The assumption that Nigeria is divided between those who “want”
devaluation and those who oppose it is a false appearance. Any
rational Nigerian, especially middle class individuals, who can be
assumed to be rationally self-interested “want” a strong currency so
that they can maintain real purchasing power and lifestyles in a
globalized consumerist economy.
There is no division amongst Nigerians, especially within elite and
middle class society on that erroneous basis! The real argument is
over economics and its basic principles. Economics is all about how
to reconcile “wants” and “needs” with “resources”-the most basic
principle in economics is “scarcity” and the imperative of “choice” in
a real world in which we can’t have everything we “want”.
According to The Economist’s “Dictionary of Economics”, scarcity
refers to “a situation in which the needs and wants of an individual or
group…exceed the resources available to satisfy them. In the presence
of scarcity, choices HAVE to be made between those wants that can
be satisfied and those that cannot be: the available resources must in
some way be rationed, either through price or some central
distribution system.
In the absence of scarcity, no difficult choices would need to be made,
no prices would need to be attached to anything, and the study of
economics would be rendered entirely unnecessary”. Exchange rates
are a “price” with which an economy rations scarce foreign currency
and the entire devaluation debate is about whether very scarce dollars
should be rationed through the price mechanism or (as the
beneficiaries of the current huge N200/$ subsidy argue) should be
distributed administratively by the CBN to whomever it pleases!!!
So the question is not whether anyone “wants” devaluation, but
whether given our current “economics”, is devaluation an appropriate
or optimal policy response? The other question of course is, if you
reject devaluation, what alternative AND effective policy response do
you recommend to deal with the current policy quagmire? Just saying
no and watching helplessly as the currency slides to N400/$
everywhere except in the CBN is NOT a policy response!!! By the way,
we should take a step back and restate the facts-I agree entirely with
Emir of Kano and former CBN Governor Sanusi Lamido who pointed
out, completely correctly that devaluation of the currency HAS in fact
already occurred! The debate is now over the appropriateness or
otherwise of CBN using federation account resources (which jointly
belong to the federal, states and LGAs) to subsidise foreign currency
needs of selected businesses and middle class persons who travel
abroad, educate their children overseas or seek medical treatment
outside the country. For every other person who needs dollars in
Nigeria, devaluation has already happened!
It should be noted that CBN has not provided any objective criteria on
the basis of which it is allocating the scarce dollars, and questions
may legitimately be raised on some of the published allocations! In
effect the CBN is administering a huge subsidy based on unknown and
unclear criteria, and without transparency on the basis of the
allocations! The current situation guarantees moral hazard, corruption,
subjective considerations, cronyism and crony capitalism, favouritism,
influence peddling and administrative abuses.
I am willing to bet that central bank officials with the unfettered
prerogative to administer this subsidy, not being angels or saints, may
already be susceptible to one or more of these challenges!!! I have
mentioned earlier in addition that this large subsidy is being shared
not from resources that belong to the federal government or CBN, but
the federation, including our insolvent states and local governments.
While it is apparent that current policy has the concurrence of
President Buhari, it is not clear that the states and LGAs if they fully
understood what is going on, would endorse the “donation” of
approximately half of their legitimate income to some businessmen
and middle class families! I cannot think of a worse national subsidy
anywhere in the world!!!
With regard to the businesses currently obtaining the tremendous FX
subsidy from the national purse, it is evident that they benefit from an
anti-competitive and unfair advantage over other businesses who are
“less-fortunate” and it is not evident that the Nigerian economy
benefits from the dispensing of such subsidies. One may also ask
whether beneficiaries of our subsidized dollars discount their retail
prices to fully reflect the public subsidy, relative to their competitors?
There is a fundamental economic illiteracy emanating from some of
the contra-devaluation sources, including surprisingly from several
who hold degrees and advanced degrees in economics-we do not
export anything so we wouldn’t benefit from devaluing (so we NEVER
want to export anything knowing that prices provide INCENTIVES for
future behavior?); people should stop asking for devaluation and
instead should start consuming locally produced goods and services
(isn’t this argument illogical and contradictory?
If we want to discourage imports and encourage local production, why
are we so determined to protect the Naira so that imports remain
relatively cheap?); devaluation would lead to inflation (devaluation
has ALREADY happened and is already reflected in inflation which is
now 9.6% since most importers and manufacturers now get their FX
from non-CBN sources and even those who get CBN FX subsidy know
the correct cost of dollars); finally they say devaluation will hurt the
poor, which is the biggest lie (the poor have nothing to do with
exchange rates; they eat local food; do not send their children to
schools abroad; get medical treatment from primary health centres;
and get absolutely no benefit from whether you devalue or not!). The
truth is that the only beneficiaries of subsidized FX are the few
businesses who CBN in its grace “allocates” dollars to, and the
segment of the elites who secure PTA, BTA, school fees and medical
payments in foreign currency from the central bank!!! As well as those
now able to “round-trip” official dollars into autonomous markets at
huge profit!!!
The real situation, casting aside Nigeria’s powerful people who seek
an unfair advantage through a privileged FX subsidy, is that the
country built a defective economy in which 95 percent of exports and
75 percent of government revenue came from oil. That situation is no
longer tenable and our monthly FX income has declined precipitously
with the current exchange rate simply not sustainable. Worse still the
current official exchange rates has resulted in the dry-up of foreign
direct and portfolio investments; and even diaspora remittances which
are required to be made at official or near-official rates have also
dried up. Manufacturers are starved of inputs and our banking system
is increasingly not credible in the global financial system and we may
soon, if not already, return to cash-collateralized letters of credit and
the scarcity of “essential commodities” as in the 1980s and 1990s!!!
We have seen this movie before, and we know how it would end!!! In
1980, oil prices fell due to a global oil glut. Nigeria had a fixed
exchange rate and therefore could not use the pricing mechanism to
modulate between demand and supply of dollars. Our reserves were
quickly exhausted and then we started borrowing from the Paris and
London Clubs, multilaterals and commercial creditors and soon we
were trapped in debt which we could not service. We are already
replaying this sequence seeking to borrow N2.2trillion or more to fund
the 2016 budget; our debt service ratio is already 25 percent of federal
revenue, even before we take the proposed huge loans; we have fixed
our exchange rate at N197/$ and our reserves are fast declining (now
at $27billion).
To deal with the scarcity of dollars in the 1980s, we tried everything
except devaluation-austerity and import licensing, which was plagued
by corruption and cronyism-we are doing the same today. Then Head
of State General Muhammadu Buhari tried countertrade (trade by
barter) which also failed miserably. Nigerians (and evidently President
Buhari) learnt the wrong lessons from the 1980s episode-that
Babangida “killed” the Naira!!! Former military President Babangida
had his problems-a weakness of character that resulted in erosion of
societal values and increased corruption; and political gerrymandering
resulting in a protracted political transition and the eventual
annulment of the June 12, 1993 elections. Babangida and all his
military colleagues (Ironsi, Gowon, Murtala/Obasanjo, Buhari, Abacha
and Abdulsalam) did one further damage to Nigeria-the subversion
and destruction of institutions including federalism, constitutionalism,
the universities, civil service, the professional bodies, the media etc.
However in relation to the economic crisis, all of his predecessors
merely kicked the problem down the road, with Babangida being the
only one with the courage to confront the problem! He did not create
the economic dependency on oil and the policy elements that turned
the Nigerian political economy into a prebendal, distributive, imported
consumption-based society. In 1986 having exhausted our reserves
and become indebted to the international community, devaluation was
inevitable and unavoidable!!! Abacha tried the dual exchange rate
system we are currently experimenting with, and that also failed!
As for the poor, they are now again the victims-losing their jobs in
large numbers; poverty is increasing as output growth and
consumption drops, and recession risks rise.
After Nigeria’s unprecedented elections on March 28 2015, exchange
rates rallied from N225-N235/$ to around N200/$ as markets
discounted political risk and imputed optimism into the Nigerian
economy.
The current scenario where rates approach N400/$ reflects a gross
failure of policy at the CBN, fiscal authorities and the presidency, and
cannot be blamed on previous administrations. It is because we have
left exchange rate management, and indeed broader economic policy
to fear, speculation, drift, myths, superstition, politics and propaganda
resulting in acute uncertainty and volatility.
Nigeria’s current imperative is to return to rational economics and the
imperative of building a productive, competitive, export-oriented and
diversified economy.
by ROTMANLUV 2023-07-08, 17:34
