The perennial debate on the devaluation of the naira was reignited on Monday, during the two-day retreat on the mid-term ministerial performance review, chaired by President Muhammadu Buhari, when the vice-president, Prof Yemi Osinbajo openly advised the Central Bank of Nigeria (CBN) to adjust the naira exchange rate to best reflect the market in order to stimulate supply.
According to Osinbajo, the exchange rate for the naira was artificially low, even though he lamented that this discouraged the influx of foreign capital into the country. The vice president also called on the CBN to review its forex strategy and ensure that the value of the naira reflects the reality of the market in order to encourage the inflow of forex.
He said: “Regarding the exchange rate, I think we need to change our rates to reflect the market as much as possible. This is, in my humble opinion, the only way to improve the offer.
Indeed, Osinbajo’s call for an exchange rate adjustment was necessitated by the recent pressure observed in the forex market which saw a large gap between the official and parallel forex markets in the country.
But CBN Governor Mr. Godwin Emefiele has always maintained that the tiny parallel market rates (only 7% of Nigeria’s foreign exchange market), which he says serve many corrupt and illegal activities should never be used to determine the exchange rate. from naira.
Analysts for their part believe the situation was a reflection of wider economic challenges in Nigeria, such as the country’s great appetite for imports, lack of trade policy, among others. Clearly, Nigeria’s heavy dependence on imports is mainly responsible for the strong outflow of foreign exchange and the persistent weakness of the naira.
This explains why the exchange rate is often the indicator of Nigeria’s economic health, and why there is a rapid transmission of movements from the exchange rate to inflation.
Much of Nigeria’s foreign exchange outflow is due to invisibles, which refer to services. These include international payments for services as well as movement of money only for transfer payments. Also, the country’s infrastructure deficit explains the enormous level of imports of processed and finished products.
It is important to note that a devaluation is the easiest thing the CBN can provide to Nigerians, but it is not what Nigerians need at the moment. For example, if the central bank decides to give in to pressure from politicians and adjust the naira / dollar exchange rate to around N550 to the dollar, this would have a ripple effect on the federal government’s debt service which is currently more than 75 percent of its turnover. Adjusting the exchange rate could raise the level of debt service to more than 100%.
In addition, fixed-income earners, which include all government employees, could see their real wages evaporate into thin air, which could trigger calls for wage increases and cause social unrest, in a country where tensions are already high.
In addition, inflation in Nigeria is currently 17 percent and a devaluation of around N550 to the dollar could push the consumer price index to over 25 percent, leading to income redistribution and results in low purchasing power. Likewise, rising prices neutralize the money we earn from investments. This is why central banks around the world are never comfortable with a rise in inflation rates which they generally consider “evil”.
Likewise, if the central bank decided to devalue the naira today, the loans taken out by the country and indexed to the forex would be immediately revalued (higher interest rates) and the conditions would be made much stricter. This could lead to widespread defaults, higher non-performing loans and financial system instability.
Similarly, with further devaluation, imports would become much more expensive, resulting in higher production costs. Producers who can would pass the higher costs on to consumers, who would pay more for the same products. Producers who cannot pass on the cost would shut down operations over time, due to the pains of devaluation.
Likewise, Nigerians who buy foreign currency for school fees, medical bills, business travel allowance, personal travel allowance, among others, should pay more in naira.
However, in order to cope with the constant pressure on the country’s foreign exchange market, it is absolutely necessary to move away from the faulty model of economic management of the country of the past. That is, there is an urgent need to revive and rebuild productive sectors of the economy to achieve higher capacity utilization and productivity, and competitive manufactured exports; strong government encouragement for local refining of petroleum products for both domestic consumption and exports; as well as strong and effective oversight of the foreign exchange market by the monetary authority to control the return of currencies from deposit banks to the parallel market.
For an economics professor and president of the Goldmark Education Academy, Professor Mike Obadan, the federal government must ensure that during oil booms, it saves the forex and creates budget buffers; increases the supply of local raw materials and revives the capital goods industry; promote fiscal and monetary discipline and harmony; create an environment conducive to the inflows of productive capital, in particular foreign direct investment; and actively promote the restoration of confidence in the economy to prevent capital flight.
The government should also pay more attention to the Nigerian Export-Import (NEXIM) Bank in order to conduct its economic diversification program and improve foreign exchange income from non-oil sources.
According to the economist, a good grasp of the current challenges of insecurity and macroeconomic stability would also be very helpful in this regard, as he stressed the need for the government to rationalize the structure of imports to manage the demand for foreign exchange. ; as supply considerations allow, use external reserves to support the exchange rate through increased funding of the foreign exchange market; and use moral suasion to encourage Nigerians to favor artisanal products and reduce their high propensity to disrupt trade and commerce.
“Only import when absolutely necessary. They should also avoid unhealthy currency speculation and rent-seeking behaviors and adopt positive attitudes to ensure a stable exchange rate for the naira, ”he added.
For his part, a former director general of the West African Institute of Financial and Economic Management, Professor Akpan Ekpo, stressed the link between a country with an effective trade policy and foreign exchange inflows.
He stressed that trade policy was very crucial for any economy to improve foreign exchange inflows. Unfortunately, the country does not currently have one.
“The country needs an updated trade policy as soon as possible. But one thing is to have a trade policy, another thing is its implementation. We therefore need a trade policy that takes into account the current state of the economy, ”added the economist.
In addition, Principal Professor in the Department of Economics at Pan-Atlantic University of Lagos, Dr Olalekan Aworinde, stressed the need for the federal government to put in place a practical trade policy.
Aworinde said: “When you have a trade policy, the implication is that the direction as well as the volume of your trade will go to a particular country or a particular part of the world. This has a lot of implications in the forex market.
Currently, reports indicate that Nigerian parents spend more than $ 10 billion a year to educate their children in all regions of the world and at all levels of education, from primary, secondary and university levels. If the education sector is developed and up to half of this huge annual drain is preserved, the naira would benefit from great stability.
Another avenue for currency leakage is medical tourism. There is a need to improve the country’s health system in order to preserve the huge amount of foreign currency that Nigerians demand for treatment abroad, even for routine check-ups.
Considering all of this, it’s really hard to see why the naira should be devalued at this time. If you look at the situation in the context of an import-dependent country, where there is 80 percent foreign content in everything bought locally, devaluation of the naira will not be the best policy at this time.
This could serve forex speculators and those who have hedged themselves and are looking for an opportunity to exit.