The conduct of the monetary policy by the Central Bank of Nigeria (CBN) involves monitoring and influencing the value of the Naira. Economics textbooks tell us that a cheaper currency boosts local producers’ international and domestic competitiveness relative to foreign competitors, makes the country more attractive for foreign investors and tourism (in price terms) and increases the local currency value of revenue earned overseas by the home based companies. However, while the immediate effects of currency devaluation are theoretically positive, the reality is far less positive in absolute and relative terms.
Virtually all the CBN governors between 1982 and 2020 have devalued the Naira. In the last 38 years, USD value increase relative to Naira is over 59,000 percent in the official exchange rate market moving from N0.67 to N400. To put it in proper perspective, N100, 000 worth $200,000 in 1980, $13,531 in 1990, $1,164 in 2000, $833 in 2001 and $200 in 2020. This unequivocally puts Nigeria’s Naira among the worst performing currencies in the world in the last four decades. Despite the systematic Naira devaluation in the last 40years, Nigeria and Nigerians are yet to experience the goodies currency depreciation advocates promised. It appears that Mark Carney, the former Governor of Bank of England might be right when he emphatically stated that currency “depreciations are how you make the economy poorer”.
There are two major reasons Nigeria is yet to benefit from the continuous weakening of her currency. The number one reason is that Nigeria currently has no other significant export product except crude oil. Out of 10 containers that come into Nigeria laden, only 2 or 3 are taken out with exports. This means that 80Percent of containers arriving Nigeria return empty according to Nigeria’s Shippers Council. The informed joke is that cargo planes that were filled to capacity on arrival leave Nigeria empty, sometimes have to be filled with sand bags to maintain the aircraft’s balance. As long as our non-oil exports remain marginal and international oil price continues to fluctuate (which is almost a guaranteed trend), dollar will continue to rise in value no matter the devaluation.
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Secondly, recent research published in the IMF Staff Discussion Note indicates that the short term gains from weak currencies may be limited especially in emerging market and developing economies where firms price their international sales and finance themselves in a few foreign currencies notably USD. The Dominant Currency Paradigm postulates that the prevalence of dominant currencies like USD in firm’s pricing decisions alters how trade flows respond to exchange rates especially in the short term. When export prices are set in USD or EURO, a country’s currency depreciation does not make goods and services cheaper for foreign buyers, at least in the short term, thereby creating little incentive to increase demand. Under this circumstance, the reaction of export quantities to the exchange rate is more muted and so is the short-term boast of a depreciation to the domestic economy. Thus, dominant currency pricing dampens the short-term trade gains of a weaker currency.
A cursory look at the trend of Nigeria’s international trade highlights the dangers of the dominant currency syndrome in a single source foreign exchange earning dominated economy. In 2018, Nigeria exported a total of $59.5billion worth of goods. Crude ($44,8b) and petroleum gas ($8.61B) alone accounting for nearly 90Percent of export. In the same year, Nigeria imported goods totalling $48.7B with refined petroleum ($9.95B) alone accounting for over 20 Percent of all imports. Similar trends were recorded before and even after the referenced year. It is therefore not difficult to see that there is nothing to gain from devaluation since the major product we export (crude oil) is already priced in USD, and we will not enjoy any benefit from increase in demand as a result of price drop, since our production volume is locked in OPEC quota.
In general, foreign currency intervention and monetary policy are closely linked. Every official purchase and sale of foreign currency affects the monetary base. To highlight this linkage, when a firm is borrowing in USD, a local currency depreciation increases the value of a firm’s liabilities relative to its revenue, weakens its balance sheet, hinders access to new financing and reduces the firm’s capacity to repay the loans especially when the firm’s revenues are earned in local currency. The resultant effect is that imports (plant and equipment inclusive) contract.
For an exporting nation like Japan, without external interference, the preference is for a weak currency. A strong Yen makes imports more affordable but there are fewer imports for Japanese shoppers to buy compared to other developed countries. In 2018, Japan’s imported goods and services were 18 Percent of GDP compared to an OECD average of 30 Percent. Devoid of external pressure, for a developing importing nation like Nigeria, the preference should be for a strong currency not to import consumables but to make the import of machineries and raw materials for industries more affordable. Is it not ironical that the same G-20 and its crony institutions that compels the likes of Japan to refrain from competitive devaluations also compels the likes of Nigeria to proceed with devaluation?
The unsaid truth is that currency devaluation is a bad monetary policy for a nation with no significant export industries. Knowing where we are currently in terms of power generation, logistics infrastructure and technological know-how, Nigeria would not likely have a competitive export oriented industry soon, more so when the huge domestic market is yet to be dominated by our home based industries. Until Nigeria’s market is dominated by locally produced goods, we are not likely to see any gain in devaluation of the national currency. It is not a coincidence that Naira was exchanging N1/$2 in the 1980s when the likes of Bata were using locally tanned leather to produce world class shoes in Nigeria, textile mills scattered all over the nation were using cotton grown in Nigeria to produce textiles and our roads were filled with Peugeot and Volkswagen cars that were locally assembled.
Even a sophisticated economy like the UK did not witness a significant boom in export when the Pound Sterling depreciated in 2016. Rather, the country saw a 2 Percent rise in retail prices. The failure of their currency depreciation to stimulate export was attributed to the fact that many UK exports also requires imports supplied from other countries. Rising input costs triggered off by local currency devaluation therefore might be another silent factor that erodes some of the hyped advantages of a weaker currency.
The greatest casualty of Naira’s incessant devaluation is our industrialization drive which becomes more expensive to finance and further delays the take-off of the much desired private sector led industrialization. Margaret Thatcher in 1990 was once quoted to have said that “to destroy a country, first debauch their currency”. Unfortunately, this is what we are ignorantly doing to ourselves.
