The Posion In Further Naira Devaluation

By: Sir Henry Olujimi Boyo (Les Leba) first published in August 2015

INTRO:

Last week this column repub­lished “Yoyo Naira Exchange Rates and Common Sense” It ex­amines how CBN policies involving currency devaluation, forex restric­tions, and multiple exchange rates have fueled inflation, discouraged investment, and deepened econom­ic instability in Nigeria. Despite re­peated expert-backed reform propos­als, key issues like excess liquidity and lack of transparency remain unaddressed.

(See www.betternigerianow. com for this series and more ar­ticles by the Late Sir Henry Boyo)

This republication highlights how, in 2015, international investors and Nigerian banking leaders pres­sured the CBN to devalue the Naira to restore forex market liquidity. Analysts argued that restrictions and fixed rates discouraged invest­ment and deepened instability, while critics and global media questioned the CBN’s leadership and called for higher interest rates. However, past devaluations in Nigeria triggered in­flation, wage erosion, and economic decline. The underlying issue may be excess Naira liquidity rather than dollar scarcity, and further devalua­tion risks worsening economic and social hardship.

As you read through the below article taking note of previous events or rates, keep in mind its year of pub­lication (2015), a clear indication that Nigeria’s economic situation is yet to improve even after all this time.

The Punch edition of 16th July, 2015, carried an Agen­cy report titled “CBN has no option but to devalue Naira”; in which, Ravi Bhatia, a Director in ‘Standard and Poors’, an Interna­tional Rating Agency, observed that in spite of the recent measures by the CBN, “another devaluation… possibly by more than 15 percent, is inevitable” to satisfy the expectations of overseas investors. The report, also noted that financial moguls, JP Morgan had earlier warned in June 2015, that it could eject Nigeria from its benchmark index by year end, “unless it restored liquidity to curren­cy markets to allow foreign investors to transact with minimal hurdles”.

In another report titled “CBN may fail Hedge fund speculators’ betting on Naira devaluation”, in Business Day edition of 22/7/15, Sewa Wusa, Head of Research and Development of Sterling Capital observed that “the onus lies on the CBN to devalue the Naira before it is too late”; according to Wusa, “what is actually pushing the Naira southward is the banning of 41 items from the forex market”.

Similarly, research analysts at FBN Capital Plc in the same report, also counseled that “devaluation fears are discouraging the offshore community from re-entry”.

Indeed, in the Punch edition of 26/6/15, in a report, titled “Bank CEOs call for further Naira devalua­tion”, the Group Managing Director of First Bank Plc, Bisi Onasanya, warned, at a CEO roundtable orga­nized by ‘Bloomberg (an internation­al Financial media house) and the Nigerian Stock Exchange, that “the banks could not support the Naira at the present artificial level of less than N200 in the official market”, and there­fore called “for further devaluation of the currency”. Onasanya insisted that “the rate is not sustainable, and the longer we continue to hold unto this (rate), the more we send signals to the international market that we are not serious as a country”. Besides, accord­ing to Onasanya, “the economy will be at a standstill unless there is some adjustment to the present level of the Naira.”

Similarly, Mr. Femi Olaloku, the Executive Director, Treasury and In­ternational Business of UBA, who represented his CEO, at the round­table talks also chorused that “there should be a little adjustment in the currency”…and therefore suggested that “interest rates would have to be increased for (external) funds to come in, to support our quest for diversify­ing our economy, broaden our income base, and restore liquidity in the forex market.”

Indeed, some financial interest groups have uncharitably engaged in an open smear campaign to rub­bish CBN’s efforts to maintain sani­ty in the forex market; for example, the otherwise long established and respected International Financial Media House, “The Economist” bra­zenly questioned the competence of Godwin Emefiele as CBN Governor and in a venomously simplistic arti­cle titled “Nigeria’s Currency: Tooth­pick alert”, also ridiculed his attempt to control forex demand.

The overriding message, none­theless, is loud and clear; speculative overseas investors and their media organs are in agreement with the movers and shakers in Nigeria’s banking industry to demand further reduction in the Naira’s exchange rate beyond N199=$1; additionally, these interest groups want CBN to also instigate higher rates of interest within the Nigerian economy, so as to promote the profitability of specu­lative foreign investors.

But the question is, what would happen to Nigeria’s economy and the social welfare of our people, if Emefiele and the CBN are intimi­dated and stampeded by the clarion call of these international and do­mestic financial hawks, to further devalue the Naira and also increase domestic rates of interest, for gov­ernment borrowings and real sec­tor credit?

Well, let us examine the potential sectoral impact of further Naira de­valuation. Indeed, Naira devaluation is probably the most potent weapon against the prosperity of Nigerians. Nigeria’s migration from a potential industrial power house with bustling social affluence, to a subdued and stumbling economy clearly began with the adoption of IMF’s Structur­al Adjustment Programme during Babangida’s regime: the chorus from International Agencies, at that time, was also that falling oil prices with an unserviced debt burden and the consequent restriction of trade cred­it to Nigeria, were the products of an allegedly overvalued Naira ex­change rate.

Ultimately, the overwhelming pressure from International Finance Agencies, with the government’s craving for international support for another illegal military junta, precip­itated serial Naira devaluations from less than N2 to over N22=$1 by 1993. This rash decapitation of the naira exchange rate pauperized Nigerians, including University professors and technocrats and tragically triggered the brain drain to more stable econo­mies in Europe and America; sadly, this disenabling phenomenon has since gathered speed and persists till date, as beneficiaries of our indi­vidual and collective sacrifices still abandon service to their country in preference for dollar pay packets abroad.

Indeed, wages and salaries soon became decimated by the unyield­ing devaluation, such that it be­came necessary for most Nigerians, particularly civil servants to make awkward adjustments and engage in ‘extra-curricular’ activities to supplement their paltry incomes; although the impact of Naira deval­uation may not have been the origin of corruption in Nigeria, it certainly contributed to its spread as well as public apathy to the disease as more Nigerians became beneficiaries of the wages of corruption.

Clearly, Babangida’s decision to drastically devalue the Naira did not recognize its impact on fuel price; indeed, the notion of fuel sub­sidy apparently became inevitable with Naira devaluation. Regrettably, successive administrations have remained in denial of this relation­ship and the most recent devalua­tions from N155 to N199=$1 within 4 months also triggered another 20 percent rise in fuel prices despite the irony of prevailing lower crude oil prices. Consequently, additional Naira devaluation above 20 percent as demanded by overseas ‘investors’ would only stoke fuel prices and make subsidy removal a major chal­lenge for Buhari’s administration; ultimately, with such devaluation, fuel subsidy will exceed the alleged burden of about N1tn annually and account for over 20 percent of ex­penditure, if Federal budgets still remain below N5tn.

Furthermore, an additional 20 percent devaluation, will also reduce minimum monthly wage to about $75, down from almost $120 less than 5 years ago; indeed, with inflation consistently nearer 10 percent, the current minimum wage undeniably buys much less than was earlier possible, with an inevitable collateral reduction in consumer demand and new invest­ment decisions.

Consequently, if the CBN now yields to the current pressure to promote higher interest rates, the cost of government borrowings will inch closer to 20 percent to impress overseas investors; in this event, cost of funds to the real sector may also approach 30 percent to further discourage investments, reduce ca­pacity utilization and employment opportunities, and also turn the pos­sibility of diversifying our economy to a mirage.

In other words, higher interest rates will constrain job creation and also increase a debt burden that will be serviced by future generations at rates of interest which are clearly oppressive and anti-growth.

Nonetheless, some analysts still suggest that weaker Naira exchange rates will promote Nigerian exports; regrettably, Nigeria’s non-oil ex­ports have continued to dwindle as the Naira exchange rate collapsed overtime from stronger than N1=$1 to N200=$1!

Instructively, the strategies to res­cue the Naira Exchange rate has con­sistently related to the reduction of dollar demand; however, in view of the apparent failures, it may now be time to recognize the unceasing sys­temic excess supply of Naira as the actual villain; clearly, a market with surplus Naira constantly chasing rations of dollar supply will always constrain Naira appreciation.

SAVE THE NAIRA, SAVE NI­GERIANS!!!