Exchange rate management is critical to a nation’s economic aspiration as it sets the rate at which goods and services are exchanged with other sovereign states. Countries watch their exchange rates and sometimes it becomes a strong economic and political power for trade and investment negotiations. A country with strong export base such as Japan, US, Britain and China in recent times, show concern if their exchange rates becomes too strong as it makes their products highly expensive to importers.
In the same vein, a weak exchange rate makes goods and services produced in a given country cheaper and encourage export. Economies with strong export base benefit from devaluation. Nigeria is essentially an import-dependent economy. Prices of imported raw materials, food and medicaments will go up when ever the naira is devalued as more volume of naira are required to acquire the same volume of product.
Nigeria is dependent on the export of crude oil for close to 80 per cent of its foreign exchange earnings. Ironically, the price of crude oil is determined by the forces of demand and supply at the international oil market not by Nigeria. The volume produced is equally determined and fixed by OPEC. Economic logic suggests that Nigeria will derive no serious economic benefit from devaluation of the currency except to make foreign products more expensive and those produced locally for export less expensive as Nigerian importers will need more unit of naira to buy the same amount of dollar.
Sometimes it is difficult to see the economic rationale for certain decisions taken by the authorities in Nigeria. Knowing full well the near-zero elastic nature of oil demand to price change, why embark on devaluation of the naira at this critical time? But last Monday, the CBN devalued the nation’s currency (with about N10) to N160 to the dollar. In devaluing the currency, the CBN moved the band it wants the naira to trade in to between N150 and N160 to the U.S. dollar, compared with N145-N155 to the dollar it sold previously, due to the prolonged weakness of the naira and high demand of the dollar.
The only argument for the devaluation is that government wants more money. Government’s continued quest for more naira monetised from crude oil sales and its penchant for increased spending has resulted in general rise in prices of goods and services across the country which as at last month, stood at 10.5 per cent. For apparently the only reason for this decision is the fact that this government needs more naira to pursue its agenda given the fact that the targeted budget bench mark for crude was reduced from $75 per barrel to $70 per barrel.
The CBN knows this and was instructed to find more naira for the nation and the only way open to it was to adjust the exchange rate to make room for more naira to flow. The desire of the Federal Government to earn more volume of naira has been responsible for the falling value of the currency because it is difficult to justify exchange rate depreciation in a period when prices of crude oil are high and the country is an import-dependent economy.
Would it not have been better for this government to trim its plethora of advisers, reduce cost by cutting down on the cost of governance and save some reasonable amount than embarking on devaluation of the naira?
At the foreign exchange inter-bank market on Monday when the decision was made, the naira was trading at around N158.90 to the dollar, having hit an all-time low of N167.40 in October, prior to sharp monetary tightening measures adopted by the apex bank. The CBN Monetary Policy Committee also left its benchmark interest rate unchanged at 12 per cent and its 200 basis point corridor around the benchmark rate. Its recommended deposit rate is 10 per cent while its lending rate is 14 per cent. Is devaluing the naira the only option to expanding the naira available to government? Why is government shying away from efficient and effective tax system in the country? If every level of government works out an effective tax system that ensures that Nigerians pay equitable tax, there would be no need to gamble with the exchange rate for volume of naira.
In his submissions at the discussion of the monetary policy meeting earlier in the year, Sanusi Lamido Sanusi had stressed that the greatest threat to inflation was the anticipated liquidity pressure and that a lot of what was done and achieved by the MPC relied on credibility of the authorities. “He argued that if the bank had made a commitment to exchange rate stability, there was a cost in moving away from that position. He emphasised that it was difficult to justify exchange rate depreciation where prices were high and the country was an import-dependent economy. But the CBN authorities could not hold their ground this time around; they had to bow to pressure and devalue the naira but in whose interest?
In the circumstance of the present economic stance, it is clear to discerning economic minds that moderation in inflation in Nigeria is almost an aberration. The global increase in energy and food prices has made Nigeria very vulnerable as an import-dependent nation that also imported oil. Now that the nation is debating subsidy removal, naira devaluation has further put a spanner in the wheel of progress in this regard for if oil prices continue their upward trend, it would translate to more subsidies to the Nigerian National Petroleum Corporation (NNPC) for imported petroleum products.
Already, government borrowing is crowding out the private sector. For last year, “Net aggregate credit to the economy grew by 13.4 per cent, on an annualised basis as at December, 2010, compared to 59.6 per cent recorded in December, 2009. This was driven mainly by the substantial credit to the government which grew by 67.83 per cent, while credit to the private sector fell by 4.92 per cent in December 2010 as against the benchmark of 31.54 per cent for 2010.” When will Nigerian policymakers learn simple principles of economic management?