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Rasher devaluation and oil policies

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By Sonny Atumah

Walter Bigelow Wriston (1919-2005) a U.S. banker, former chairman and CEO of Citicorp said that ‘’when a system of national currencies run by central banks is transformed into a global electronic marketplace driven by currency traders, power changes hands”. This quote was on Monday, 27th June, 2016 portrayed in President Muhammadu Buhari’s mien in expressing the Central Bank of Nigeria, CBN ruthless and rudderless Naira devaluation.


The President took swipes at the monetary authorities by throwing them almost to the wolves on the current floating exchange rate that enabled market variables determine the value of the currency.  Visibly angry on the returns he was getting from the CBN he recoiled and recalled August 1985 when a dollar exchanged for N1.30, but now the dollar exchanged for between N300 and N350.

President Buhari who spoke while breaking his Ramadan fast with members of the Nigerian business community at the Presidential Villa, Abuja said: ‘’I am not an economist neither a businessman, I fail to appreciate what the economic explanation is. What has happened to us now is that we have maneuvred ourselves into a mono-economy which led to the collapse we are seeing now.” The President could not understand what Nigerians derived from the CBN’s monetary policy when Nigeria exports all her crude oil and imports all her petroleum products.

Perhaps the President needed enlightenment on the flexible exchange rate system in which the values of participating currencies are free to change in relation to one another according to market demand and supply for each currency. In April 1978, the IMF made the flexible exchange rates system official, permitting currency rates to fluctuate in exchange markets according to supply and demand with some management of the rates by central banks to avoid disorderly markets.

The Bretton Woods institutions including the International Monetary Fund, IMF and World Bank had put intense pressure on the Nigerian authorities to devalue the Naira and withdraw petroleum products subsidies to liberalise the downstream petroleum sector. IMF 2014 Article IV Consultation with Nigeria published on February 27, 2015 maintained that bringing the wholesale Dutch auction system, wDAS and the retail Dutch auction system, rDAS to the interbank foreign exchange market would lessen the external shocks from dwindling commodity (oil) prices.

In January 2016, Buhari rejected visiting IMF Managing Director Ms. Christine Lagarde’s advice to devalue the currency. Lagarde’s team worked with the Nigerian fiscal and monetary authorities to address the economic challenges occasioned by low oil prices. The CBN in June floated the currency with the flexible exchange rate between N300 and N350 an adjustment difference for the increase drifting between 52.28 and 77.66 percent respectively.

Nigeria’s monetary authorities on November 25, 2014 adjusted (devalued) the Naira by 8 percent from N155 to N168. By February 18, 2015 again the currency was adjusted by 18 percent from N168 to 197 with the CBN closing the twin official wDAS and the rDAS. With falling international crude oil prices Nigerians pay exorbitant rates for imported petroleum products. Petrol was increased in May 2016 from N86 to N145 a litre with a difference for the increase at 68.60 percent.  Household kerosene, HHK which was N50 has now risen to N200 per litre with a difference for the increase at 300 percent with diesel now selling for N200 per litre.

IMF urged a strain at the leash to call a halt to the Naira official rate for manufacturers and oil marketing companies. It advised that greater exchange rate flexibility would cushion external shocks. The policy may give a perceived boon to state coffers for the 2016 budget implementation, but the vulnerable Nigerian groan under high pump price of imported petroleum products in a free falling devalued Naira. There was no consideration that the dollar and price of crude oil move inversely.

We appreciate the President Buhari’s sincere heart but puritanism would not absolve him of what is happening in his government. Whatever came from the CBN was the responsibility of his government and it is assumed all factors and variables were comprehended and digested. The current monetary policy of flexible exchange rate depends on judgment rather than rules and moral suasion is often not an effective tool. Are there unseen strangleholds on his government?

President Buhari’s advisers should make amends on his genuine concerns for the exchange rate hands-off. Economic watchers wondered why the IMF chief’s advice assumed a toehold when manufacturers battle for imported raw materials with floated exchange rates. Banks are now retrenching staff members. Micro-small-medium enterprises are closing shops over the attendant severe inflation.

The Jimmy Carter led United States government in 1978 came under heavy attacks when the American economy and global investment patterns were affected by the dollar fall. Carter’s economic advisers later admitted it was bad advice on managing the dollar which they did not foresee a universal impact of a falling dollar on the economy and indeed the world trade.

Carter’s advisers only foresaw a falling dollar making American exports cheaper and helping boost American industry and reducing the United States trade deficit which hit an all-time record in 1977. American exports indeed became cheaper while the imported goods including cars and televisions were more expensive. With the low dollar, American manufacturers of similar products increased their prices thereby increasing the inflation rate.

Recent IMF study said that global trade is dominated by the export of goods that sold better after a cut in exchange rate.  IMF said a 10 percent cut in the value of a nation’s currency can boost exports by an average 1.5 percent of GDP; a benefit in exchange rate for foreign trade. IMF’s fears were that the global economy would likely suffer another round of currency wars dominated by the export of particular goods (cars and fridges) that sold better after exchange rate cuts made them better (The Guardian London).

That was a kernel in the IMF’s world economic outlook in October 2015 in Lima, Peru. The IMF worried that currency wars via exchange rate manipulations by nations that export goods to make better sales portend danger in the international finance system. IMF’s concerns did not include Nigeria that is a monomaniacal economy, virtually relying on crude oil exports. Yet Nigeria’s monetary authorities bought IMF wholesale devaluation policy.

Refining crude into a myriad of products and derivatives that number up to 6000 for diversification along vertical linkages would have put Nigeria in context with the Peru economic outlook. Nigeria is still buying refined products overseas with the devalued Naira. The vulnerable bears the brunt of high exchange rate in the NNPC/PPPRA price modulation for petroleum products imports. President Buhari might have been led to recant his stance a year ago on devaluation and products subsidies withdrawal reproduced here: ‘’ when you touch the price of petroleum products, that has the effects of triggering price rises on transportation, food and rents.



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