What is 'Killing' the Naira? (Must Read)
This
piece tends to look at the travails of the naira in recent times as it
has suffered incessant fluctuation in value against the dollar.
The assumption that Nigeria is divided between those who “want”
devaluation and those who oppose it is a false appearance. Any rational
Nigerian, especially middle class individuals, who can be assumed to be
rationally self-interested “want” a strong currency so that they can
maintain real purchasing power and lifestyles in a globalized
consumerist economy.
There is no division amongst Nigerians, especially within elite and
middle class society on that erroneous basis! The real argument is over
economics and its basic principles. Economics is all about how to
reconcile “wants” and “needs” with “resources”-the most basic principle
in economics is “scarcity” and the imperative of “choice” in a real
world in which we can’t have everything we “want”.
According to The Economist’s “Dictionary of Economics”, scarcity
refers to “a situation in which the needs and wants of an individual or
group…exceed the resources available to satisfy them. In the presence of
scarcity, choices HAVE to be made between those wants that can be
satisfied and those that cannot be: the available resources must in some
way be rationed, either through price or some central distribution
system. In the absence of scarcity, no difficult choices would need to
be made, no prices would need to be attached to anything, and the study
of economics would be rendered entirely unnecessary”.
Exchange rates are a “price” with which an economy rations scarce
foreign currency and the entire devaluation debate is about whether very
scarce dollars should be rationed through the price mechanism or (as
the beneficiaries of the current huge N200/$ subsidy argue) should be
distributed administratively by the CBN to whomever it pleases!!! So the
question is not whether anyone “wants” devaluation, but whether given
our current “economics”, is devaluation an appropriate or optimal policy
response? The other question of course is, if you reject devaluation,
what alternative AND effective policy response do you recommend to deal
with the current policy quagmire? Just saying no and watching helplessly
as the currency slides to N400/$ everywhere except in the CBN is NOT a
policy response!!!
By the way, we should take a step back and restate the facts-I
agree entirely with Emir of Kano and former CBN Governor Sanusi Lamido
who pointed out, completely correctly that devaluation of the currency
HAS in fact already occurred! The debate is now over the appropriateness
or otherwise of CBN using federation account resources (which jointly
belong to the federal, states and LGAs) to subsidise foreign currency
needs of selected businesses and middle class persons who travel abroad,
educate their children overseas or seek medical treatment outside the
country. For every other person who needs dollars in Nigeria,
devaluation has already happened! It should be noted that CBN has not
provided any objective criteria on the basis of which it is allocating
the scarce dollars, and questions may legitimately be raised on some of
the published allocations! In effect the CBN is administering a huge
subsidy based on unknown and unclear criteria, and without transparency
on the basis of the allocations!
The current situation guarantees moral hazard, corruption,
subjective considerations, cronyism and crony capitalism, favouritism,
influence peddling and administrative abuses. I am willing to bet that
central bank officials with the unfettered prerogative to administer
this subsidy, not being angels or saints, may already be susceptible to
one or more of these challenges!!! I have mentioned earlier in addition
that this large subsidy is being shared not from resources that belong
to the federal government or CBN, but the federation, including our
insolvent states and local governments. While it is apparent that
current policy has the concurrence of President Buhari, it is not clear
that the states and LGAs if they fully understood what is going on,
would endorse the “donation” of approximately half of their legitimate
income to some businessmen and middle class families! I cannot think of a
worse national subsidy anywhere in the world!!! With regard to the
businesses currently obtaining the tremendous FX subsidy from the
national purse, it is evident that they benefit from an anti-competitive
and unfair advantage over other businesses who are “less-fortunate” and
it is not evident that the Nigerian economy benefits from the
dispensing of such subsidies.
One may also ask whether beneficiaries of our subsidized dollars
discount their retail prices to fully reflect the public subsidy,
relative to their competitors? There is a fundamental economic
illiteracy emanating from some of the contra-devaluation sources,
including surprisingly from several who hold degrees and advanced
degrees in economics-we do not export anything so we wouldn’t benefit
from devaluing (so we NEVER want to export anything knowing that prices
provide INCENTIVES for future behavior?); people should stop asking for
devaluation and instead should start consuming locally produced goods
and services (isn’t this argument illogical and contradictory? If we
want to discourage imports and encourage local production, why are we so
determined to protect the Naira so that imports remain relatively
cheap?); devaluation would lead to inflation (devaluation has ALREADY
happened and is already reflected in inflation which is now 9.6% since
most importers and manufacturers now get their FX from non-CBN sources
and even those who get CBN FX subsidy know the correct cost of dollars);
finally they say devaluation will hurt the poor, which is the biggest
lie (the poor have nothing to do with exchange rates; they eat local
food; do not send their children to schools abroad; get medical
treatment from primary health centres; and get absolutely no benefit
from whether you devalue or not!).
The truth is that the only beneficiaries of subsidized FX are the
few businesses who CBN in its grace “allocates” dollars to, and the
segment of the elites who secure PTA, BTA, school fees and medical
payments in foreign currency from the central bank!!! As well as those
now able to “round-trip” official dollars into autonomous markets at
huge profit!!! The real situation, casting aside Nigeria’s powerful
people who seek an unfair advantage through a privileged FX subsidy, is
that the country built a defective economy in which 95 percent of
exports and 75 percent of government revenue came from oil. That
situation is no longer tenable and our monthly FX income has declined
precipitously with the current exchange rate simply not sustainable.
Worse still the current official exchange rates has resulted in the
dry-up of foreign direct and portfolio investments; and even diaspora
remittances which are required to be made at official or near-official
rates have also dried up. Manufacturers are starved of inputs and our
banking system is increasingly not credible in the global financial
system and we may soon, if not already, return to cash-collateralized
letters of credit and the scarcity of “essential commodities” as in the
1980s and 1990s!!!
We have seen this movie before, and we know how it would end!!! In
1980, oil prices fell due to a global oil glut. Nigeria had a fixed
exchange rate and therefore could not use the pricing mechanism to
modulate between demand and supply of dollars. Our reserves were quickly
exhausted and then we started borrowing from the Paris and London
Clubs, multilaterals and commercial creditors and soon we were trapped
in debt which we could not service. We are already replaying this
sequence seeking to borrow N2.2trillion or more to fund the 2016 budget;
our debt service ratio is already 25 percent of federal revenue, even
before we take the proposed huge loans; we have fixed our exchange rate
at N197/$ and our reserves are fast declining (now at $27billion). To
deal with the scarcity of dollars in the 1980s, we tried everything
except devaluation-austerity and import licensing, which was plagued by
corruption and cronyism-we are doing the same today. Then Head of State
General Muhammadu Buhari tried countertrade (trade by barter) which also
failed miserably.
Nigerians (and evidently President Buhari) learnt the wrong lessons
from the 1980s episode-that Babangida “killed” the Naira!!! Former
military President Babangida had his problems-a weakness of character
that resulted in erosion of societal values and increased corruption;
and political gerrymandering resulting in a protracted political
transition and the eventual annulment of the June 12, 1993 elections.
Babangida and all his military colleagues (Ironsi, Gowon,
Murtala/Obasanjo, Buhari, Abacha and Abdulsalam) did one further damage
to Nigeria-the subversion and destruction of institutions including
federalism, constitutionalism, the universities, civil service, the
professional bodies, the media etc. However in relation to the economic
crisis, all of his predecessors merely kicked the problem down the road,
with Babangida being the only one with the courage to confront the
problem!
He did not create the economic dependency on oil and the policy
elements that turned the Nigerian political economy into a prebendal,
distributive, imported consumption-based society. In 1986 having
exhausted our reserves and become indebted to the international
community, devaluation was inevitable and unavoidable!!! Abacha tried
the dual exchange rate system we are currently experimenting with, and
that also failed! As for the poor, they are now again the victims-losing
their jobs in large numbers; poverty is increasing as output growth and
consumption drops, and recession risks rise. After Nigeria’s
unprecedented elections on March 28 2015, exchange rates rallied from
N225-N235/$ to around N200/$ as markets discounted political risk and
imputed optimism into the Nigerian economy.
The current scenario where rates approach N400/$ reflects a gross
failure of policy at the CBN, fiscal authorities and the presidency, and
cannot be blamed on previous administrations. It is because we have
left exchange rate management, and indeed broader economic policy to
fear, speculation, drift, myths, superstition, politics and propaganda
resulting in acute uncertainty and volatility. Nigeria’s current
imperative is to return to rational economics and the imperative of
building a productive, competitive, export-oriented and diversified
economy.
Source: Vanguard
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