The naira devaluation dilemma

I have listened carefully to the arguments and perspectives from proponents and opponents of naira devaluation and foreign exchange control sequel to the Central Bank of Nigeria’s (CBN) policy measures to stabilise the naira, partly as a result of low price regime in the global oil trade and dwindling foreign reserves. CBN’s action has sometimes drawn scathing criticism, undeservedly, from some stakeholders. Though, in all fairness, one cannot but empathise with genuine dollar users especially those in the real sector of the economy, much so that as an import dependent economy, dollar illiquidity is a key binding constraint to firms that rely on raw material inputs from abroad in the production process. On the other side of the divide are those who are equally convinced the CBN is on the right path, even if as a short term analgesic solution to the plunge in oil price in order to prevent the “Zimbabwean currency experience” from replicating itself here in Nigeria.

Truth is, there is no easy way out of the prevailing crisis and the policy options available to the Central Bank of Nigeria to manage the current naira dilemma is only as effective as the level of complementary fiscal policy support it can get. The CBN can either adopt demand management tool, as is presently the case, to curtail foreign exchange demand for non-essential items and administratively prop up naira value or simply beckon on unrestrained market forces to determine Naira value. Clearly, whichever option the CBN pursues, there are undesirable outcomes – threats to going concern status of and low capacity utilisation by local industries, growth deceleration, inflation, unemployment, price and social instability. Crucially though, the fundamental difference(s) between the two policy choices can be situated in their time-relevance, severity of impact and relative capacity to accelerate misery index or worsen social indicators within a short period of time.

As an import dependent economy and a country in dire need of the much need capital required to catalyse investment (key growth challenges facing the economy), it makes economic sense, ordinarily, to apply less restriction to foreign exchange demand because of the impact on real sector capacity utilisation and economic growth. The concerns raised by pro-devaluation commentators are real – at present, prices are trending up, the real sector is bleeding, firms are defaulting on and deferring their obligations to foreign suppliers and future outlook is uncertain. But liberalizing foreign exchange market would not be the right path to thread, as a short term measure, against the backdrop of declining oil prices, shrinking dollar revenue and depleted reserves. The economic and social consequences of a liberalised foreign exchange regime at this inauspicious is hard to imagine – the severity is likely to be much higher.

We are often made to understand by proponents of further devaluation that the Naira will find its true market value if left for market forces. My concern is, what exactly is the true market value, an indeterminate exchange rate? A market driven exchange rate will result in unending free fall in naira value, imported inflation, heightened credit risk environment, usurious cost of borrowing, reduced output with adverse effect on our already ailing and inefficient local industries. Pray that a loaf of bread does not exchange for five thousand naira (even a Louis Vuitton or Prada bread should not cost as much) should the Naira be devalued, those clamouring for devaluation will, in equal measure, hold the CBN accountable – this time around for wrongful implementation of their much vaunted policy.

There are also suggestions that if the price of the naira is right, then there would be no shortage of dollars in the market as some analysts are wont to propagate – this line of thought is flawed and reveals an understanding anchored on an oversimplified market economics. First of all, at the aggregate level, price has minimal role to play in foreign exchange supply in the Nigerian market. The main and less unsustainable source of foreign exchange supply in Nigeria is crude oil revenue – itself a function of international oil price and crude oil export quantity.

Also within the pro-devaluation camp is a discernable vocal voice whose argument appear to be driven largely by ideological prejudice and narrow interests. Economics is certainly not an abstraction that is divorced from people -markets must be made to serve people, not the other way round and should not be conceived as an “ethics-free zone”. Market should ring around the common good. A dogmatic ethics-of-the-market or “devalue-we-must “ narrative is inimical to the overall interest given the current circumstances, it is an alienating standpoint which Paulo Freire refers to eloquently in his book Pedagogy of the Oppressed: “We need to say no to neoliberal fatalism that we are witnessing at the end of this century, informed by the ethics of the market, an ethics in which a minority makes most profit against the lives of the majority, a market perspective that believes those who cannot compete should die. This is a perverse ethics that, in fact, lacks ethics.” Before I am misconstrued, let me state clearly that the role of the market in the efficient allocation of resources can hardly be denied – I am a market adherent. However, that dialectical perspective is not etched in immutability and should always be reconciled with socio-economic space and time.

In sum, the current foreign exchange dilemma is a clear case of market failure defined in terms of social sub-optimality which therefore requires some form of administrative guidance. To advocate otherwise is to deny government role in maintaining macro-stability. A critical interrogation of the suggested solutions would reveal, arguably, that whilst the impact of a completely liberalized foreign exchange market will be felt almost instantaneously with more severe consequences in the face of depleted reserves, a combination of a responsive foreign exchange control (a short term shock absorber though) with fiscal policy support is likely to be more effective in shepherding the economy out of its present morass. Again, it must be said that this only a short term palliative.

In the final analysis, drawing from the wisdom of Friedrich Hegel, “the truth is found neither in the thesis nor the antithesis, but in an emergent synthesis which reconciles the two”. Therefore, the ongoing discourse should be seen beyond the narrow text of devaluation or otherwise but largely from a broader context of the fierce urgency for structural re-balancing of the economy, a shift away from consumerism and import dependence. The current crisis is an opportunity for us to rethink our overall economic strategy. In the interim, government should urgently curtail frivolous expenditure, identify and block revenue leakages, improve tax compliance environment, reassess subsidy policy in combination with stimulus package for targeted key sectors and the sooner the better we realise that crude oil is not the engine of any competitive economy, oil is only a lubricant.

I pretty much doubt if Charles Soludo and Sanusi Lamido Sanusi, both pragmatic economists, former governors of the CBN and architects of major banking reforms in Nigeria, would have acted differently. Therefore, the scathing attack on the CBN can hardly be justified.

Glenn U. Olowojaiye

Olowojaiye, a banker, lives in Lagos.