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Devaluation: IMF vs BUHARI

By Henry Boyo

A Team from IMF, recently consulted with relevant government Agencies and officials to assess the economic impact of the crash in oil revenue and the proposed responses to address the ‘’near-term vulnerabilities’’ and those fundamental reforms which are required to promote sustained economic growth and reduce poverty.buhari-Naira

The Team’s recommen-dations, reflect the self evident need for reforms which would improve fiscal discipline and also reduce the present imbalance between our gross export and import values; furthermore, the IMF report re-echoed the need to broaden the tax base and to implement those measures that would boost the ratio of non oil revenue to Gross Domestic Product.

The Team advised that sustained private sector led growth requires a competitive economy, which the report suggests, can evolve with an exchange rate policy that is allowed “to reflect market forces”, and therefore recommended that ‘’restrictions on access to foreign exchange should be removed”.

Although the IMF acknowledges that “CBN has eased monetary conditions”, the Team however observes that there is still a ‘’need to ensure a strong and resilient financial sector that can support private sector investment across production segments, (including SMEs) at reasonable funding cost’’. There is nothing new in these recommendations, as they simply amplify the same self evident prescriptions without defining the appropriate medium that would guarantee a cure.

For example, if you have not identified the antidote to the poison of systemic surplus Naira, how do you bring down cost of funds from a clearly prohibitive twenty percent plus to ‘’more reasonable’’ and progressive 4-7% interest rates that would facilitate industrial consolida-tion and rapid job creation?

The IMF report, inexplicably shifted attention from the albatross of  liquidity surplus, that undeniably fuels inflation well beyond best practice models below 2%; or, is there an unwritten law that countries like Nigeria must not enjoy minimal inflation and truly catalystic  low cost of funds below 6% across the board? Surely, it is not so difficult to appreciate that all static income earners, particularly, pensioners and other low income earners will lose 50% of the purchasing value of their incomes every five years, if inflation continuously trends closer to double digit rate.

Indeed, if the IMF sincerely expects sustainable inclusive growth for Nigeria, there is no way they would have failed to examine the persistent cause of the systemic surplus Naira which forces CBN to regularly commit to reckless financial management to fight inflation, when it involuntarily sets out to crowd out borrowing and consumer demand by marginally reducing the persistent liquidity challenge with unreasonably high interest payments on moneys that it would simply borrow and store as sterile and idle funds.

Similarly, it is the same threat of inflation that instigates self flagellating double digit CBN Monetary Policy Rates, in place of more supportive rates below 2% adopted by Monetary Authorities in disciplined and more successful economies.

Instructively, if the  recommendation for the ‘’removal of restrictions on access to foreign exchange’’ was adopted, the Naira exchange would have since plummeted below N1000=$1. In such event, the World Bank would step up, to advance Nigeria, another dollar denominated loan, with shylock terms, to defend the Naira; regrettably, ultimately, the Nigerian economy would unravel and the Naira rate will unfortunately track the Ghana Cedi which eventually exchanged for over 10,000=$ with still no respite.

Nonetheless, the IMF’s recommendation that Naira exchange rate should be allowed to reflect market forces may seem credible and progressive; the reality however, is that the Naira will continue to have absolutely no chance against the dollar, if the money market remains deliberately skewed, as it presently is, with persistently surplus Naira liquidity against rationed dollar Auctions; Nevertheless, CBN’s monopolistic compulsive dollar auctions to banks, is certainly not commercial best practice and unfortunately provides a wide latitude for forex market malpractices.

It is unexpected that the counterproductive impact of CBN’s monopolistic stranglehold on the forex market escaped the notice of the IMF Team; however, if CBN retains its monopoly of dollar supply, unending Naira depreciation will become inevitable, and ultimately not even a steady rise in crude prices will save us; after all, the Naira rate inexplicably remained between ‘weak and stagnant’ even when reserves bountifully approached $60b when the oil market was fortuitously very buoyant.

Devaluation does not holds any other promise for Nigeria, other than the obviously misguided and unrealisable expectation that matching official with parallel market exchange rates will attract foreign investors or ensure competitiveness of the Nigerian economy. Nonetheless, Naira’s devaluation from 0-50kobo before 1979 to the presentN200=$1 did not attract much more than about $20bn in foreign investments, i.e a paltry annual average of $540m; worse still, foreign investors were ‘smart’ enough to invest primarily  in economically, minimally impactful, but secure and high yielding federal government bills and bonds!

The unusually wide gap between the official and parallel Naira exchange rates, has intuitively engendered the observation that Nigeria’s economy will only become competitive if Naira is devalued and brought closer to the street market rate. Instructively, however, despite serial Naira devaluation, from 50kobo to N200=$1 Nigeria’s economy remained neither diversified nor internationally competitive; well, maybe a further devaluation to N300=$1 may just change our fortunes; but such expectation must be predicated on the parallel market rate remaining static; consequently, if the root cause of the deliberate market imbalance against the Naira is not squarely addressed, the call for further devaluation beyond N300=$ will again become clarion from misguided and self serving experts.

Fortunately, President Buhari is not fooled by the false promises that advocates of devaluation canvass. The President is sharply aware that the intensity of deepening poverty in Nigeria, loyally correlates with Naira’s steady depreciation, even in times of plenty. Buhari certainly recognises that devaluation instigated and has sustained our economy’s debilitating brain drain and the mass migration of our youths to greener pastures.

Besides, further devaluation will only precipitate Labour’s agitation for wage increases, while pension incomes will invariably gradually become valueless. Furthermore, the inevitable inflationary spiral instigated by a huge devaluation will invariably reduce consumer demand and adversely affect investment decisions, with collateral damage on employment opportunities.

Worse still, if the dollar sells officially for N300=$ and above, fuel price will spiral beyond N130/litre and make deregulation and the removal of fuel subsidy impossible. Sadly, Nigeria’s celebrated GDP of US$ 510bn will invariably also shrink below $300bn, while the current stock market capitalisation of about $42bn will similarly recede below $25bn and make the market vulnerable to an easy take over by foreign portfolio investors. In the above circumstances, Buhari must be encouraged to resist further Naira devaluation. Save the Naira, save Nigeria.


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