President Muhammadu Buhari may have, so far, given the clearest preview of his template for the revival and sustenance of inclusive growth in the Nigerian economy, in a recent interview with a French media house in Paris. Indicatively, in his comment on our currency, Buhari noted that “the naira has been devalued, as it used to be around N140/$ and now it is hovering around N200/$ and above; I don’t think it is healthy for us to have the naira further devalued.”
Furthermore, Buhari explained that “we are therefore getting the Central Bank to make modifications in terms of foreign exchange availability for essential industries, spare parts, essential raw materials and so on, while liberal access to the CBN’s depleting forex reserves will be denied to importers of such things like toothpick and rice for which Nigeria has adequate capacity.” He therefore concluded that “we don’t need to give our hard earned currency for that, but those who insist on toothpick from Europe or from China, instead of using Nigerian toothpick, they can go and source their (own) foreign exchange.”
What is clearly evident from the above narrative is Buhari’s unequivocal endorsement of the CBN Governor, Godwin Emefiele’s recent steps to reduce the pressure of dollar demand on the “CBN’s reserves” and naira exchange rate”.
Indeed, Buhari’s antecedent suggests that he was never enamoured by the usually extravagant promises that a weaker naira would jump start or successfully stimulate economic prosperity and promote exports.
For example, according to a front page story in the Daily Independent Newspaper of September 17, 2015, the President had reportedly recalled at a Town Hall election campaign in March this year in Abuja, that “he (Buhari) refused to remove subsidies on petrol and devalue the naira when he was Head of State between 1983 and 1985, because it would destroy the economy”. He also revealed on the same occasion that “when we came into power in December 1983, we were approached by the world powers at some stage to devalue the naira, remove petrol subsidy and remove subsidy on flour, but we refused.” According to Buhari, “the issue was that if we get plenty of naira, what are we going to do with it? We (had) even stopped farming and the only thing we get money from was oil and that was being paid in dollars.”
One does not have to be a top flight economist to appreciate Buhari’s logical insight of the economic realities of devaluation.
In retrospect, however, soon after he was ousted from power, the IMF came calling with a Structural Adjustment Economic Plan, which they boasted would chart our course to El Dorado! Regrettably, the succeeding regime of Ibrahim Babangida, ultimately, smuggled in SAP under the guise of a home-grown variant, which horrifyingly debased the naira and inadvertently kick-started the odious brain drain of some of our best human assets to Europe and America and inevitably triggered the steady descent of our economy and our national values.
Ironically, Buhari is back as President 30 years later, when the naira exchange rate has alarmingly tumbled from less than N1=$1 in 1985 to N200/$ today. Curiously, nonetheless, the appropriate pricing of the naira and fuel subsidy still remain pivotal issues. There is also growing international pressure once again to further devalue the naira by between 15 per cent and 20 per cent i.e. to N230-240=$1, with the promise, this time, of more portfolio investment inflow, despite their inherent fickle disposition and prosperity for economic dislocation.
Thus, the President’s observations in the France 24 interview is probably an early reiteration of his position 30 years ago, that “devaluation would destroy the economy”.
Nevertheless, let us examine whether Buhari’s claim of the destructive capacity of naira devaluation can be substantiated. For this purpose, let us assume, for arithmetic facility, that the dollar appreciates 100 per cent against the naira to exchange for N400=$, even though such rate of appreciation may deceptively appear unrealistic presently. However, we must remember that the same dollar exchange rate appreciated from 50k=$ to N200=$ between 1975 and 2015 i.e. a 20,000 per cent increase, despite relatively increasing surplus forex earnings from higher crude oil prices!
In reality, N400=$1 exchange rate will reduce the current minimum wage to less than $50 per month! Thus, a minimum wage earner, may have to work 2×10 hour shifts every day to earn the income required to maintain his old consumption pattern before devaluation, unless he receives a commensurate wage increase! Similarly, all other higher income earners, and their savings, would also lose up to 50 per cent of the dollar value of their incomes, while all equity in the stock market will suffer the same fate if the dollar appreciates to N400=$1. In plain language, we would all be poorer!
So, in essence, naira devaluation was and remains bad news that portends social and economic dislocations and deepening poverty; evidently, our trajectory in the last 30 years bears ample testimony to this reality.
Incidentally, the inflationary spiral which comes with weaker naira exchange rates will also critically reduce consumer demand with adverse consequences on industrial capacity utilisation, fresh direct investment and the already suffocating rate of unemployment. For example, while the manufacturing sector contributed more than 10 per cent to our Gross Domestic Product in 1986 when the naira was N2.02=$1, regrettably, however, with N200=$1 today, manufacturing barely contributes up to five per cent to the GDP. Thus, by simple extrapolation, a N400=$1 exchange rate may inevitably also further weaken the contribution of the industrial subsector to well below five per cent of the GDP, with unpleasant consequences for job opportunities.
Furthermore, oppressively high cost of funds and higher raw material costs induced by weaker naira exchange rates, inevitably make “Made in Nigeria” goods uncompetitive and therefore promote Nigeria as an inviting dumping ground for myriad imports.
Similarly, sustainable fiscal plans will clearly also become a challenge if dollar appreciates 100 per cent against the current naira rate. For example, although the nominal budget size may double, such bloated budgets would barely command less than 50 per cent of their former purchasing values before devaluation.
Incidentally, with N400=$1 exchange rate, our celebrated GDP of about $510bn, when N155 bought one dollar, will clearly crash embarrassingly to a much more humble value of about $200bn.
Worse still, fuel price will double beyond N200/litre (even with production from local refineries) if N400=$1, and expectedly, such a price hike will surely make the removal of subsidy very unpopular. Instructively, however, if fuel remains subsidised, we may have to dedicate over 20 per cent of annual budgets directly to the settlement of subsidy!
Evidently, from the preceding narrative, President Buhari’s phobia for naira devaluation may be justified. However, frankly, it is difficult to see how further naira devaluation can be avoided if low crude oil prices continue to reduce dollar inflow while indiscriminate naira liquidity conversely remains uncaged to constantly chase the CBN’s rationed dollar supplies. The CBN’s recent notice of its intention to mop up over N800bn of allegedly surplus naira values from the money market before December 2015 clearly portends more dark days for naira exchange rate.
Furthermore, the threat from the self-inflicted albatross of excess liquidity on inflation will simply propel the CBN’s counter-productive strategy of borrowing the trillions of naira which are simply stored away as idle funds, notwithstanding the oppressive 12-15 per cent attendant rates of interest for such risk-free sovereign loans and the crying need of the real sector for cheap funds. Sadly, another 20 per cent of annual budgets (about N1tn) will be dedicated to debt service charges with such heavy government borrowings. May God help us!
PUNCH
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