Between Sanusi and IMF who is right about the true value of the naira
Sanusi Lamido
By Omoh Gabriel, Business Editor
The International Monetary Fund last week said that the naira is currently over valued. Immediately, the CBN Governor, Sanusi Lamido Sanusi reacted and criticised calls from the IMF for greater exchange rate flexibility, saying he did not believe the naira exchange rate to dollar was overvalued and that the advice was based on flawed logic. After ending consultations with Nigeria, the International Monetary Fund had noted in a statement that forex reserves had been falling and said speculation against the naira could become “intense”. The Fund said its staff believed the naira, which has traded around N150 to the U.S. dollar for more than a year, was overvalued and that greater flexibility would cushion external shocks to Nigerian economy.
This has sparked off debates and controversy as to the true value of the naira exchange rate. Many may wonder the fuss about what the naira is exchanging for. In a highly productive economy with high export base, depreciation of the currency is encouraged to make export cheaper. But in a mono product economy like Nigeria, concerns are raised whenever devaluation is contemplated. In the first instance, Nigeria as OPEC member does not determine the volume of crude it exports but fixed by OPEC quota. The price of the commodity is also outside its power to determine. So devaluation does not pay such an economy in real terms.
The CBN Research department in its assessment of the external sector in the third quarter of last year said: “The estimated current account surplus which stood at $3.61492 billion in the second quarter of 2010 declined to $1.35975 million in the third quarter. When compared with the level in the corresponding quarter of 2009, the decline in the current account surplus was steep. This development was traced to the high import bills, visible and invisible, and a slight drop in aggregate exports, reflecting the country’s over-dependence on imported goods and services coupled with the fact that the services sub-sector is not competitive, occasioned largely by the absence of technical know-how required for external competitiveness. This underscores the need for significant investment in service industries and education sector.”
In economic management, foreign exchange rates are of key significance in directing the flow of merchandise, services, and capital between nations. An international economist, Franklin R. Root of the Wharton University USA in his book, International Trade and Investment,”wrote and said that foreign exchange is bought and sold in foreign exchange market at a price that is called the rate of exchange. Specifically, the exchange rate is the domestic money price of foreign money, establishing an equivalence between the naira and the dollar, naira and pounds, naira and Euro, naira and francs etc . In Nigeria as elsewhere, the daily quotations of foreign exchange are based on the domestic price of bank transfer.
According to Root, in a free market, the rate of exchange, like any price, is determined by the interplay of supply and demand. The volume of foreign exchange that is demanded at any time depends on the volume of international transactions that requires payments to foreign residents. As is true of most goods, the amount of foreign exchange in demand varies inversely with its price. The amount demanded at a high rate is less than the amount demanded at a low rate. A (devaluation) high exchange rate makes import expensive to domestic buyers because they must offer more domestic money to obtain a unit of foreign money. As a result, a high rate of exchange reduces the volume of imports and thus lessens the amount of foreign exchange demanded by domestic residents. Similarly, a low rate of exchange, by stimulating imports, increases the amount of foreign exchange demanded. Perhaps allowing the naira to find its true market value will discourage Nigerians from the present high taste for foreign goods. Exchange rate in a free, unstabilised market is determined by the supply of and the demand for foreign exchange. But the CBN has been the major supplier of foreign exchange implying that the exchange rate is being managed.
According to the IMF report on Nigeria, “Directors took note of the staff’s assessment of an overvaluation of the naira, and stressed that greater exchange rate flexibility would prevent one-way bets in the foreign exchange market and cushion external shocks. The IMF probably looked at the exchange rate of the naira based on free market practice of a floating exchange and not a managed exchange rate. The IMF over the years, has used the parallel market price (shadow price) as the true market value of the naira exchange rate. This is not the first time the multilateral institution in its assessment of the naira exchange rate is saying the naira is over valued. During the Structural Adjustment Programme, Nigeria kept adjusting the exchange rate because the Bretton wood institutions kept saying the currency was over valued because of the existence of the parallel market which gave them the impression that the exchange rate was suppressed.
But the CBN Governor is well aware that the exchange rate of the naira is currently being managed and supported by the nation’s external reserves. The CBN Monetary Policy committee for which Sanusi is the chairman wrote in February saying: “The Committee reaffirmed its conviction that a stable exchange rate regime is critical to maintaining price stability but noted that in the absence of complementary policies, the regime is only sustainable at the cost of significant attrition in foreign reserves. The MPC, therefore, continues to emphasize that the solution to reserve depletion lies in the implementation of appropriate reforms with regard to industrial and trade policies aimed at reducing import dependence, which are beyond the scope of monetary policy. The country is also expending foreign exchange on import of food items such as rice whereas what is needed is the implementation of policies that will lead to food security and total self-sufficiency. Is Sanusi not in real terms double speaking?
The IMF has projected what it thinks the naira exchange rate should be, giving a programme of depreciation of the naira in the coming years and believed it will exchange for N202.7 to a dollar by 2015. Projection by the multilateral institution said that in 2009, the naira will exchange on the average for N148.7 to the dollar and it actually exchanged for N149.69 by December of that year. In 2010, while the IMF said it will go for N149.9 to the dollar, the naira as at end of December exchanged for N150.48. In 2011, the naira is projected to exchange for N155.1 to the dollar and in the first two months of the year, the naira exchange rate is N151.2 on the average. In 2012, the IMF has projected it will exchange at N166.1 to the dollar.
IMF data projection on the exchange rate of the naira further indicates that in 2013, the exchange rate of the naira will depreciate further to exchange for N177.7 to the dollar and that in 2014, it will exchange for N189.9 to the dollar and in 2015, N202.7 will exchange for one dollar. As at today, the naira is already exchanging officially at N151.1 to the dollar at the official market. At the parallel market, it goes for as low as N155 to the dollar. Between the CBN and IMF, who is right? Has the CBN any future trend data on the naira? No.
This trend in the loss of value in the nation’s currency is expected to continue and would by IMF projection, exchange for N202.7 to the dollar in the next four years.
Sanusi while reacting to the IMF report said: “We do not believe that the naira is overvalued. We do not believe that at a time when the oil price is going up and output is going up, we should be losing the value of our currency.”
If the CBN Governor admits that “substantial foreign exchange is expended annually on importation of petroleum products, in addition to the huge amounts spent on import of food items such as rice whereas what is needed is the implementation of policies that will lead to food security and total self-sufficiency,” then the demand for foreign exchange in Nigeria outstrips supply, and the price will be higher. What the CBN Governor should tell the nation is that Nigeria cannot continue down this line of importation of just anything. Nigeria has no business importing petroleum products, toothpick, 15-year-old junk vehicles, table water etc. If the price for this import recklessness is devaluation of the currency, let the monetary authorities muster the courage to admit the obvious, let the foreign exchange market be thrown open for every operator to earn and spend what it can generate or purchase from the open market.
