Christine Lagarde
The debate whether or not to officially devalue the naira is diversionary. What is important is how to substitute local goods for imported ones– which devaluation may never help to achieve. Vincent Obia writes
When on January 4 the managing director of the International Monetary Fund, Ms. Christine Lagarde, arrived in Nigeria for an official visit, many never hesitated before condemning her visit as a mission to introduce the fund’s economically strangulating prescriptions. Lagarde was quick to read the mood of the nation and respond. “Let me be very clear,” she said in Abuja after a meeting with President Muhammadu Buhari, “I’m not here nor is my team here to negotiate a loan with conditionalities, we’re not programming negotiations. Frankly, given the determination and resilience displayed by the president and his team, I don’t see why an IMF programme is going to be needed.”
Buhari also made it clear that currency devaluation, one of the commonest recommendations of IMF, was not on the cards. But barely one month after, pressure has mounted immensely on the naira, though, the federal government appears determined not to buckle under the pressure of devaluation.
There is nothing glorious about devaluation of the currency: it is an unfair economic medicine that keeps the devaluing country, especially an import-dependent country like Nigeria, perpetually sick and clung to the apron strings of the world economic order dominated by the West.
Classical economics recommends devaluation as a way of making exports cheaper and imports costlier, thereby encouraging exports and discouraging imports. That is given appreciable capacity to export on the part of the devaluing country. Nigeria does not possess such capacity, and it may remain a perpetual loser in the world economic system where it is being force-footed via devaluation and other processes. Two recent devaluations in quick succession, on November 28, 2014, which devalued Naira from N155 to N168 to $1, and on February 18, 2015, which brought the exchange rate to N199 to $1, are clear indications of the hollowness of the dream of improved exports and other economic benefits from devaluation.
The cure for the current economic woes in Nigeria, highlighted by an awful fall in crude oil prices, lies in the reinvigoration of local production and consumption of local goods and services. Acting otherwise carries the risk of complete economic liquidation.
Edo State Governor Adams Oshiomhole captured the poignancy of failure to curb the appetite for foreign goods at a recent colloquium on devaluation.
Edo State Governor Adams Oshiomhole captured the poignancy of failure to curb the appetite for foreign goods at a recent colloquium on devaluation.
“As we speak, I understand that our forex inflow is under $1 billion. If you’re earning less than one billion, and your outflow remains at more than $4 billion, obviously, all other things being equal, I imagine that in one year, our foreign reserves would be zero,” Oshiomhole stated at the dialogue on February 11 in Lagos organised by the online news medium, TheCable.
About a fortnight ago, the Central Bank of Nigeria said school fees and medicals would no longer attract foreign exchange at the official market, bringing to 43 the number of items excluded from access to forex at the official rate. The market reacted sharply, increasing the exchange rate from N310 to the dollar, to about N345 to one dollar. The announcement of the exclusions, experts say, had triggered a high demand for dollars by currency speculators for storage in expectation of supernormal profits from a predictably huge forex demand for school fees and overseas medical as well as importation of sundry consumables.
The federal government needs to make a conscious policy to not only discourage the importers from importation, but also encourage them to channel their resources to local production. Stimulation of local production and consumption would reflate the economy and create jobs. It would help to reduce the pressure on the foreign reserve and shore up the value of the naira.
The federal government also needs to look carefully at the foreign exchange market with a view to removing the extra-market forces that have continued to burden the naira. The foreign exchange market in the country is fraught distortions, excessive speculation, and volatility that need to be addressed by the government. On paper, the parallel market accounts for only about 10 per cent of trade on the foreign exchange market. Yet activities in the unofficial market have posed the greatest problem to the value of the naira, an apparent indication that many of the official channels are also used for underhand practices.
The relevant government institutions must rise to the challenge of fighting corruption and recovering looted funds as well as keeping the searchlight on the organisations involved in the foreign exchange market.
With its Gross Domestic Product worth over $550 billion, Nigeria is undoubtedly an economic giant. It can always manage to hold its own. The country should look inwards for solution to its present economic crisis. The foreign-induced strategies, which assumed a prominent feature in the economy since the 1980s, have hardly helped the country.
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