The decision on whether to devalue or not has stirred so much sentiment and has apparently developed a life of its own. People frustrated at the non-stop depreciation of the naira have even attempted to suggest the solution to our currency woes is a “silver bullet”. This is a huge problem as millions of Nigerians without an opinion are now made to believe that devaluation is the one solution to solving the currency crisis.
Even with the pressure on the CBN governor to devalue, he’s remained resolute, because according to inside sources, “its promise has not been able to guarantee increased FDI/FPI” at least not to the appropriate levels that would mitigate losses devaluation would bring to the economy. In other words, the so called FDI/FPI that a currency devaluation could trigger is not enough to cushion the negative effect devaluation will have on the wider economy. So, while all commentators might have brilliant sounding ideas, only one man will be held responsible for a slump in the official rate of the Naira; and his name is Godwin Emefiele.
Not a silver bullet
Reports also does show that there is currently an unmet dollar demand of between $2bn-$5bn every month; which normally would be met by daily cash flow from oil and Nigeria’s retained earnings represented by current FX reserve, currently sitting at about $28bn. The CBN has tried to mitigate that by controlling the demand and banning 41 items from its FX window. It has also issues several policy guidelines aimed at capital controls and have banned BDC operators from its official window. Despite all this attempt to squeeze out demand, it is still not able to meet forex demand for essential goods and services. This apparently shows that controlling demand or supply or price is not the solution to Nigeria’s currency crisis or indeed failing economy. While we focus on the currency, the bigger picture here is the inefficiency of the Nigerian economy to effectively sweat its assets. The picture stares us right in the face.
The real issue
The biggest challenge of being a largely commodity based economy, is that whenever the business cycle pushes commodity prices low, as it sometimes will, you’re powerless and can only hope for it to rebound. Commodities are cyclical in nature and it’s a major downside for commodity based economies. Economies based on tax revenues are better structured to wriggle through downturns due to their ability to draw in revenue from a more diverse revenue base. Unlike commodity based economies they do not rely on the blessings of the soil to drive economic growth. During downturns, they can easily inject liquidity to its private sector, which will in turn stimulate economic activity. They can also provide tax incentives for sectors facing downturns and cut expenditures in areas in the public sector that are prone to high leakages.
Devaluation is not an advantage
It is important to also note that should crude oil prices rebound to $70/barrel, the intense intellectual debates would ultimately fade and it would once again be “as you where” for the Nigerian economy. A sad thought especially when you note that, just the way crude prices dipped sub $40/barrel in 2007, it will dip again in another 7-8 years from now, as another business cycle turns full circle.
Thus, while countries like Kazakhstan, Egypt, Russia and even China may have been forced to devalue their currencies, I’m convinced that a further devaluation of the Naira holds no advantage to Nigeria, outside reducing sovereign debt (in nominal terms); which ultimately impoverishes investors too. Now, not devaluing alone also isn’t a solution in itself, as you carry a heavy subsidy for every dollar sold at the official rate. The CBN says it operates a managed float, which means it gives the Naira up to the laws of demand and supply, while still intervening when it feels necessary. The challenge though, is that since the back to back circuit breakers of 11th and 12th of February 2015, the CBN has enforced stricter measures that resemble the capital controls experienced pre-2009.
To quote former CBN governor, Sanusi Lamido Sanusi in 2009, he said “But we need to understand that the exchange rate in Nigeria has been a sensitive issue primarily because the elites take an interest in it. The elite who have to buy dollars to pay their children’s school fees abroad, who go on summer holidays, who want to go and get medical care in the UK, who want to attend conferences abroad. But imagine what a three-, four- five hundred basis point reduction in interest rates does in terms of the consumer and their ability to buy cars, to build houses, to finance consumer demand, for factories to recruit and grow. The interest rate is far more important than the exchange rate, but because the exchange rate is tied to elite and political interests it takes on a great space”.
Not devaluing is also not an advantage
So while businesses are groaning under incredibly harsh conditions, the discuss on major forums is “How to buy dollars”. Every economy battles the “unholy trinity” of keeping inflation down, keeping interest rates down and having a strong exchange rate, but if we must lose any battle (to win the war), I say, do whatever you must to ensure a stimulated environment for businesses, as their long term activity will ultimately fix the other challenges.
The combined failure of the managers of the economy (Fiscal and monetary), despite available data and logical arguments, is in failing to realize that you cannot eat your cake and have it, sometimes you may just have to be willing to let the Naira adjust accordingly in order to preserve your foreign reserves, especially when you have a dip in revenue, as we are currently experiencing. On the other hand, it’s also important to remember that if we are able to attract foreign investment and stimulate economic activity, then the Naira is strengthened anyway.
This looming crisis presents Nigeria with the opportunity to hit the reset button, to set in play, day to day activities that are specifically targeted at a long term solution. Our leaders must be brave enough to embrace unpopular policies that would bring about an efficient social and economic structure. They must be ready to concede, apologize, communicate and even sometimes be willing to fail; for the path to greatness will be tempestuous.
My rough estimates point to Nigeria needing about US$8bn annually to bridge the huge gap in the nation’s public infrastructure; a point which wasn’t addressed adequately in the 2016 budget, nor has super minister Fashola been able to show a clear path to achieving his lofty ideas. Nigeria continues to be the mockery of giants, as though her size can’t be ignored, her makeup leaves so much to be desired. The leadership of Nigeria is quick to say that it doesn’t want to add to the sufferings of Nigerians, but continues to choose short term placebos to long terms measures. Every 1st world economy began its journey to greatness off the back of years of solid investment in infrastructure. This then becomes the foundation that not only allows businesses thrive, but also allows low earning citizens, live in places as far as Ibadan, yet work in Victoria Island; because the nation has an efficient rail service.
This is the reason why expending our energy on debating devaluation, in my mind seems the biggest distraction to Nigeria since the debate on diversification began; now, that’s a discussion for another day. For now, let’s talk infrastructure.