Economy, (not Naira) on trial
Cable on line media colloquium last Wednesday 10th of Febuary, 2014 featured a policy dialogue on the exchange rate with the theme; The Naira on Trial; To Devalue or Not? Yours comradely was a panelist among others that included Bismark Rewane, CEO Financial Deriavatives, Moses Tule, Director CBN, monetary Policy Department and Muda Yusuf, DG, Lagos Chamber of Commerce and Industry. It was moderated by Frank Aigbogun CEO Business Day newspapers. Comrade Adams Oshiomhole, the Governor of Edo state gave the key note address at the dialogue that was televised live by the Channels TV. The point cannot be overstated; the question as to whether we should devalue the Naira or not was wrongly posed. The exchange of any currency of any nation reflects the level of the performance of its economy. It is indeed Nigerian economy that is on trial not the Naira. With manufacturing contributing miserably less than 4 per cent to the GDP, Nigeria is the only country on earth that survives on wholesale consumption of imported goods rather than production of its goods. We must consume what we produce, and consume what we produce to reduce the criminal pressure on our external reserves and safeguard the value of the Naira.
It is better we concentrate our energy on how to grow the economy rather than agonizing on the value of the Naira. I support the position of the CBN (which is mandated to know) that Nigeria does not need to devalue the Naira now. On the contrary the CBN should consolidate on its current creative control of the application of the scarce capital towards development. Why financing importation of petroleum products in billions of dollars when we could add value to crude and generate foreign exchange? Why financing payment of fees for education abroad that could be sourced locally?
There was however a singular consensus that Nigeria deserves an exchange rate policy that must be linked to development agenda. Be that as it was, no nation sets to ask the question to devalue its currency or not. On the contrary every nation desires stronger stable currency as a fall out of development process. The CBN Act of 2007 of the Federal Republic of Nigeria charges the Bank with the overall control and administration of the monetary and financial sector policies of the Federal Government. The objectives of the CBN include the followings: ensure monetary and price stability; maintain external reserves to safeguard the international value of the legal tender currency and promoting a sound financial system.
The core mandate of the CBN is also “maintaining the country’s foreign exchange reserves to safeguard the value of the Naira”. Nigeria is not a debating society but supposed to be a performing economy. The Fundamental Objectives and Directive Principles of State Policy in the 1999 constitution say that the security and welfare of the people shall be the primary purpose of government.
The constitution also says that the country would harness the resources of the nation and promote national prosperity and an efficient, a dynamic and self-reliant economy. The impact of any further devaluation will be negative on wages and productivity given the import dependency of the economy. The current Minimum wage regime of N18000 negotiated in 2010 was $124 dollars at the then ruling N145 to 1dollar exchange rate. Today real minimum has fallen to less than 60 dollars given the serial depreciation of the Naira in recent times. Indeed to restore the real minimum wage to 2010 value, on account of exchange rate alone, the minimum wage should be N48,000. If we add inflation and General cost of living index, a worker deserves better pay linked to productivity. We make unnecessary fetish of sharp drop in oil revenue. But there is no direct relationship between exchange rate and oil revenue, otherwise at 150 dollars per barrel with $65 billion reserves, Naira value was as weak as when the price of crude fell.
I agree with Godwin Emefiele, the CBN governor conclusions in his address to the Senate that; “Given the multifaceted objectives of the CBN, we are compelled to consider the effects of the exchange rate on critical variables like inflation, real wages, and GDP growth”. According to him, “Zambia had allowed a market driven devaluation and today, inflation has risen from 6.7% in June 2015 to 19.5% in November of the same year. Argentina did the same thing and today inflation is over 25% there. Yet, growth has not improved in these economies. Similar situations have occurred in Brazil, Venezuela, Russia, and Ghana. Some have also argued that devaluation could be a way of helping the government with more revenues especially as they struggle to meet basic expenditures. But once again, this ignores the effects of devaluation on inflation and real wages.
Although government would actually get more nominal Naira with devaluation, that cash would buy much fewer goods given induced inflation. Real wages will be wiped out and organized labour is likely to seek higher wages for Nigerians, thereby causing civil unrest. We must also keep in mind that both the Federal Government and many State Governments have external debts that must be financed with foreign exchange. Devaluation, therefore, would mean that they would need much more Naira to service these debts.”
It is better we concentrate our energy on how to grow the economy rather than agonizing on the value of the Naira. I support the position of the CBN (which is mandated to know) that Nigeria does not need to devalue the Naira now. On the contrary the CBN should consolidate on its current creative control of the application of the scarce capital towards development. Why financing importation of petroleum products in billions of dollars when we could add value to crude and generate foreign exchange? Why financing payment of fees for education abroad that could be sourced locally?
There was however a singular consensus that Nigeria deserves an exchange rate policy that must be linked to development agenda. Be that as it was, no nation sets to ask the question to devalue its currency or not. On the contrary every nation desires stronger stable currency as a fall out of development process. The CBN Act of 2007 of the Federal Republic of Nigeria charges the Bank with the overall control and administration of the monetary and financial sector policies of the Federal Government. The objectives of the CBN include the followings: ensure monetary and price stability; maintain external reserves to safeguard the international value of the legal tender currency and promoting a sound financial system.
The core mandate of the CBN is also “maintaining the country’s foreign exchange reserves to safeguard the value of the Naira”. Nigeria is not a debating society but supposed to be a performing economy. The Fundamental Objectives and Directive Principles of State Policy in the 1999 constitution say that the security and welfare of the people shall be the primary purpose of government.
The constitution also says that the country would harness the resources of the nation and promote national prosperity and an efficient, a dynamic and self-reliant economy. The impact of any further devaluation will be negative on wages and productivity given the import dependency of the economy. The current Minimum wage regime of N18000 negotiated in 2010 was $124 dollars at the then ruling N145 to 1dollar exchange rate. Today real minimum has fallen to less than 60 dollars given the serial depreciation of the Naira in recent times. Indeed to restore the real minimum wage to 2010 value, on account of exchange rate alone, the minimum wage should be N48,000. If we add inflation and General cost of living index, a worker deserves better pay linked to productivity. We make unnecessary fetish of sharp drop in oil revenue. But there is no direct relationship between exchange rate and oil revenue, otherwise at 150 dollars per barrel with $65 billion reserves, Naira value was as weak as when the price of crude fell.
I agree with Godwin Emefiele, the CBN governor conclusions in his address to the Senate that; “Given the multifaceted objectives of the CBN, we are compelled to consider the effects of the exchange rate on critical variables like inflation, real wages, and GDP growth”. According to him, “Zambia had allowed a market driven devaluation and today, inflation has risen from 6.7% in June 2015 to 19.5% in November of the same year. Argentina did the same thing and today inflation is over 25% there. Yet, growth has not improved in these economies. Similar situations have occurred in Brazil, Venezuela, Russia, and Ghana. Some have also argued that devaluation could be a way of helping the government with more revenues especially as they struggle to meet basic expenditures. But once again, this ignores the effects of devaluation on inflation and real wages.
Although government would actually get more nominal Naira with devaluation, that cash would buy much fewer goods given induced inflation. Real wages will be wiped out and organized labour is likely to seek higher wages for Nigerians, thereby causing civil unrest. We must also keep in mind that both the Federal Government and many State Governments have external debts that must be financed with foreign exchange. Devaluation, therefore, would mean that they would need much more Naira to service these debts.”
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