What Nigeria must consider to devalue Naira
The push for a fully market determined foreign exchange rates regime in Nigeria will be meaningless without addressing many other issues that have brought the country’s economy to its knees, according to Uche Uwaleke, a professor of finance at Nasarawa State University.
The university teacher says this approach would ensure that the gains of a revamped foreign exchange market are reflected in the economy to allow Nigeria break what has become a vicious cycle of unending devaluation of the naira without real benefits.
Vice President Yemi Osinbajo sparked a fresh debate on the management of the foreign exchange market on Monday when he spoke at a ministerial retreat where he canvassed the idea of devaluing the naira.
However, Uwaleke said the implications of devaluing the naira now are quite scary.
According to him, “the Vice President obviously means well; but have we thought of the impact it would have on pump price of fuel and the multiplier effects?
“How about the knock-on effects with regards to inflation and interest rates especially at a time when inflation rate remains elevated? Is high inflation rate not inimical to investments whether local or foreign?” Uwaleke asked.
From CBN published reports, NNPC used to fund the CBN reserves with over $3 billion per month from sale of crude oil. This contributed immensely to stabilising the exchange rate. BusinessDay learnt that in more than four months NNPC has not funded the reserves by a single dollar.
The don said the argument that a string of naira devaluations will incentivise foreign investors remains to be tested in the Nigerian context as other factors such as falling government revenues in the era of rising oil prices, inflation, and insecurity equally play a huge part.
Analysts say Nigeria has many more battles to contend with, the key of which is the reality that for months the national oil company has not made any contribution to either government revenues or to foreign exchange accretion.
According to leading economist, Ayo Teriba, increasing foreign exchange supply is the only enduring way to achieve naira stability, adding that “fighting over exchange rate premium distracts us from concentrating on how to raise large sums from global asset-based securities like progressive developing countries are doing,”
He said, “We should learn that it is just as futile to try to curtail demand for forex as it is to try to control the price of forex. Supply of forex is the only variable that we should be trying to boost,” Teriba said.
“The sooner we refocus our efforts on how to substantially boost foreign exchange supply into Nigeria, through balance-sheet-related foreign exchange inflows that are fuelled by the unprecedented global liquidity glut, rather than transactions-related foreign exchange inflows that are adversely affected by weakening global commodity prices, the better,” Teriba said.
“Most other oil exporting developing countries have shifted from relying on oil exports for foreign exchange supply towards asset-based securities that is helping them to attract bigger net foreign exchange inflows than oil could ever have brought even in the best of times.
“Fighting over exchange rate premium distracts us from concentrating on how to raise large sums from global asset-based securities like progressive developing coun- tries are doing,” he added.
A source at the Central Bank said devaluing the naira at this time will create more problems than solutions for Nigeria in the short term.
The source explained that government debt service which is already over 70 percent of revenues, will cross 100 percent easily as “Nigeria’s FX loans will be immediately repriced (higher interest rates) and terms will be made much tougher. This could lead to widespread defaults, higher NPLs and financial system instability,” the source added.
According to the source, fixed income earners, which include all government workers, will see their real wages (take home pay minutes inflation) evaporate into thin air.
The same pay they got last month, which they were already struggling to use to make ends meet, will simply buy less than half of what it bought them last month.
“This could ignite justifiable calls for salary increases and could cause social unrest, in a country where tensions are already high,” the source said.
According to one analyst, “why is it that 80 percent of cargo ships and planes that bring goods to Nigeria (for which we pay dollars) leave our shores empty (implying we do not earn dollars from potential exports of goods they would have carried)?
“Does the Nigerian Custom Service consider itself a trade facilitation agency or a revenue generating one? If they are a trade facilitation agency, has anyone seen their strategic plans to improve Nigeria’s international trade and ability to earn FX?”
Another economist asked, “what is the government doing to improve our healthcare systems and ensure we reverse the need for Nigerians to seek medical treatment abroad even for routine checks? We can save up to $2 billion annually from this and the Naira could strengthen on account of this.”
He said “in the 80s and 90s, the typical basket of food Nigerians ate was almost totally made in Nigeria. Our clothes were made here with cotton from our farmers, textiles from our mills and embroidery from our tailors. Our cars used tires made here.
“The cars themselves were made either in Kaduna (Peugeot) or Lagos (Volkswagen). Today, we spend billions of dollars annually importing anything and everything! What is the government’s plan to reverse this trend? Can we begin by requiring that over the next 3-5 years, all government vehicles be made in Nigeria by Innoson Motors or any other car manufacturers? If we can reverse up to 40 percent, the Naira would strengthen to N70/$1.
“Over the last 3-5 years, more than 5,000 men have relocated their families to Canada or other places for “better” life. And this trend has continued unabated with no end in sight. Whilst these men are here earning Naira, their major expenses are in dollars for family upkeep, mortgages, car loans etc. This means we have more than 5,000 new men chasing dollars every day, every week, every month. Imagine if the country gave them some hope to believe and stay, the Naira would be strengthened to N25/$1.
“The country’s problems are significant but fixable. The solutions are staring us in the face. We just have to be honest and work diligently to solve them rather than make cheap political statements aimed at scapegoating,” the source said.
Taiwo Oyedele, head of tax and corporate advisory services at PwC, said, “I believe the main thrust of the Vice President’s comment is not about Naira value being kept artificially low but actually about multiple foreign exchange rates and windows which create market distortions and discourage inflows of foreign exchange especially FDI. This continues to put pressure on our external reserve in a manner that is unsustainable if not reversed.
“Our reality today is that Nigeria’s forex receipt is less than what is needed to meet demand whether legitimate, speculative or otherwise. While it is true that fx for illegal activities are being sourced from the parallel market, there are also legitimate transactions like importation of raw materials which are listed as prohibited from accessing fx in the official market. This effectively gives credence to the parallel market as an alternative window rather than a black market for illegal transactions and speculative demand which can be ignored.
“This also speaks to the Vice President’s comment on the need for coordination and collaboration between agencies including monetary and fiscal authorities. If we intend to discourage the importation of certain items then the fiscal authority could impose higher import tariff progressively as local substitutes become available.
“We can then allow all legitimate transactions to access the official forex market and let market forces determine the exchange rate. As a long term solution, we need to address impediments to local production of many items which are currently being imported while boosting export earnings through non-oil sources including services. We also need to address petrol subsidy which constitutes the biggest strain on our fx demand used for fuel importation which unfortunately seems to benefit corruption agents far more than ordinary Nigerians,” Oyedele said