Policy Briefs

Devalue Now 

The Naira devaluation debate is raging, but in an opaque manner. Government’s policy is to hold the reins; not to devaluate, at least for now. President Muhammadu Buhari is adamant about that. He has valid reasons. But devaluation is premised on empirical facts not traditional emotionalism. Already there’s great volatility in the foreign-exchange markets. It’s an open secret that IMF endorsed devaluation, in response to the recent fall in oil prices. Mainstream ideas however differ.  Nigerian bankers are parroting the government line, while stressing that foreign exchange demands for the non-commercial sector – education, medical bills and holidays – continue to place undue burden on the forex needs for the critical industrial and commercial sectors.

The Central Bank of Nigeria (CBN), for its part, seems lost on which policy trajectory to follow. Between the Bank and the Ministry of Finance, no agreed lines of action have emerged.  The inability to arrest the downtrend of the Naira, and official policy taciturnity suggests implied acquiescence to allow the Naira float and self-devaluate.  That’s devaluation by stealth and inaction, or allowing the market forces to hold sway.  Market forces are compelling factors, except that the pressure on forex demand is fueled mainly by high-living bankers involved in all forms of multi-million forex racketeering due to lax regulation and enforcement.
Meanwhile, the parallel market is thriving. Business is brisk for education, medical needs, and holidays; for small-scale commercial import bill settlement, and for those seeking security in the dollars believing that the Naira will hit 500:1 before stabilizing. This week, the Naira slid further, exchanging at N390 to $1.  The implication is a progressive and implicit devaluation with a loss in value of twenty-five percent in a two week period.   Paradoxically, the CBN, which presently does not hold sufficient foreign exchange to statutorily regulate sales, is holding the official exchange rate line at N197 to $1 for inter-bank transactions.  What this translates to is that speculators who are able to buy the scarce dollar at bank rates, can cash in big time in the parallel market.

Whether to devaluate or not to devaluate is a no-brainer. I join those who say devaluate now.  It must not be by stealth. Why? Nigeria is not alone.  Besides China, Vietnam and about eight other emerging market countries have commenced or are about to devaluate. Global trends linked to China’s slowdown and the fall in oil prices compel such decision.  Yet another compelling factor is self-preservation. In Nigeria’s case, we have not planned for the proverbial rainy day. Now reality bites!
But there are challenges.   There are jitters everywhere. Major  equities stocks keep falling.  This week a drop of nearly 2% in Nigeria’s bourse index was recorded. Also, the foreign exchange policy dissonance is impacting on the economy and investor’s outlook. The domino effect is impacting on the local stock market, as investors offload their holdings and secure the remnant by booking profits.  Most of the present challenges are self-induced.  Whereas the simple explanation links the fall-in-value of Naira to the fall of oil prices, that is not entirely the true story.   First, Government through the CBN did not conserve enough.  Second, the Federal and State governments have borrowed heavily. And third, there is a nexus between the scarcity of foreign exchange and ambiguities in fiscal and economic policies; a reality compounded by the anti-graft campaign, which has driven both foreign and domestic currency investment transactions underground.

The crux of matter is that as  oil sales dropped with deleterious consequences for foreign exchange earnings, and  foreign reserves plummeted to approximately $28bn in mid-February, the CBN inexplicably fiddled with the next highest foreign exchange earner — Diaspora remittances — by banning the sale of dollars to licensed Bureau De  Change operators.  The equally inexplicable freeze on the operation of domiciliary accounts, exacerbated matters as the foreign exchange market went into flux.  Naturally, Diasporans held back on their remittances to Nigeria; an act that amounted to capital flight in a sector valued at $22bn annually.  It also translated to vast diminution of foreign exchange available for trading in the parallel forex market.

The broad implication beyond the stress imposed on consumers, commerce and on the Naira, is that for the first time in nearly twelve years, Nigeria’s external reserve has hit an all-time low.  Relief does not seem imminent except if the government decides to make clear cut policy pronouncement. For now, it seems the preference is to incrementally achieve the desired end of devaluation through stealth and inaction, thus avoiding the political consequences of direct or vicarious responsibility. Convenient and attractive as this plank is,  such a policy track will backfire. Consider that employers of labour responsible for wealth creation and employment are also feeling the impact.  For instance, John Holt Nigeria Plc reportedly suffered an exchange loss of N528m in 2015. It’s operating profit dropped by 18.50 per cent from N2bn in 2014 to N1.63bn in 2015. Same fate awaits other multinationals. Envisaged losses will run into  multiple billions.
Political consideration may dictate delinking any decision on devaluation from IMF prescriptions. For the government this realty presents a Catch-22 situation. While devaluation will boost capital inflow into Nigeria, and reduce pressure of demand for forex, it will stoke inflation and further diminish the cost of living capacity of Nigerians and their disposable income.  Yet, a decision not to devalue is not sustainable and may be seen as overly protective. Managed as it has been by the CBN, the fact remains that the monetary resources do not exist to shore up the Naira. This week banks devoted N700bn for purchase of forex.  It’s uncertain the CBN covered the lot, which further proves that shoring the Naira can’t be done with bravura propaganda or gumption alone.

As much as the present economic challenges are acceptably global and linked to falling oil prices, the frantic economic circumstances confronting Nigerians is real. Moreover, devaluation is not apolitical. Any attempt to cast it as such is misleading, since devaluation certainly will not offer a permanent solution to the country’s fiscal problems or obliterate its economic challenges. It will, however, offer Nigeria a soft landing and the opportunity to stabilize, regroup and move on with change.

For Nigerians who continue to bear the brunt of the foreign exchange crunch, the challenge will not be limited to settling educational, medical or import bills only.  Devaluation will compound prevailing challenges. The already eviscerated Naira presents vastly reduced store value and store of value; hence cost of goods and services will remain linked to the spiraling dollar exchange rate. Prices will rise in tandem.  So, the nation does not only court devaluation, but also inflation. Salaried workers will be most adversely affected. Painful as this may be, not to devalue now, is to postpone the inevitable. Months from now, we will look back and wish we devalued in early 2016. The time for devaluation is now.

Obaze, MD/CEO of Selonnes Consult, is a strategic public policy adviser, consultant and immediate past Secretary to the Anambra State Government.

Oseloka Obaze, MD & CEO

Oseloka Obaze, MD & CEO

Mr. Obaze is the former Secretary to the State Government of Anambra State, Nigeria from 2012 to 2015 - MD & CEO, Oseloka H. Obaze. Mr. Obaze also served as a former United Nations official, from 1991-2012, and as a former member of the Nigerian Diplomatic Service, from 1982-1991.

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