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Stanley Ihugba: Why Buhari’s anti-devaluation position makes sense


Stanley Ihugba: Why Buhari’s anti-devaluation position makes sense

By Ihugba Stanley

In mid-2015, the global price of crude oil which is Nigeria’s major source of foreign exchange tanked. One of the ripple effects of this price crash was a severe dip in foreign exchange earnings and the concomitant shrinking of our foreign reserves as reflected in the sharp decline from $34.3 billion in August 2015 to $28.2 billion in January 2016.

While the golden goose is laying fewer eggs, the demand for United States dollars has skyrocketed. Easier access to services denominated in dollars such as education, health, fashion and tourism; as well as increased trade with Asia and the Middle East have led to a steady demand for US Dollars (USD) in the face of dwindling foreign exchange (FX).

The Central Bank of Nigeria rolled out several reactive measures meant to curtail the demand for FX. These include the restriction in August 2015 of 41 Items from accessing FX through the Official window for importation; the pegging of cash withdrawal on ATMs abroad to $300 daily and the stoppage of weekly sales of USD to licensed Bureau De Change Operators in January 2016. The CBN also maintained a fixed exchange rate of 197 NGN per USD in a bid to cushion the free-fall of the naira.

This spiraling of Naira against the USD in recent times saw the emergence of two divergent schools of thought – those clamoring for devaluation of the naira in a bid to reflect its true value as shown by parallel market rates and those rooting for non devaluation, especially as a temporary solution to a problem with long history.

While currency devaluation in itself is neither good nor bad, it all depends on where one’s bread is buttered. For heavy export-based economies like China, currency devaluation is desirable, as this means that their exports become cheaper and more likely to knock out competitors offering similar but costlier goods and services. China, sometime in August 2015, devalued the Yen, much to the chagrin of the United States who accused her of artificial devaluation to gain competitive advantage at the expense of global financial stability.

On the flip side, currency devaluation in a heavy import based economy will portray more doom than boom. The free flow of oil weakened the Country into a rentier-state that collects FX for crude oil and almost immediately exchanges it for importation of numerous items from industrial supplies to capital goods, fuel, lubricants, machineries, equipment, food, beverages and household items. Devaluation of the naira will simply hurt the man on the street. The salaried worker will have his real salary gravely chunked down even though his nominal salary remains unchanged.

Already, labor groups are clamoring for a review of the minimum wage to reflect inflationary trends which have reduced the purchasing power of their take-home stipends, devaluing the naira will simply hammer in the last nail in the coffin of the common man on the street. There is no gainsaying the fact that untold hardship will trail any attempt to devalue the naira, in a country where we import even tooth pick.

Admittedly, there is nothing to be proud of, concerning our excessive and often irrational crave for foreign made goods, but devaluation in the face of FX pressure is never the answer as that will simply amount to cutting off our nose to spite our face. The resurrection of autonomous bidding for BDCs through the ban of official sale of USD by CBN will stabilize the FX market in the near future as market mechanics of supply and demand will kick in. It is no longer a harvest spree for BDCs who sabotaged the Country’s economy by cashing in on the FX drought to sell USD at cut-throat prices at the parallel market even though they acquired same from CBN at official rates. Already, there are positive signs of a return to normalcy which hopefully will be sustained.

Another chink in the amour of the argument for devaluation is that it will definitely hurt financial institutions, especially banks, which are poised to play key roles if the government is to restructure the defective nature of the monolithic Nigerian economy. Nigerian banks by virtue of dabbling in the oil sector have got most of their loans to multinationals doled out in USD. Banks were overexposed to the oil sector, regrettably at the expense of the real sector, because advances to the oil sector; prior to the price plunge, ensured steady and juicier returns. Many of these loans are set to go bad, loan restructuring plans are already being implemented in many banks and the industry wide margin of non-performing loans is set to skyrocket. While these uncertain loans are mainly denominated in US Dollars, the assets of banks are mainly denominated in Nigerian Naira. Devaluation will severely crash the balance sheet of banks. There are already speculations of liquidity problems for banks, profits are dwindling, job losses are steady on the rise, bad debts are getting bigger, and asset-crash through currency devaluation might expose some banks to runs, which could be disastrous for the economy.

Rather than kicking the issue of restructuring our flawed economic nature down the road and settling for a temporary solution, it’s high time the Government seized the bull by the horn and take decisive steps towards reviving our oil-dependent economy. It is not enough pontificating about industrialization and local production, the Government must lay the fertile grounds for industrialization to grow. Steady power supply, security and a qualitative, functional and technology-driven education system are sine qua non for industrialization.

Agriculture and SMEs’ should be of top priority. We also need a massive and radical reorientation in order to realign our pattern of consumption which is extremely skewed towards foreign goods. The banks also have a major role to play – support the real sector, by bridging the gaps between the creditors and lenders. Lending rates for Agriculture and SMEs should be reviewed to single rates. It is high time banks started doing the real business of banking – instead of feeding fat on cheap funds. The TSA which denied banks of a sizeable chunk of cheap government fund is a commendable step. The CBN should set policies to ensure banks lend certain percents of their total loan portfolio to Agriculture and SMEs.

An adage has it that the two best times to plant a tree is 20 years ago and NOW. Since our past leaders have failed to take corrective steps to steer right our monolithic economy, now is the time for the Buhari administration to kick-start the revolution that will steer our economy on the right path. It’s an uphill task. But it’s doable!!!

Ihugba Stanley writes from Enugu.

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