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Of devaluation, JP Morgan and Nigerian economy

By Gerbil Omoh
There has been pressure in recent times from within and outside the country for Nigeria to devalue the Naira for the third time this year.
The call is in every sense of the word self-seeking for investors who want to take advantage of Nigeria. The most recent is that coming from JP Morgan which from the look of it, is outright blackmail.

There has been a series of syndicated attacks from FT, The Economist, Reuters, Bloomberg and other agents of the western free market on Nigeria just to sink the nation’s currency so that their businessmen can move in like hawks to pick up Nigeria’s assets for a pittance. To the discerning mind, this is an orchestrated conspiracy against Nigeria.

Those calling for the devaluation have given the situation in the oil market that has constrained Nigeria’s foreign exchange earnings and the rising demand which resulted in measures put in place by Nigeria to curtail excess demand for foreign exchange as excuse for the call for devaluation of the currency. China, faced by the same economic crisis recently devalued its currency, the Yuan, but found that devaluation was not a solution to its economic woes. It has now resorted to using its reserves to defend its currency. JP Morgan’s insistence that Nigeria must devalue the Naira or freely float it endlessly and increase the suffering of the masses, can best be described as blackmailing the nation into committing economic suicide. JP Morgan and its co-foreign investors have already divested over $5billion out of $8billion they invested in Nigeria.

Their pulling out from the bond market will only deplete the nation’s external reserves by about $2.75 billion out of the current $32 billion in the reserves now. Before 2012, the economy was performing well with better commodity prices and as such delisting of Nigeria from  the JP Morgan index should not give Nigerians sleepless nights.

JP Morgan and its elitist economists are well aware of the economic fact that there are conditions that are necessary for an economic action that may not be sufficient for monetary or fiscal policy authorities to take decisions. The fact that there is rising demand for foreign exchange and a short supply are necessary conditions but they are not sufficient for Nigeria to take the risk of further devaluation of the Naira. Devaluation, as JP Morgan and other armchair economists are aware, will make Nigerian goods and services cheaper to foreign buyers and make theirs more expensive for Nigeria to buy. In simple language, Nigerians will have to work harder to earn more Naira to buy the same amount of goods and services they used to buy before the devaluation whereas foreigners will need fewer dollars to pay for what they were buying before.

These economists are also aware of the fact that devaluation does not benefit a country which product price change does not affect the quantity supplied. The bulk of Nigeria’s foreign exchange earnings comes from crude oil sales. Nigeria does not determine the price of the crude it sells nor the volume it sells. The price is determined by the forces of demand and supply in the international oil market. The volume is predetermined by OPEC. Devaluing the Naira will not help Nigeria earn more foreign exchange.

Devaluation will rather increase the cost of production here and increase in prices of goods and services. This is because most of the consumables and factory inputs are imported items. A general rise in prices of goods and services will further impoverish fixed income earners and the citizenry. Because of rising cost of living, the disposable income of the average worker will fall and agitation for increase in wages will be triggered off.

Foreign investors calling for devaluation know too well that Nigeria’s assets will become cheaper for them to pick. They want to invest little and reap bountifully. Besides, JP Morgan and its co-travelers are portfolio managers who bring in hot money into the economy when the going is good and at any sign of trouble, they pull out, leaving the nation high and dry. Yes, Nigeria needs investors but not the JP Morgan type. Nigeria needs foreign direct investment more than it needs portfolio investors. Direct investment will create wealth and employment in Nigeria.

Nigeria has a right to take economic decision that best suits its people. There are two sides of a coin, just as there is supply side in the allocation of resources by the invisible hands of the free market, there is equally the demand side. If Nigeria cannot control the supply of foreign exchange, it can control the demand. Nigeria should as matter of fact not import goods and services it can produce locally. Nigeria has no business importing rice, tomatoes, cotton, beans, palm oil and petrol etc. These are things Nigerians can produce locally. Why should Nigeria spend its hard earned foreign exchange importing wheat when there is millet and sorghum grown in Nigeria? Why should Nigeria import beef when there is enough cattle in the country? Why should Nigeria be importing stockfish?

Nigeria has over the years been exporting jobs to these countries while millions of Nigerian youth remain unemployed for years. Now that the country has said no to some of these items, companies abroad which rely on Nigeria solely to sell their products are already in panic that they will go into liquidation if the policy is not changed.

For countries like Japan, Korea, China and America, devaluation is of much benefit to their exporters as their products become cheaper and more affordable abroad. Citizens of these countries are more concerned with an over-valued currency.

In Nigeria, the reverse is the case, because of the country’s low non-oil export and over-dependence on foreign exchange earnings from oil, devaluation is an economic pain because the goods and services produced by Nigerians are less sensitive to changes in price, (exchange rate).

In economics, the increase in supply of foreign exchange to any economy is mainly dependent on the response of foreign demand to exports from that economy. When foreign demand is elastic, this decline in export prices will stimulate an expansion in the quantity exported that will be sufficient to enlarge total receipts of foreign exchange despite the lower prices in terms of foreign exchange. However, because the response of foreign demand for Nigerian goods is not sensity to change in crude oil export, total receipts of foreign exchange become smaller.

Generally speaking, the demand for manufactured products has higher response to devaluation than the demand for agricultural and other primary products produced in Nigeria, which is often inelastic.

So Nigerians must know that investors like JPMorgan make their profits from currency manipulation for which they were fined several billions of dollars in the US in May this year. It is no surprise that they are championing the call for the devaluation of the Naira.

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