RECENTLY, President Buhari     opined in far away Nairobi, Kenya that Nigeria will not devalue the Naira.  No doubt, the president is well intentioned and means well. It is in the “interest” of the masses who have been battered by the prevailing economic circumstance.

However, artificially keeping the naira “strong” in the midst of limited foreign currency reserve puts paid to this good intention. Unknown to the president, the power not to devalue the Naira no longer exists and does not lie with him. As at the time the president made the pronouncement, the Naira had been devalued already. It is like a judge attempting to adjudicate a case when events have overtaken it.

The Central Bank of Nigeria has artificially pegged the exchange rate at N197-N197 to the US dollar. We don’t know how they arrived at this rate. What we know is that very few can get the dollar to buy at this rate. So who is fooling who. The greater majority therefore have to go and source at alternative markets and at whatever rate. This exerts more pressure on the Naira. Less than 10% of the demand is met by this CBN induced rate.(I don’t have exact figures/statistics). So the remaining 80% or 90% as the case may be are met at the alternative market rate. This alternative rate then is the determinant of market prices, since it is where the bulk of demand is met. So it is safe to assume that the common man (the president is trying to protect) buys at this rate.

The first unintended consequence of this approach to shoring up the naira is corruption and manipulation. It does not take rocket science to know this. Any form of rationing is a breeding ground for corruption, even when you have strong institutions and the cost of getting caught is high. In Nigeria, this is not the case. The institutions are weak and the cost of getting caught is very low.

Will those lucky to get the CBN rate price their goods at the CBN rate? I doubt. They will more likely price at the open market rate and make huge profits. To get this huge profit, they are willing to grease a few palms. Only the rich and well connected will get this rate. So the rich get richer. The CBN recently gave a guaranty to some people (names withheld) to supply all their dollar requirements at this induced and highly subsidised rate. If these guys are smart , which they are , they will turn round to sell at market rate not ,CBN rate.

So what is the common sense approach?

First is to allow the market determine the rate. Hitherto, Nigeria through the CBN was subsiding manufacturers in China, USA , UK and wherever we imported goods from. We were providing employments in all those places and killing our own manufacturers and creating local unemployment.

We were making their goods more affordable and cheaper than the locally produced ones. This is why we had low capacity utilisation and high unemployment. Will this not lead to huge inflation? No. It will actually lead to a reduction in inflation.

This is because the now market determined Exchange rate at which everybody buys will come down.

By eliminating duality of rates where some buy at N199 and some at N300,everybody will most likely now buy at about N250 (N300+N199)/2. Since the market pricing was at N300,the new market pricing will now be at N250 for everybody. Competition to sell will begin to exert downward pressure and the rates will begin to come down. We have seen this in the Telecommunications market.

Secondly, because the exchange rate is high, imported goods become prohibitive, forcing a previously import oriented economy to begin to look inwards. (The reason we love imported goods was partly because they were cheaper due to the subsidy provided by the CBN ). As more people patronise locally produced goods, they are able to expand and employ more people. They get better and are able to invest in better machinery, training and enjoy economies of scale, translating into better quality and lower pricing.

Imagine this scenario: Ten men each have N100. A man wanted to exchange $1000. So they each can exchange $100 for their N100. Case closed.

However, this man with the $1000 (Mr. CBN) now decided to exchange $300 for N50 instead of the N100 for a cousin of his named Cousin B.

We are now left with $700 for the remaining 9 people who have their N900 naira.N900 /$700 will now give approximately N128 instead of the N100.

By artificially selling $300 to cousin B at N50,the dollar is now priced at N128 instead of N100. The artificially induced rate of N199 for a few privileged people has driven up the cost for the remaining nine people (the majority). Eliminating duality of rates will reduce corruption, make the market more efficient, lead to competition and innovation. These will ultimately lead to lower costs and the common man will be the main beneficiary. Allowing a market determined rate is more beneficial to the economy in more ways than one.

Take Rice for example. We probably spend $1billion importing rice (Hypothetical figure).As stated above it was cheaper to import compared to locally produced rice. At N250 naira to the dollar, imported rice has become more expensive. So the local rice farmer who is able to produce at N200 will be patronised. He gradually increases acreage, employ more hands, embrace mechanisation and produces more efficiently. Ultimately the N200 naira rice become N150. The $1billion that was being used to import rice is now part of our reserve. So the naira become stronger. So the president’s dream of a low exchange is achievable after all.

Mr. Bowo Olateru-Olagbegi, a pblic policy anlayst, wrote from Lagos.