The odds are against devaluation part1
Foreign experts’ and most Nigerian intellectuals have been conditioned to post-industrial, competitive, free-market economics, in which changes in price are automatically compensated by changes in demand and supply, such that a desirable equilibrium is quickly attained – because the means of production and distribution of goods and services abound, patriotism and allegiance to the State are great, resources are efficiently allocated and income is normally distributed. It is in this light that they see devaluation of the Naira as the panacea to our cash flow challenges. But our case is different.
Dearth of domestic production aligns with cultural and structural distortions to render the system unresponsive. Any condition that diminishes domestic production of needed goods and services is antithetical to devaluation. And we have many of them. In the long run, this unresponsiveness must be addressed before devaluation can be beneficial. In the short run, it rules out free-market devaluation because the equation of response will break down.
To devalue the Naira is to officially reduce its equivalent weight in other currencies for which it can be exchanged. Devaluation is, essentially, an export-oriented measure, intended to correct declining reserves and balance of trade. It is supposed to flog the system back to the truism that money is a measure of value and that value comes from the production of needed goods and services.
Devaluation should encourage other countries to invest more and buy more from Nigeria (as Nigerian goods become cheaper to them) and, concurrently, discourage importation (as imports become dearer) while motivating domestic production (as buyers turn to local substitutes). As the re-alignment intensifies, the Naira, in particular and the economy, in general, bounces back in a new equilibrium! Conversely, if the adjustment fails to materialise, the Naira will not find a timely berth and may spin into a free fall with the economy. It is an adjustment that leverages on the availability and flexibility of domestic means of production and distribution, patriotism and efficient resource allocation.
The converse is the more likely scenario in our case because we lack all the leverages for timely post-devaluation adjustment. Devaluation would rather trigger a run on the declining foreign exchange (forex) reserves, which can hardly cover critical imports (e.g., petrol and raw materials) not to talk of indulgent ones. Access to forex by preferred end-users will not improve by the mere fact of devaluation, which precludes prioritisation. CBN’s prioritisation strategy can prevent that run. There will always be a parallel market. And there will always be speculative demand and acceleration in the same direction between the official and the parallel-market rates such that the two may never merge – as long as forex scarcity lasts – devaluation or not.
We have devalued the Naira for 30 years. It has not triggered quantum increased production of locally needed goods, not to talk of exports. It has not triggered the critical mass of foreign direct investment (investment by foreigners in local production as opposed to portfolio investment in securities which can be liquidated precipitously, with capital flight). It has not led to the rebound of the Naira. Only the fortuitous rebound of crude oil price always wedged the Naira from a free fall. We are also largely unpatriotic and prefer imports to local substitutes. Our attitude to the State and to one another is more predatory than supportive. And resource allocation is inefficient, even in the present dispensation.
Moreover, the political risk of free-market devaluation is too high. As we run out of reserves sooner than later in the deregulated forex market and the going gets tougher, the docility of the people, which had been taken for granted, is bound to snap (there is always a tensile limit) and anything can follow. Just imagine the hyper-inflation, labour unrest and social upheaval of devaluing the Naira from, say, N197.50 to N300 to the U.S. Dollar, as petrol consequently escalates from N86.50 to N130 per litre, spilling over to pervasive transportation and food prices. In contrast, forex restriction can repress the appetite for non-essential imports and extend the life of the declining reserves while cashflows and domestic production undergo restructuring.
Yes, there is the issue of doubtful capacity for objective and transparent allocation of forex and for stringent enforcement of measures against arbitrage, round-tripping and smuggling by the CBN, the financial institutions and all other government agencies concerned under the CBN conservation strategy. And there is palpable apprehension over the unsettling dictatorship of international financial institutions and the foreign press as well as the precipitous reaction of foreign investors and currency speculators.
For example, the parallel market rates are known to be spurious and asymmetrical to the regular forex demand profile. If the CBN stayed its course, speculators who bought up foreign currencies, in anticipation of sustained decline of oil price and devaluation under pressure, would be bound to offload. The CBN could also tinker with the policy on export proceeds utilisation as well as autonomous sales by oil service companies and the like to bureaux de change and third parties, to unravel the market.
The CBN strategy also connects well with the primary purpose of State which is to protect the weak and to galvanise the economy towards growth and development for the benefit of all citizens. The poor and under-privileged (the overwhelming majority of the population) do not import luxury vehicles, do not school their children overseas, do not go abroad for medical treatment and holiday and do not buy champagne or red wine or even caprice. Should those hooked to imported luxury goods and services not drawdown their offshore and domiciliary accounts or look elsewhere for forex other than the CBN?
Public forex holdings should be channeled to manufacturing, education, infrastructure, transportation, healthcare and youth empowerment, etc, that can facilitate import substitution and are largely shared by all the people. In this sense, the current range of restrictions is actually inadequate and should be extended. The restriction must also be complemented by congruent and far-reaching fiscal measures.
Targets must be set for self-sufficiency in all areas that are significantly within our comparative advantage, competence and control. For example, there must be an end to food imports within two years, through dramatic increases in farm acreage and mechanisation; food processing, preservation and storage facilities; target collaboration between research institutes, higher institutions and farming communities and in subsidy and guarantee schemes. There must also be an end to imports of fuel within the same timeline and to most crude oil-derived petrochemicals, including fertilizers, within five years.
Phase-wise refurbishment of hospitals – in staffing, facilities and culture – should commence immediately while distinguished ones (both private and public) should be assisted to transform to world class medical facilities. Nigerian experts in the Diaspora willing to set up world-class medical facilities at home should be encouraged with concessions on land and location, etc, by government. National Health Insurance should be accelerated to all citizens.
•To be continued tomorrow
• Emma Nwosu is a business, training and research consultant.
Our youths seek overseas education mainly for security and predictability of term. Many of them do not return. This brain drain can be curbed – and forex conserved – by urgently refurbishing our higher institutions in faculty, facilities and culture, with the target of transformation to world class within five to 10 years and with an immediate end to cultism, strikes and labour unrest, whatever it takes. Various schemes of overseas collaboration in post-graduate training, particularly, in science and technology disciplines, should be accelerated, to augment the output of competent faculty by local institutions.
To be continued tomorrow
Emma Nwosu is a business, training and research consultant.