The naira devaluation debate appears to have been conducted in abstract terms that make it difficult for many folks to participate in it. This shouldn’t be the case. In fact, the economics of devaluation or revaluation appears to be plain and simple, though there are no simple answers to the questions that they raise.
The debate has highlighted some inconvenient truths about the economy that we have operated since the beginning of the republic. But the inconvenience of these truths does not diminish their status as truths. In the language of popular introductory books, then, I present “Devaluation for Dummies.” I would still be one of the dummies but for my power couple who broke the issues down for me in plain language.
First, we operate an economy that is fundamentally based on foreign exchange earnings from one product, that is, fossil fuel. The vibrancy or otherwise of the economy is therefore dependent on fluctuations in the oil market. There is no better evidence for this truth than the benchmarking of our annual budget on the price of oil. To allow for the shock of the fluctuation, we use conservative figures so that we may have a pleasant surprise for our Excess Crude Account, an extra constitutional device cleverly designed as buffer for us in the rainy day.
Second, we do not produce any tangible products for export besides oil and we do not produce most consumer goods. So we are fundamentally a consuming nation. As President Muhammadu Buhari has repeatedly observed, we even import toothpicks.
Third, from the foregoing, it follows that we need more foreign exchange than we earn from the export of oil, our only commodity, in order to pay for our cravings for imports. If the individual importers of these goods have access to their own foreign exchange earnings, e.g. through their business and professional incomes, they would not need any from the government through the CBN. However, the vast majority, including most businesses, have no independent sources of foreign exchange. Therefore, they rely on government for supply. Additionally, we also now import education for our kids by sending them to foreign institutions for which we have to pay their tuition in foreign currencies.
Fourth, since we operate a market economy, the market can easily decide the rate at which the naira exchanges for any other currency, including the dollar. It should depend on the law of supply and demand. The currency that we do not need remains weak against our naira while the currency that we need badly remains strong as long as it doesn’t exist in sufficient amount to satisfy our personal and business demands.
Over the course of 40 years, we have seen a reversal in the rate of exchange between the dollar and the naira. As a graduate student in the United States in the 1970s, I used to receive my allowance in dollars, and I received more dollars in exchange for the naira amount that was remitted to me. That means that the dollar was weaker than the naira at the time. That was also because we earned more foreign exchange from crude oil sales. It was a time we wallowed in oil wealth and didn’t quite know what to do with it. Now the reverse is the case and we are in the grip of an economic malaise.
Fifth, with supply crunch in the forex market and too much naira chasing too few dollars, it is an inconvenient truth that more naira will have to be dished out to catch just one dollar. It’s the law of demand and supply.
Sixth, naturally a government likes to protect the value of its currency in the exchange market. There is national pride in the strength of the national currency. Therefore, while the market goes south for the naira, government wants it to stay north. It can only effect this with a strategic intervention that freezes the rate of exchange at a particular level despite what the market determines to be the real rate.
Seventh, the unintended consequence of such a decision to freeze the rate of exchange in the face of a real shortage is that some businesses and industries are favoured to receive foreign currency at the governmental rate for their external transactions, while others are forced to the parallel market where the law of supply and demand operates. MAN just made a request to the Central Bank for a direct allocation to it as an organization, instead of going through the commercial banks so its members can have access to cheap forex to avoid the closure of businesses and factories.
Eighth, an alternative policy is to follow market leadership and officially bring the value of the naira to the level that the market determines. That is, government devalues the naira relative to, say, the dollar or pound sterling. Apart from avoiding distortion and unfair favouritism in the forex market, an important advantage of formal devaluation is that it makes the country’s export products cheaper for prospective foreign buyers. Therefore, they buy more and the country is able to earn more foreign exchange, which it can use for its imports.
So, what could possibly be wrong with the argument for official devaluation especially when, in reality, we have an unofficial devaluation of the naira in the parallel market? And what might be the response of the pro-devaluation lobby?
The presidency has stuck to its position against devaluation. Both President Buhari and Vice President Osinbajo have argued that the allure of devaluation is the prospect of a country earning more foreign exchange from its exports which become cheaper to importers abroad. However, since we do not produce a lot for the export market, devaluation is not an option for an economy such as ours. Furthermore, devaluation would make imports costlier to us; and so, while we do not earn more from exports, we would have to dish out more for our imports, to the benefit of other countries. This is the heart of the argument against devaluing the naira.
Another argument against devaluation is that naira speculators are responsible for the run on the dollar in the forex market. Not knowing whether or when the government would officially devalue, panicky buying of the dollar and selling of the naira has apparently distorted the value of both to a large extent. This means that while it is true that there is a shortage of forex, what is going on in terms of the value placed on the dollar vis-à-vis the naira may all be due to those anxiously purchasing the dollar. The way to deal with such a situation is not devaluation but with a combination of fiscal and monetary policies that assure citizens. While it may not do away with all speculation, it may at least reduce it. An example is the announcement that government will not provide forex for tuition for students studying abroad.
The response of the pro-devaluation lobby is swift. To take the last point first, it is not clear how the decision to withhold forex from students studying abroad will stop speculation. Parents are advised to make their own forex arrangements presumably through the parallel market. This, of course, puts pressure on that market leading to few dollars chased by naira, a perfect condition for speculation, and thus for the further weakening of the naira. And the vicious cycle is unrelenting.
Furthermore, as the government protects the naira and the market gives it a drubbing, it doesn’t help the policy objective of attracting much needed influx of foreign investment that can stimulate the economy towards the ultimate goal of producing more for export. For instance, if foreign investors are not sure about what the value of the dollar or pound sterling that they plan to bring in tomorrow to start a production chain will be the next day, they are likely to defer the decision to bring it in as long as possible. This further exacerbates the situation by denying the economy another source of much needed foreign exchange. And poor naira continues to be the helpless victim.
