Naira devaluation, another journey into economic wilderness
THE naira was devalued some six weeks ago and instantly, the effects started showing in the rising cost of local and foreign goods in the Nigerian markets. The Governor of the Central Bank of Nigeria, Godwin Emefiele, has again hinted of another devaluation very soon by stating that the naira is overvalued. One of the primary objectives of the CBN is to protect the value of the domestic currency and devaluation is definitely one of the ways of destroying the value of the currency. The condition for devaluation of a currency did not exist at the time the currency was devalued in May this year. In fact, the condition that would make devaluation work in favour of a country was and does not exist in the Nigerian case in recent time. All the recent devaluation has been for political convenience rather than economic salvation. Thus, a check on all devaluations shows that economic conditions eventually worsen.
Devaluation is an official reduction of the value of a domestic currency in relation to the value of foreign currency, particularly those currencies accepted internationally for transactions. That is, unlike depreciation of domestic currency where market forces of demand and supply activities and which is a natural way of adjusting the value of the currency, devaluation is a deliberate action of the monetary authority. Depreciation can be reversed to appreciation through the same market forces when an economy improves. Not so with devaluation. Devaluation of a currency against others is expected to make the exports of the devaluing country cheaper and attractive to foreign countries’ importers but makes imports from other countries expensive to deter citizens of the devaluing country from importing. This implies that there will be more capital flow into the country than outflow which should invariably improve the balance of payments and over time make the devalued currency to appreciate and economic conditions improve.
The foregoing scenario assumes that the country devaluing its currency has a variety of exports needed by other countries and which it has control over the prices of such commodities. On the import side, such a country’s production units do rely heavily on domestic inputs such that it can then control the importation without injuring domestic production. Nigeria is an import dependent economy in terms of importing raw materials for production and even importation for consumption of essential commodities like refined petroleum and foodstuff. We have no control over the price and output of our major export, crude oil, and even agricultural exports like cocoa beans, cashew nuts and sesame seeds. Oil output is determined by OPEC and the price by international market forces while prices of the agricultural output are also determined by international price mechanism. Clearly, Nigeria fails on both sides of exports and imports, and the need to be cautious of devaluation is very important. But the CBN eagerly devalued the naira without consideration for its implications on domestic prices, domestic production and reactions of foreign investors who will have to convert their profits to foreign currency for repatriation. The devaluation action has always been political, as I will explain later.
The economic consequences of devaluation, on the present structure of the economy, are in the medium to long-term and more damaging. With the statement that the naira is overvalued, the CBN governor has already given the warning that another devaluation is coming soon. That is the statement usually uttered by the International Monetary Fund when they want a country to devalue its currency. If the Ethiopian currency with 43.01 Birr to one dollar; Ghana’s currency of 5.89 cedi to one dollar; Liberian currency of 171.50 Liberian dollar to one US dollar; or Kenya’s 108 shillings to one US dollar are not overvalued, how come Nigeria’s N411.50 be described as overvalued when we claim to be the number one economy in Africa, implying that we have higher Gross Domestic Product than these countries?
The economy is presently lying prostrate due to the penchant or addiction to borrowing by the fiscal authority and the resultant huge revenue set aside to service the debt as well as pay off the ones that have matured for repayment. The Keynesian economic theory that supports deficit budgeting to manage an economy out of recession did not recommend unbridled external borrowing which has serious and deleterious implications for economic growth and development as we are witnessing currently, despite all the warnings we have given in the past. The monetary authority is now on its own path of destroying the economy, which is what the immediate past and the planned devaluation of the naira will bring.
Three weeks before the announcement of the devaluation, the Nigerian economy was reported by the National Bureau of Statistics to have exited recession and that the price of oil had started improving, raising the hope for improved economic situation. The condition on the ground did not therefore justify devaluation of the domestic currency; but it created a ray of hope for better economy. Immediately the naira was devalued in May 2021 and the black market price of dollar moved from around N380:$1 to N450 and later almost N500:$1, prices of goods, including garri, beans, oil and manufactured items rose rapidly worsening the already poor living condition of the citizens. One hopes this will be reflected in the June 2021 inflation figures by the NBS, as one can hardly trust Nigerian statistics. Apart from the increased level of poverty and worsen income disparity arising from that singular action of devaluation and the fiscal profligacy which had been laced with corruption, many of the manufacturing businesses are now thinking of relocating to neighbouring countries where cost of production is moderate. That will be another level of loss of job, loss of government revenue from taxes and worsening poverty level.
But why would the CBN devalue the currency when there were claims from statistics that the economy was improving? Two plausible answers do come to mind. Firstly, the figures presented on the economy were doctored to reflect what was not on ground. The data were more of political gimmick than economic realities. A pretence that the economy was doing well because politics is largely about pretense. Secondly, the devaluation was to create a kind of money illusion for the state actors and of course the opposition parties, that the economy is really on the path of growth.
The devaluation will make the naira value of the money to be shared by the states to be more than what it ought to be, since the dollar oil proceeds will be monetized in naira. Instead of getting, for example, $2 billion multiplied by 350 which should be the exchange rate, the state would now be paid $2 billion multiplied by 450 or 500. What a kind of political gimmickry without consideration for the attendant precarious economic implications in the medium to long term! This has always been the trend in naira devaluation and that is why we have never benefitted from devaluation. The structure of the economy has never been programmed to benefit from devaluation. The Nigerian economy has not and cannot achieve what economists refer to as Marshall-lerner condition for devaluation in which the elasticity of imports and exports after devaluation must be exhibit unity. That is, devaluation reduces imports and improves exports. Devaluation of the Nigerian currency is a disservice to the economy as it only has temporary political succour.
I took time to read an article by IMF on devaluation pasted on the door of my great teacher of the blessed memory, Professor Bade Onimode, in 1985. The summary of the article was that devaluation of a country’s currency should always be the last option in economic crisis because of its devastating effects on worsening economic condition and its inability to rescue such economy if there is a problem with diversification in production and absence of multiple tradeable goods for exports. This is the characteristic that the Nigerian economy has always exhibited. Based on recent recalibration of the economic structure, there are some economic sectors coming up, but the oil sector still dominates in terms of national income. Thus the economy remains weak, sick and prostrate. Any further devaluation of the naira will aggravate inflationary trend, intensify unemployment and income inequality as well as promote exist of domestic and foreign investors from Nigeria! We warned against unbridled external loan acquisition which the regime ignored at its own peril and we are now earning revenue to service humongous debts instead of spending the same for development. This is another warning.