Buhari’s reality check on floating the naira – Part 1
The adoption of a floating exchange rate by Nigeria on June 14 ,2016 was informed by similar challenges faced in the United States on June 2, 1929 when the U.S stock market crashed, triggering the Great Depression. Pulling out of the gold standard by England in 1931 is the modern day equivalent to floating a country’s currency, a policy that has just been introduced by CBN’s Godwin Emefiele and president Muhammadu Buhari with a view to equally lifting Nigeria out of the economic dungeon that it is currently trapped in.
Upfront, it is important to point out that Nigeria’s economic malaise is not in any manner ,shape or form comparable to the Great Depression; however some of the factors that had compelled Nigeria’s joining of the popular global economic trend of floating their currency are derived from the belief that during depression, a flexible exchange rate is critical.
With a weak aggregate consumer demand; falling oil prices; negative GDP growth; alarming inflation and unemployment rate as well as a huge backlog of payment of workers’ salaries by 27 state governments, situations that are currently the case in Nigeria, the nation is on the verge of a recession, which is why a flexible exchange policy is being adopted as a panacea.
Today, after about one year of resistance that resulted in severe economic crisis such as the downward slide of all development indices in Nigeria including dropping from the position of the world’s number 2 in global ranking of FDI destination , 2 years ago, the IMF president Christine Lagarde’s desire for flexible exchange regime in Nigeria is being fulfilled through the new policy announced by the CBN, June 14,2016.
Hopefully, with the flexible exchange rate regime’s take off from 20th June, it is speculated that the naira/dollar exchange rate which is now hovering around N365/$, would find equilibrium may be at around $250/$. If nothing else, the new fx regime would usher in some certainty which would ease planning for manufacturers and other entrepreneurs.
This means there is cause for economists, bankers and business men and women to celebrate the recent development in the financial services sector ,which seems positive, but Nigerians should be cautious not to create the erroneous impression that the creation of a flexible exchange rate regime would be a sort of economic nirvana and Eldorado signaling the reversal of all our economic woes. We can’t afford to be complacent enough to believe that the removal of fx trade restrictions is an end in itself and therefore a magic bullet that would relieve Nigeria of all the burden arising from plummeting crude oil price, corruption and maladministration over the years.
Right now, although Africa has comparative advantage in agriculture, the nation is unable to sustain her food need, how much less export and neither does she have any experience in the production of technological items such as iPhones, airplanes or even motor cars which provide incentives for countries to devalue or float their currencies to boost export trade.
At least that’s the justification that president Buhari and his close advisers had been holding onto and they have a point, but that cannot be a cogent excuse for sticking to a policy that is counter-productive for so long. Nigeria’s economy went bust as reflected by the challenges faced by Shehu Shagari’s govt from 1979 to 1984 when oil prices crashed from $30 to as low as $13 per barrel. The perilous times were carried over into the Buhari era as military head of state from 1984-1985, compelling the ban on foreign imports and introduction of queues for purchase of so called essential commodities comparable to the present situation in Venezuela.
The Ibrahim Babangida austerity measures, after he took over the reins of govt in 1985, birthed the Structural Adjustment Program, SAP of 1986, which was the alternative to taking the infamous IMF loan that then General Buhari detested and most Nigerians loathed.
While the president govt has, at least acknowledged that Nigeria is no more as rich as it was in the mid 1970s and identified the folly of being stuck in the past, it took too long in accepting the fact that pegging the Naira is foolhardy, but as the saying goes, it’s better late than never. The commendable acceptable reality by the authorities has now enabled her creatively find a workable variant of flexible naira exchange mechanism.
To be continued tomorrow.
Magnus Onyibe, a development strategist, futurologist and former commissioner in delta state govt is an alumnus of Fletcher school of law and diplomacy, Tufts university, Medford Massachusetts, USA.