Devaluation is the lesser evil

Written By Bolaji Akinola

Professor Wole Soyinka, in his prison notes The Man Died, it was who recommended that the moment power is deemed culpable in any way, each family should, in place of, or after its regular morning prayers, make a ritual of throwing their breakfast slop at a pinned-up photograph of the symbol of power before going out to earn a living under an insupportable system. The bard recommended that this should be done “every morning religiously”.

By the time you’re reading this piece, a dollar would be exchanging for at least N400 at the parallel market. This means in absolute terms, the national currency would have lost 60% of its value over a six-month period. The Central Bank of Nigeria official exchange rate remains N197 but no one is in doubt that it is not the official exchange rate but the parallel market rate that governs business decisions in the country.

While it had been argued that President Buhari’s government cannot be totally blamed for the sliding value of the naira, the administration cannot plead a strong case for its failure to arrest the unrestrained depreciation of the national currency.

To refresh our minds, when General Babangida stepped-aside in August 1993, he left the naira at N22.33 to the greenback but by February 1994, under General Abacha, the naira had appreciated to N21.89 to the dollar. This was a period of six months. The dark-goggled General, notwithstanding all that has been said and written about him, sustained the exchange rate at N21.89 until he died in June 1998. This was despite series of sanctions and bans on Nigeria.

The one sore point that sticks out under the current dispensation is President Buhari’s caustic posture on devaluation. He left no one in doubt on December 31, 2015 when he told Nigerians that he would not support devaluation of the naira because he was not convinced it would benefit the economy.

“I will not support devaluation,” the President said. “I need to be convinced that devaluation of the naira is what Nigeria needs. Devaluation against what currency? American Dollar? Or Pound sterling? Or Yen? Dutch Mark? Or French Franc?” he asked his interviewers.

My immediate reaction was to ask where Mr. President got the Dutch Mark and French Franc thing? Have these currencies not since been replaced by the euro?

On January 28 this year in Nairobi, the President reiterated his line of thoughts, arguing that he would not “kill the naira”.

One cannot but sympathise with the President because he faces very hard choices. It is like being torn between the devil and the deep blue sea.

Either the President gives his approval to devaluation or not, the economy will continue to bleed and the fall will continue with its free fall.

I think President Buhari is holding tenaciously to this view because his appointees are telling him only what he wants to hear, rather than tell him the tough and narrow options facing the country as a result of the drop in oil prices.

The naira maintained a relatively stable exchange rate between 2010 and mid-2014 because Nigeria had over $40billion in reserve. Oil prices were also high and stable; there was no glut in the market. So the Central Bank of Nigeria conveniently used oil money, which rose to as much as $120 per barrel to defend the local currency. 

The scenario is different now. The nation’s foreign reserves have been dangerously depleted while oil prices are about a third of what they used to be. So Nigeria, which totally depends on oil revenue to finance its budgets and imports, is now experiencing dollar scarcity.

We all learnt in elementary economics that prices will go up when there is drop in supply. That is exactly why the price of dollar in relation to the naira trends northwards everyday. For as long as the status quo remains, naira will continue to depreciate.

Nigeria needs about $3.6billion to finance importation of food and other consumables every month but the CBN is able to provide only $1billion through its foreign exchange window. The balance has to be sourced from somewhere and that is through the black market. This puts a lot of pressure on the black market which naturally adjusts its price in relation to demand.

All the measures taken by CBN in restricting access to the official foreign exchange window are nothing but panicky attempts to push for a cut in demand. While this may happen, it won’t be overnight. We squandered our chances in the past to diversify our economy, which should have happened in the time of plenty.  

The President’s grasp of economic issues is limited because of his background but that is why he has economic advisers and ministers. He has to listen them; he must have an open mind on the subject matter.

While the government works on diversifying the economy, his political appointees must be bold enough to tell him the truth. They must be ready to put their jobs on the line by driving a contrary position to the President’s. 

In the current situation Nigeria has found itself, even a non-finance student knows that devaluation is the way to go. What the President must understand is that the more averse he is to devaluation, the more he gives room to speculation and the more the economy plunges into crisis.

In any case, the President has no choice in this matter. Devaluation is inevitable this year. Market forces will compel the President to take that route.

Nigeria of 2016 does not have resources to defend the naira. This is common knowledge; it is calamitous if the President does not. 

The scenario playing out in Venezuela where the official exchange rate of the Bolívar is 6.35 but the parallel market rate is 423 per dollar – 66 times the official rate – is instructive. Venezuela has maintained strict currency controls since 2003, pushing people and businesses to the black market when they can’t obtain government approval to purchase dollars at the legal rates. The resultant effect is that the country has the fastest inflation in the world; with hard goods such as autos and real estate in short supply and people mopping up dollars to protect their savings. 

Without devaluation to officially reflect the true value of the naira, much needed foreign direct investments will remain elusive and common Nigerians will still suffer the fate President Buhari tries to protect them against. FDI will increase forex supply and stabilise the market. In my opinion, devaluation is the lesser evil.

I expect the President’s economic team to take the argument beyond the level of whether we should devalue or not. The question should be by how much? They should start creating scenarios for different levels of devaluation and implications for the economy and on Nigerians. Devaluation is one of the bitter pills Nigerians must swallow, again, for series of past inept management of the nation’s resources.

And I think it is a big shame that almost 60 years after the discovery of crude oil in commercial quantity, Nigeria has no buffers to shield it from oil price decline. Our leaders must begin to act now before Nigerians are pushed to the wall and start the ritual of throwing their breakfast slop…

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