CBN’s reported cushion of 36 months imports cover provided by our over $60bn reserves at that time.  So, the question is, in spite of the strong supply and low demand fundamentals at the time, why did the CBN consider it imperative and strategic to devalue the naira so significantly?  We recall that the speculative rush to purchase dollars for the sake of value conservation was consequent upon the CBN’s devaluation of the naira in November/December 2008!  The appropriate question that arises from the foregoing is, what did the CBN hope to gain or achieve from over 25% naira devaluation against the then current balance of supply and demand of dollars? 


On closer examination, there are only two major factors which the CBN could advance for choosing the option of a weaker naira against rational expectation.  The first reason may be the illusion of export competitiveness of Nigeria’s products.  The basis of this argument is that a weaker naira would translate into cheaper Nigerian made goods and conversely deter patronage of more costly imports.  Thus, Nigerians would be expected to shun the expensive imports and patronize cheaper made in Nigeria goods.  By the same token, Nigerian goods would also become cheaper in the international market and our non-oil exports will grow and more jobs will be created locally!  The big hole in this argument is that the naira has depreciated from stronger than 1:1 to the dollar to its current lowly N145/$1, but not surprisingly, our non-oil exports as well as our once fledging industrial landscape have diminished!  Indeed, there is no ray of hope that further naira depreciation will stimulate local production and increase job creation!  It also needs to be added that the demand for crude oil, our major export crop is in no way influenced by a cheaper or weak naira, even though a depreciating naira means a bonanza for across the border smugglers of our petroleum products!  In other words, we have ended up subsidizing the cost of petroleum products to the economies of neighbouring countries all these years!


The second reason why the authorities have promoted a weak naira is even more farcical!  Hear, for example, the Minister of State for Finance, Mr. Remi Babalola in a syndicated article titled “A Globalised Crisis Hitting Nigeria”  XX“…even the sharp reduction observed in the February 2009 allocations would have been more drastic, if not for the depreciated exchange rate applied in the conversion of the oil proceeds”! XX   The foregoing is, of course, a reflection of the Central Bank’s admission that the naira had to be devalued XX (and more naira consequently printed)XX in order that the 2009 budget revenue expectations would  be met!  Note the emphasis is on revenue expectations rather than budget implementation.  The reality is that a devaluation of such magnitude would also adversely affect the cost of capital projects and infrastructural development which are largely import dependent, and consequently impede capital budget implementation!  In addition, such devaluation would also increase domestic fuel prices with the inevitable ripple effects on the rest of the economy, not to talk of the creation of an inflational spiral with consequent loss in the value of earnings of all income earners and an attendant pressure on labour to take a harder position on wage increments!


Indeed, it seems that our monetary authorities have not learnt any lessons from the past.  It was also reported that the Babangida administration accepted expert advice to devalue the naira in the S.A.P. era, in order that loads of paper money could be printed to offset the huge debts owed to local contractors, in spite of the debilitating effect of such fraudulently liberal increased money supply on the economy.  It should be obvious from the foregoing that the recent deliberate and strategic naira devaluation was predicated on untenable assumptions and it may be foolhardy to expect its impact to be a salutary balm on the economy or the reduction of poverty in the land!


Now, let us take a quick look at the other side of the coin; that is, what are the merits of a stronger naira?  We observe that in the Nigerian context, the beneficial impact of a stronger naira does not require much elaboration as the advantages are patently obvious.  Suffice it is to say that the Nigerian economy, the industrial landscape and social welfare of the masses have never been better than the 1970s and early 1980s when the naira gallantly held its own against the dollar and other international currencies. The naira rate at N1=$1 for example translated to lower raw material costs  for our industries, which in turn induced lower product and consumer prices which kept inflation in check.  The lower consumer prices and inflation spurred consumer demand, which further facilitated industrialisation and increased capacity utilisation and industrial efficiency with a positive impact on the rate of employment!


Even if Nigerians fail to appreciate the linkage between petrol/fuel prices and the rate of naira, the truth is that a stronger naira will automatically bring down fuel prices with a positive ripple effect on all sectors of our economy.  The current wasteful burden of N800bn/year subsidies would be alleviated and this huge revenue could be compounded with a bearable petrol sales tax to revamp our decrepit infrastructural base!


Finally, a stronger naira would, no doubt, lead to greater effectiveness and efficiency of the increasing presence of Automatic Teller Machines.  The frequent cash stock-outs would be quickly minimized because of the higher purchasing values of our currencies.  The failed reintroduction of coins into our currency profile can also be resuscitated with glowing success as our kobo coins will carry higher purchasing values.    Indeed, we would not need to resort to enforcement to ensure respect for the naira!  In all seriousness, a stronger naira will improve the lives of millions of Nigerians; so, why, may we ask, do the authorities consciously favour a much weaker naira, even when the fundamentals of real demand and supply do not justify such an affliction? 


Again, the answer to this contradiction lies in the fact that the framework of our management of money supply is grossly defective.  The poor management of money supply is the main cause of a weak naira in the face of multiplying dollar reserves.  Indeed, a country may have all the supportive requirements for a strong economy, but the level of success will be greatly impaired if the monetary framework is structurally poisonous.  Thus, countries like Japan and Switzerland, which have minimal endowment of mineral and agricultural resources continue to do well, in spite of their resource handicaps because monetary and economic management are consistent and transparent and the interest rate structure is single digit, catalytic and impactful, with inflation rate below 3% and the inevitable complement of low unemployment!  Such conducive environment will also engender increased industrialization, security, high incidence of research and development with an abiding component of the rule of law!


Conversely, Nigeria with bountiful resource endowment and the prerequisite of a significant market of 140 million people remains crippled because our economic and monetary framework is characterized by shrouded and inconsistent policies with retrogressive consequences of interest rates above 20%, inflation at about 15% and an exchange rate determined by CBN fiat instead of market demand and supply, which engender low industrialization, high unemployment (70%), insecurity, dearth of R&D  and a weak judicial system in a largely corrupt and rent-seeking economy!


Next week, we shall examine the problem with our monetary framework and the concomitant result of a weak naira in spite of bourgeoning dollar reserves in a progressively comatose economy!  We will demonstrate how the current infusion process of our export revenue into the system remains the major cause of our backwardness in spite of our export earning reality.





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