The reluctance of the Buhari government to devalue the Naira is causing quite a lot of consternation in some circles, and the furore generated thereof is causing even a lot more consternation in others. The depth of the passion whipped up on both sides of the argument is quite instructive, yet neither side has yet provided a cohesive and comprehensible analysis in support of their argument. Admittedly, neither argument is tangential to the real issue at hand, but it would be pertinent to explore the real reasons one side has proposed devaluation while the other is dead set against it.
In the first instance, there are a number of salient questions to be answered, the first of which is (though blatantly obvious) does Nigeria operate a fixed or a floating exchange rate system? The equally blatantly answer is yes, we do operate a fixed exchange rate system, as the official Naira:dollar is 197:1. That is fixed, and this is central to the argument at hand. What is clearly happening is that agitators for depreciation are, with due respect, confusing devaluation with depreciation. Depreciation can only occur in a floating exchange rate system, and it is not determined by government; the laws of supply and demand strictly apply in this context.
With this clarity in mind, many of the agitators for depreciation might want to reconsider, and reshape the nature of, their argument. Rather than agitate for a devaluation, they might want to press for a case for the government to consider unpegging the Naira from the dollar. Only then could depreciation be feasible, as the Naira would then find its own level, just like the proverbial water. This would be totally devoid of government intervention. However, we are where we are and as such, the issue of devaluation can be debated without the attendant prior confusion.
The economic benefits to be accrued from devaluation are, unfortunately, somewhat limited by the very nature of our economic architecture, and its obvious obtuseness. In a more and better structured market economy with readily discernible and verifiable economic indicators, one might expect, firstly, devaluation to make exports cheaper (increasing demand for exports) and imports pricier (reducing demand for imports). The resultant effect of both of the aforementioned instances would be higher economic growth and therefore, increased aggregate demand. These are much desired possible outcomes because overall, GDP should head north (improving the current account balance); the caveat being that inflation most inevitably heads in the same direction.
Moreover, even though the world economy is not technically in recession (as the growth rate is only easing, instigated by the slowdown in Chinese and other emerging economies), demand would be helped upwards and if growth rate increases, growth in demand would be even higher. As the world economy is not in boom time, runaway inflation resulting from a currency devaluation could be safely discounted. Now, the final and perhaps the most pertinent question of all is why exactly does the currency need to be devalued? If it is to increase competitiveness, then devaluation could be a desirable and necessary monetary tool. On the flip side, if it is just to target a specific exchange rate, its effect may even be counterproductive.
My contention, therefore, is that many of the agitators of Naira devaluation (some of my good friends included) have comprehensively failed to articulate the real need for a devaluation in the current Nigerian economic and political climate. For the reasons I alluded to earlier, our economy, being overwhelmingly mono-product-based coupled with the lack of reliable and verifiable economic indicators, would not benefit from a devaluation were it to be done at this moment. How are we supposed to benefit from increased export earnings when we hardly produce and export anything, apart from crude oil? Nigeria is overwhelmingly a consuming, rather than a producing, economy. In addition, with the recent and current travails in the global energy market, how are we supposed to benefit from increased earnings from our oil exports? We are currently chasing around for buyers in a very depressed global energy market. What competitive advantage is potentially accruable from a Naira devaluation? It is increasingly appearing to me that the agitation for a Naira devaluation has an emotional undertone rather than borne out of any economic rationalization and reality. Emotion ought to be detached from reality.
In summary, rather than follow the path of currency devaluation, I am of the humble opinion that we need to focus our collective minds and effort on devaluing corruption. It was corruption and criminal impunity that got us where we are. We frittered away our economic advantages for many years when a barrel of oil sold at an average of $110. We failed to fix the roof while the sun shone and we thought the party and the jolliness would last forever. The boom years were boon times for the thieving political elite and we should concentrate all our efforts on taking back what was stolen from us. Can anyone imagine the difference it would make if we got back even only 10% of what was stolen, and the recovered funds judiciously utilized? I'm sure nobody would even be thinking of any movement either way in currency positions. So, first thing first. Let's get our house in order and then have a solid basis on which to formulate sound economic and fiscal policies fit for the 21st century.
The raft of ongoing criminal prosecutions should be expedited and other suspects speedily indicted. We need the money, and the culprits severely punished, like yesterday!
In the first instance, there are a number of salient questions to be answered, the first of which is (though blatantly obvious) does Nigeria operate a fixed or a floating exchange rate system? The equally blatantly answer is yes, we do operate a fixed exchange rate system, as the official Naira:dollar is 197:1. That is fixed, and this is central to the argument at hand. What is clearly happening is that agitators for depreciation are, with due respect, confusing devaluation with depreciation. Depreciation can only occur in a floating exchange rate system, and it is not determined by government; the laws of supply and demand strictly apply in this context.
With this clarity in mind, many of the agitators for depreciation might want to reconsider, and reshape the nature of, their argument. Rather than agitate for a devaluation, they might want to press for a case for the government to consider unpegging the Naira from the dollar. Only then could depreciation be feasible, as the Naira would then find its own level, just like the proverbial water. This would be totally devoid of government intervention. However, we are where we are and as such, the issue of devaluation can be debated without the attendant prior confusion.
The economic benefits to be accrued from devaluation are, unfortunately, somewhat limited by the very nature of our economic architecture, and its obvious obtuseness. In a more and better structured market economy with readily discernible and verifiable economic indicators, one might expect, firstly, devaluation to make exports cheaper (increasing demand for exports) and imports pricier (reducing demand for imports). The resultant effect of both of the aforementioned instances would be higher economic growth and therefore, increased aggregate demand. These are much desired possible outcomes because overall, GDP should head north (improving the current account balance); the caveat being that inflation most inevitably heads in the same direction.
Moreover, even though the world economy is not technically in recession (as the growth rate is only easing, instigated by the slowdown in Chinese and other emerging economies), demand would be helped upwards and if growth rate increases, growth in demand would be even higher. As the world economy is not in boom time, runaway inflation resulting from a currency devaluation could be safely discounted. Now, the final and perhaps the most pertinent question of all is why exactly does the currency need to be devalued? If it is to increase competitiveness, then devaluation could be a desirable and necessary monetary tool. On the flip side, if it is just to target a specific exchange rate, its effect may even be counterproductive.
My contention, therefore, is that many of the agitators of Naira devaluation (some of my good friends included) have comprehensively failed to articulate the real need for a devaluation in the current Nigerian economic and political climate. For the reasons I alluded to earlier, our economy, being overwhelmingly mono-product-based coupled with the lack of reliable and verifiable economic indicators, would not benefit from a devaluation were it to be done at this moment. How are we supposed to benefit from increased export earnings when we hardly produce and export anything, apart from crude oil? Nigeria is overwhelmingly a consuming, rather than a producing, economy. In addition, with the recent and current travails in the global energy market, how are we supposed to benefit from increased earnings from our oil exports? We are currently chasing around for buyers in a very depressed global energy market. What competitive advantage is potentially accruable from a Naira devaluation? It is increasingly appearing to me that the agitation for a Naira devaluation has an emotional undertone rather than borne out of any economic rationalization and reality. Emotion ought to be detached from reality.
In summary, rather than follow the path of currency devaluation, I am of the humble opinion that we need to focus our collective minds and effort on devaluing corruption. It was corruption and criminal impunity that got us where we are. We frittered away our economic advantages for many years when a barrel of oil sold at an average of $110. We failed to fix the roof while the sun shone and we thought the party and the jolliness would last forever. The boom years were boon times for the thieving political elite and we should concentrate all our efforts on taking back what was stolen from us. Can anyone imagine the difference it would make if we got back even only 10% of what was stolen, and the recovered funds judiciously utilized? I'm sure nobody would even be thinking of any movement either way in currency positions. So, first thing first. Let's get our house in order and then have a solid basis on which to formulate sound economic and fiscal policies fit for the 21st century.
The raft of ongoing criminal prosecutions should be expedited and other suspects speedily indicted. We need the money, and the culprits severely punished, like yesterday!
