By Henry Boyo

There has been a palpable feeling of economic uncertainty in the land, since the Central Bank officially devalued the Naira exchange rate from N155 to N168 last week; the public’s anxiety is probably, the recognition of the pervasive impact of the Naira/Dollar exchange rate on the general cost of goods and motor-spirits (aka petrol) in a heavily import dependent economy such as ours.

In the rest of this article, we will briefly discuss the most frequently asked questions in relation to the recent Naira devaluation.

What is the immediate implication of Naira devaluation?

Up until last week, the Central Bank sold one dollar for about N155; henceforth, however, the CBN would officially sell one US dollar for N168, specifically for approved imports while banks would, now independently source and sell their own dollars at a market determined rate, which is currently around N175=$1. In other words, further dollar scarcity in the market could well push interbank exchange rate nearer N200/$1 as Bureau de Change currently sell their dollars for over N180=$1. The net impact of weaker Naira exchange rates would be the sustenance of an inflationary spiral. For example, the recent 8% Naira devaluation may ultimately drive the already oppressive level of inflation above 10%, such that all incomes, including the N18,000 minimum wage would lose over 50% of their purchasing value every 5 years and further deepen the level of poverty and constrain consumer demand with adverse consequences for industrial and inclusive economic growth.

In addition to inflation, what are the other challenges posed by the devaluation?

The collapse of a once bourgeoning industrial landscape in Nigeria between 1986-93 was the result of a massive devaluation of the Naira in conformity with the IMF inspired Structural Adjustment Programme (SAP). The cost of industrial inputs quadrupled and made-in-Nigeria products quickly became uncompetitive against cheaper imports; consequently, job opportunities became increasingly scarce and regrettably our industrial subsector is yet to recover from the dastardly blows suffered as a result of Naira devaluation; indeed our landscape is littered with hundreds of formerly active factories which have since been converted to places of worship or social event centres. The product of the attendant industrial contraction is the increasing size of our unemployed labour force!

Similarly, with steady Naira devaluation over the years, durable, lifestyle enhancing consumer product imports also became quickly priced out of the reach of the average working class family, for example, brand new tear-rubber automobiles which cost less than N5,000 on average when N1 exchanged for more than $1, (Mercedez 200 flat back was introduced to the Nigerian market for less than N7,000! Incidentally, today, a Mercedez Benz car tyre cost well above the minimum wage of N18,000).

Furthermore, Naira devaluation precipitated the unwholesome brain drain of very solid and well rounded professionals from our ivory towers and educational institutions and the private sector to greener pastures abroad; regrettably, the trend continues to this day and Nigerians now spend over a billion dollars annually to educate our children and wards in foreign institutions; worse still, after qualification we encourage these youths to support the economies of their host countries with their acquired expertise rather than return home to contribute their quota to improvement and growth of our economy.

What will be the impact of devaluation on fuel prices and subsidy?

The Economic Management Team has, for over a decade remained in denial of exchange rate as the real driver of higher fuel prices and the collateral of the payment of obnoxious fuel subsidy values exceeding N1tn ($6bn) every year. Indeed, subsidy became a component of domestic fuel price as a result of a precipitate devaluation of the NAIRA in compliance with IMF conditionalities attendant to the Structural Adjustment Programme.

For example, an exchange rate of N80=$1 will immediately crash fuel prices below N90 without subsidy; however, any exchange rate above the erstwhile N155/$1 will conversely instigate fuel prices accordingly. It is not yet clear if fuel imports will be settled at the CBN’s new official rate of N168 or the interbank exchange rate of N175/$1; what is clear however, is that instead of about 20% lower crude oil prices bringing down domestic fuel prices, the weaker Naira exchange rate of between N168-N175 will compensate for the fall in crude prices and still keep domestic fuel prices at the premium levels which accommodate increasing subsidy values as the Naira exchange rate depreciates.

Is Naira devaluation the product of tumbling oil prices?

That is what the authorities want us to believe, however, in reality, there is no evidence that the Naira exchange rate responded positively and became stronger when crude prices exceeded $120/barrel a while back. Indeed, historically the Naira exchange rate has fallen over time, despite much higher crude prices and bountiful dollar reserves from oil export.

What then is the prime driver of Naira exchange rate?

Evidently, the Naira exchange rate is primarily a function of surplus Naira a.k.a. excess liquidity; even the CBN Governor and the Economic Management Team and the Monetary Policy Committee do not deny that the eternally present surplus state of Naira in our economy also has a diluting effect on the strength of the Naira against the dollar; indeed, a market which constantly has a huge overhang of Naira against tightly rationed dollar supplies, will inevitably produce a weaker Naira exchange rate. Consequently, by rationing dollar supplies in its capacity as supplier of over 80% market dollar values, the CBN inadvertently weakens the Naira exchange rate, when it liberally floods the money market with Naira whenever it substitutes Naira allocations for dollar derived distributable revenue.

Why have CBN’s measures to contain excess liquidity failed?

Actually, the CBN’s strategies have been targeted at the symptoms, rather than the actual cause of excess liquidity. The abiding symptoms of excess liquidity are untamed inflation, disturbingly and inappropriately high cost of funds to the real sector, weak exchange rate, high national debt accumulation at oppressive costs and the rather unusual accommodation of outlays of between $6-12bn for subsidising fuel prices annually. Nonetheless, the incontestable cause of excess liquidity is the CBN’s substitution of Naira allocations for dollar revenue; this singular act is undoubtedly also responsible for driving higher inflation rates and higher oppressive cost of funds; additionally, such eternally surplus Naira is consequently responsible for increasing national debt and a weaker Naira which in turn instigates higher fuel prices and the attendant burden of subsidy.

Save the Naira, Save Nigerians