With the backlog of demand for dollars topping an astronomical $5.5 billion, all bets are now off that the naira will suffer yet, another devaluation, after the Central Bank of Nigeria (CBN) eased some capital controls and President Muhammadu Buhari, who vehemently opposes devaluation, extended his sick leave in Britain. Forward contracts rose to the highest level since November after the CBN said it would “increase the efficiency of the foreign-exchange market” and make hard currency available to Nigerians needing to fund business trips and overseas school and medical bills. There is no doubt the president’s resolve not to devalue the naira is correct in Nigeria’s circumstance. Devaluation will put the real value of Nigeria’s debt stock at over ₦19 trillion, when considered at the official rate of ₦307.79 per dollar, according to figures from the Debt Management Office. With over 21% of the entire budget dedicated to debt servicing and over 33% of the budget to be financed from borrowing, any weakening of the naira with no redeeming value to the Nigerian economy cannot be in the public interest and must be resisted.
However, a mere decision not to devalue will not lead Nigeria out of its present dire economic straits. As emphasized in basic economic theory, an economy thrives on its level of productivity, both domestic and exports. Therefore, the government should urgently embark on actions that will reverse the current low productivity in the country. Since the downturn in the price of crude oil in the international market, Nigeria’s foreign exchange earnings and reserves have been adversely affected. President Buhari has resisted devaluation; giving the informed reasons that nothing will be gained from it since Nigeria is not export-driven. He also stressed correctly that poor Nigerians will suffer more as devaluation will fuel inflation. Nigeria will have to spend more in debt servicing. The national debt stock comprising external obligations for both federal and state governments is estimated at $11.3 billion (about ₦3.5 trillion); domestic obligations of $37.5 billion (about ₦11.5 trillion) and $12.7 billion (about ₦3.9 trillion) for federal and states respectively. The additional ₦6.33 trillion that would be needed to pay off Nigeria’s external debt represents over one-fifth (20.58%) of its estimated $296 billion (₦91 trillion) GDP.
Currency devaluation is usually carried out to achieve economic and social objectives. The ultimate aim is to make a country’s exports more price-attractive while making imports more expensive and thus, less attractive. Thus, trading partners are encouraged to buy more of Nigeria’s exports and services while Nigerians are discouraged from importation of foreign goods. In so doing, foreign exchange earnings increase, and from both sides of the trading relationship, Nigeria’s foreign reserves will trend upwards. As it is well-known, Nigeria is a mono-product export country. Apart from crude oil, there is nothing to export to earn forex. Conversely, Nigeria is import-dependent and any attempt to further devalue the naira will lead to massive depletion of foreign reserves perhaps, to a level that can hardly support further imports. Such a situation will automatically result in hyper-inflation and aggravate poverty, civil unrest and criminality across the country.
With a planned ₦2.32 trillion borrowing to fund the ₦2.36 trillion deficit in the 2017 budget, from a mix of dollar-denominated and local debts, the country’s obligations and associated service bill will rise to new record highs. Already, the ₦7.298 trillion 2017 budget has a debt service provisioning in excess of N1.66 trillion, representing more than one-fifth of the entire budget; with a sinking fund estimated to gulp ₦177.46 billion to enable government retire certain maturing bonds. The combined forces of devaluation and inflation, will take a toll on the nation’s economy, eroding the naira value, as well as pushing up the sovereign debt stock upwards.
The clamors for naira devaluation, especially by financial institutions of the great banking interests -the International Monetary Fund (IMF) and the World Bank – is a clear indication, that the CBN urgently needs a change of strategy in exchange rate management. It also shows that recent measures by the CBN to limit access to forex, including the ban on certain imports as a way of restricting the demand for forex, falls short of the structural reforms needed to boost the Nigerian economy, which, it must be said, is now on life support. The battle to save the naira highlights the CBN catch-22 of defending the naira and maintaining access to finance at affordable rates which leads to high inflation, or keeping interest rates low; and by default weakening the naira. It’s like digging a hole to fill up another hole.
Nevertheless, saving the naira demands a holistic approach starting from CBN monetary policy. CBN should reject devaluation which will only further doom the naira because the economic infrastructure where market forces drive micro-economic policies and determine efficient allocation of resources, like forex, does not exist in Nigeria. Nigeria is not a credit driven economy. For efficient allocation of resources under a market economy to succeed, all parties must settle their debts as and when due. In other words, there must be no break in the circular flow of income. In Nigeria, parties do not settle their debts as and when due. People do not pay taxes as and when due so revenue accruing to government is either delayed or lost. Even governments at all levels do not honor their obligation as and when due to public servants and contractors.
Also, Nigeria’s economy is a cash-based economy. There is more money circulating outside the banking system than in the banking system. This is because the informal sector is about 70% of the domestic economy. The balance 30% is the formal sector involving people who bank their money. Add this to the heavy spending by government to finance deficit budget through funds raked in from naira devaluation and the inability of CBN monetary policy to drive economic development becomes inevitable. The CBN must abandon its present strategy on monetary management and explore the possibility of fashioning an economic model for managing an economy that is largely informal in which businesses and economic operators do not trust banks and electronic payment platforms.
With respect to managing naira/dollar exchange rate, the CBN should adopt the foreign trade approach since Nigeria operates an import-substitution economy. Since there is high demand for forex which makes the foreign currencies in international trade, CBN should make forex to pursue the Naira. The way to achieve this is to invoice our exports in Naira. It will not stop Nigeria from earning forex and the new demand for Naira for foreign trade will achieve two things. First, it will kill the speculative forex market that leads to massive devaluation of Naira at the forex market; second, it will eliminate the vexed issue of excess liquidity that occurs during the monetization of dollars in the Dollar to Naira intermediation. In this way, the phenomenon of excess liquidity will end because what caused excess liquidity is the monetization of petro-dollar receipts under the present substitution method.
When exports are invoiced in Naira, it will stimulate economic activity in Nigeria due to increased demand for Naira which will become scarce and command an enhanced value in the international foreign exchange market. After all, demand for Naira is equal to demand for goods and services Naira will buy. In addition, tourism, hospitality industries will receive a boost. Just as Nigerian importers travel to Asia, Europe and America, to supervise their imports. They will stay in hotels and buy made in Nigeria goods and services which will be mutually beneficial to all parties.
