NAIRA DEVALUATION: HERE WE GO AGAIN!
BY PROFESSOR EGHOSA OSAGIE,
FORMER VICE CHANCELLOR,
BENSON IDAHOSA UNVERSITY, BENIN CITY,
and
FORMER DIRECTOR OF RESEARCH, NATIONAL INSTITUTE, KURU
The influence of academics may be thought to be limited to faculty seminar
rooms and lecture halls. Rarely is it realized that originators of new academic
challenges to orthodox doctrine influence heads of state and presidents
regarding the direction of policy and orientation to governance.
Not many people are aware that in her years in opposition, Mrs. Thatcher, the
brilliant chemist who later studied law, also studied the rudiments of
monetarism under the tutelage of Professor Milton Friendman of the University
of Chicago. Friendman, as it has now turned out, became the chief priest of
monetarism whose main tenets were free market economics, limiting
discretionary financial policy by government, the superiority of monetary policy
over fiscal policy, and the belief that money matters in macroeconomic analysis.
This was in sharp distinction from the analytical conclusions of John Maynard
Keynes, who operating from Kings College, Cambridge, propagated the
employment of discretionary fiscal policy to stabilize the economy.
Keynesianism is widely credited with economic policies which rescued the
global economy from the Great Depression of the 1930s. Keynesianism was
readily embarrassed by liberal Democrats in the United States, while
conservative Republicans were more comfortable with monetarism.
The 1980s were years of dramatic changes in global economic policy. Mrs.
Thatcher the British Prime Minister, found a ready ally in President Reagan,
and both successfully influenced the World Bank and the IMF to design a
monetarist economic policy framework in the form of Structural Adjustment
Programmes (SAP) to address economic problems of sub-saharan African
countries. These policies were widely applied in the 1980s and beyond. Indeed,
aspects of SAP are still being implemented in Nigeria in spite of the fact that it
compounded rather than ameliorated economic problem. A key component that
has refused to go away is devaluation/depreciation of the naira. To explain this
puzzle, we shall be specific.
During the first two decades after Independence, Nigeria as well as the rest of
the world operated a system of fixed exchange rates. For much of that period,
the price of one US dollar was below 70 kobo. The Central Bank managed the
allocation of foreign exchange under foreign exchange control regulations.
When the system was subjected to corrupt practices during the Second
Republic, the World Bank and the IMF recommended devaluation of the naira
in 1982. After a detailed analysis of the situation by economists invited by
Professor Emma Edozien to advise Government, it was agreed that devaluation
was not the appropriate policy response. Government accepted this
recommendation. The appropriate response, in our view, was control of
corruption which unfortunately was not considered, as the 1979 Constitution
was corruption-friendly. Even when the balance-of-payments situated assumed
crisis dimensions during the short-lived Buhari Administration with the price of
a barrel of crude oil falling below $10 (ten US dollar), the Federal Government
resisted the pressure to devalue. Oil prices are volatile, and it is short sighted to
hinge a decision to devalue a currency on their movements.
Then came the famous national “debate” on devaluation and the IMF in 1985.
In spite of empirical evidence that devaluation would set Nigeria on a slippery
slope of economic instability without realizing its stated objectives, the naira
was devalued not by a deliberate policy of government, but by bankers acting as
authorized dealers in foreign exchange with the Central Bank playing the role of
major supplier. The slide in the value of the naira accelerated from about N3.00
to the US dollar, to about N80 to the dollar when the military handed power to
politicians (really quasi-military politicians) in 1999. The slide continued
unabated during the Fourth Republic, thanks to a defective framework of the
foreign exchange market, wide-spread corruption (thanks again to the
corruption-friendly nature of the 1999 Constitution) and an unstable foreign
exchange market in which devaluation elicits further devaluation. It is
unfortunate to note here that the principle of convertibility provides ample
opportunities for foreign investors and unpatriotic Nigerians to engage in
destabilizing speculation against the naira. The Central Bank by its recent
devaluation of the naira clearly indicated preference for protection of external
reserves at the expense of the value of the naira. Where do we go from here? If
current policies on the naira continue, we should expect further devaluation into
the indefinite future. The Government may now rejoice that it can calculate the
2015 budget revenue by multiplying monetized dollars by a higher exchange
rate. But prices of goods and services would increases in line with the
percentage of devaluation due mainly to the heavy import content of investment
and consumption. In this regard, the inflation prospect for 2015 is gloomy.
Second, many manufacturing enterprises will collapse due to higher costs which
make their business unsustainable. This compounds the current unemployment
problem. Third, and most important of all, given the fact that Nigeria imports a
large percentage of refined petroleum products due to failure to rehabilitate
and/or establish new refineries, the naira cost of imported petroleum products
will be prohibitive in 2015. The Government would face an embarrassing
dilemma: if it continues to subsidize importation of refined petroleum products,
the cost of subsidy may rise to about one-third of the total Federal Government
Budget. This is clearly unsustainable. If, however the Federal Government
discontinues the subsidy programme, the pump price of petrol may go beyond
the N200 mark in 2015, an eventuality that will surely invite negative response
from key stakeholders. In an election year, this issue may become the most
decisive factor influencing the outcome.
Nigeria has spent more than 30 years searching for “an appropriate exchange
rate” for the naira. So far, it has experimented with a two-tier market, a unified
market, wholesale Dutch Action, Retail Dutch Action and a fixed rate system
without safeguards against abuses. Three simultaneous exchange rates in the
form of the official rate, the inter/bank rate and the parallel market rate co-exist.
Yet, there is no light at the end of the tunnel. Speculators, protected by the
principal of convertibility, have beaten the system hands down.
There appears one way out, an option the Government has been avoiding
like the plague since 1986. This is fixing the exchange rate at an appropriate
level with specified bands around parity, re-introducing foreign exchange
control measures which ban importation of frivolous luxury items, and
controlling destabilizing speculation against the naira. I am sure that greedy
foreign partfolio investors, unpatriotic Nigerian businessmen and banks, as well
as the World Bank and the IMF will vehemently oppose this proposal. But we
must be resolute in the belief that reduced inflow of potentially destabilizing
foreign capital is a desirable price to pay for stability in our foreign exchange
and stock markets and a more settled macroeconomic environment
Prof. Eghosa Osagie,
Department of Economics, Banking and Finance,
Benson Idahosa University,
Benin City.
November 29, 2014.