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The Great Economic Escape

21 February 2016, 12:17 Micheal Adeniyi

There are a lot of misconceptions out there about the Naira, how it affects our economy, and ways to solve the many problems we now face. We hope to be able to answer some of those questions. First, let’s examine the history of the Naira to see how we arrived at our current system.

The Economy has gone through many iterations over the years.

Nigeria has mostly a low exporting based economy with a lot of business people importing mostly for sale into our economy. Hence when the Naira depreciates,the incentive for local business people to raise their prices is very  high since most of them are retailers to of imported products.

There is a general view among the public that a “strong” Naira” represents a strong economy. 

Inside the Production and trade sector, exported output is low, imported inputs high, and foreign currency plunges high. These combine to create a strong probability that a depreciation of the currency would generate net disincentives to agricultural and manufacturing producers in Nigeria since we could not deliver the dwindling income from our crude oil ( I hope you noticed that as crude was falling, Cocoa was increasing 100%).

It is for this reason that many in the government and the private sector argue in favor of a “strong”(appreciating) currency, as a necessary support for diversification into agriculture and manufacturing. Currency appreciation is a blunt instrument to stimulate diversification, all the more because other instruments not involving the exchange rate can better target the desired outcome of domestic output and export diversification (This is why we must support and Buy Made in Nigeria).

This is the policy dilemma that exists in Nigeria. The current policy attempts to promote diversification, but at the same time prevents the incentive for exporters to gain fromincreased foreign revenue. This is the same as attempting to cut a loaf of bread with a spoon; it’s verypossible but clearly not a preferable course of action in light of conventional etiquette. If an economy is at less than full utilization of resources an appreciation will tend to reduce aggregate demand. The demand reducing effect comes through the cheapening of imports which would in the medium term lower domestic production of importables.

For a non-diversified developing country, Nigeria being an obvious case, nominal appreciation should result from long run increases in the productivity of exportables combined with declining structural inflation. This combination allows a continued export competitiveness and a “stronger” currency.

Obvious examples of countries experiencing this benign combination are Japan and Korea and china. For Nigeria this combination lies in the distant future. How distant that future is depends on policy implementation. Diverging central bank policy have created a perfect launch pad for the dollar to move higher, particularly against the Naira.

The recent strengthening of the US dollar globally is also a reflection of the demand for US dollars relative to our Naira. For years the Nigerian Government, NGOs, General Public and other stakeholders have talked about how much Naira needed to diversify its economy away from Crude. The economic condition of a nation does not deteriorate over night, something came before that deterioration.

A certain prolonged process of attrition that happened in the past is now knocking on the door. The consequences of the past misgovernance is what we are undergoing right now. Despite a good performance in non-traditional exports over the past decade, crude still accounts for over 75% ofNigeria’s exports.

That statistic alone shows that the diversification policy has failed to live up to its expectations.Unless the export base expands the depreciation of the Naira however moderate is inevitable. As long as policy makers continue to use the exchange rate as a policy instrument to stimulate diversification instead of using better tools, this policy will be an exercise in futility, however moderate it is.

Solution for the Naira

The first solution that can be preferred to curb our depreciating Naira is the reverse quantitative easing or otherwise known as quantitative tightening. But this one is specific to the bond market. This means the CBN will trade long term treasuries for short term treasuries, effectively draining the market of liquidity, without raising the rates. For this to work it would require shortening treasury periods from 4 months to one month to make it more effective.

This is by no means guaranteed to be effective but it is a tool at the disposal of the CBNSecondly, the CBN needs to make a concerted effort to make the foreign exchange market in Nigeria more asymmetrical in terms of information and access to foreign exchange flows.

The market in its current state has structural imbalances caused by a skewed control by Petroleum companies and a few big traders. Sorting this out will prevent consistent deviations of the Naira from fundamental levels.Thirdly, the Ministry of Finance needs to aid the CBN by Identifying the relevant practices by the Production companies, how these impact on the balance of payments, and whether government policy intervention is necessary.

This area needs to be looked into thoroughly. If the Naira depreciates fundamentally, then let it depreciate moderately. Import input costs are high because of other reasons than merely the exchange rate.

Why Naira devaluation is so unfavourable

It is simple really. The less our naira is worth, the less goods and services you can buy with your money, the less companies make for receiving payment for goods and services, and the less people actually make when they take their paychecks home. This causes governments and citizens to pump more and more money into the system to try to get the number of goods that they used to buy. So, not only is our money worth less, but inflation also can become a very big problem. Currency devaluation is only solved through changes in tax laws, aggressive interest rate increases, reduction in trade deficits, and/or strong corporate profits based on production.

We don’t need devaluation in this country to make a great escape from our economic woes  all we need is #MadeinNigeria, that is the only revenge to plunging rise in our exchange rate.

- MyNews24

Disclaimer: All articles and letters published on MyNews24 have been independently written by members of News24's community. The views of users published on News24 are therefore their own and do not necessarily represent the views of News24. News24 editors also reserve the right to edit or delete any and all comments received.

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