Buhari says no to Naira devaluation

President Mohamadu Buhari may have, so far, given the clearest preview of his blueprint for the revival and sustenance of inclusive growth of the Nigerian economy, in a recent interview with a French media house, in Paris. Buhari’s observation on the Nigerian currency was that “the naira has been devalued, as it used to be around N140/$ and now it is hovering around N200/$ and above”. Consequently, the President cautioned that “I don’t think it is healthy for us to have the Naira further devalued”.

Furthermore, PMB explained that, “we are therefore getting the Central Bank to make modifications in terms of foreign exchange availability for essential industries, spare parts, essential raw materials and so on, while liberal access to “CBN’s depleting forex reserves” will be denied to importers of such things like toothpick and rice for which Nigeria has adequate capacity”. The President therefore concluded that “we don’t need to give our hard earned currency for that, but those who insist on toothpick from Europe or from China, instead of using Nigerian toothpick, they can go and source their (own) foreign exchange”.

What is clearly evident from the above narrative, is Buhari’s firm endorsement of the CBN Governor’s recent steps to reduce pressure of dollar demand on ‘CBN’s reserves’ and Naira exchange rate’.

Indeed, PMB’s historical antecedent suggests that he was never enamored by the usually extravagant promises that a weaker naira would jump start or successfully stimulate economic prosperity.

Indeed, Daily Independent Newspaper of 17/9/15 reported that Buhari had recalled at a Town Hall election campaign in Abuja, that “he (Buhari) refused to remove subsidies on petrol and devalue the Naira when he was Head of State (1983-5), because it would destroy the economy”. PMB also revealed that “when we came into power in December 1983, we were approached by the world powers at some stage to devalue the Naira, remove petrol subsidy and remove subsidy on flour, but we refused”. According to Buhari, “the issue was that if we get plenty of Naira, what are we going to do with it? We (had) even stopped farming and the only thing we get money from was oil and that was being paid in dollars”.

In retrospect, however, soon after he was ousted from power, the IMF came calling with a Structural Adjustment Economic Plan which they boasted would chart our course to El Dorado! Regrettably, the succeeding regime of Ibrahim Babangida, ultimately, smuggled in SAP under the guise of a home grown variant which horrifyingly debased the Naira and kick-started the odious brain drain of some of our best human assets to Europe and America and inadvertently triggered the steady descent of our economy and our national values.

Ironically, PMB is back as President, thirty years later, when the Naira exchange rate has alarmingly climbed down from less than N1=$1 in 1985 to N200/$ today; curiously, however, appropriate pricing of Naira and fuel subsidy still remain pivotal issues. There is also, growing international pressure, once again, to further devalue the Naira by between 15-20% i.e. to N230-240=$1, with the carrot of more portfolio investment inflow, despite their fickle disposition.

Nonetheless, President Buhari’s observations in the France 24 interview, may be an early reiteration of his position thirty years ago, that “devaluation would destroy the economy”.

Nevertheless, we need to ask, whether Buhari’s claim of the destructive capacity of devaluation can be substantiated. For this purpose, let us assume, for arithmetic ease, that the dollar appreciates 100% against the naira to exchange for N400=$, even if such rate of appreciation may deceptively appear presently, unrealistic; however, we must remember that the same dollar exchange rate appreciated from 50k=$ to N200=$ between 1975 and 2015, i.e. a 20,000 percent rise despite relatively increasing surplus forex earnings!

In reality, N400=$1 exchange rate will reduce the current minimum wage to less than $50 per month! Thus, the minimum wage earner, may have to work 2X10 hour shifts in a 24 hour day to earn the income required to maintain his old consumption pattern before devaluation! Similarly, all other income earners, including savings, would also lose up to 50% of the value of their incomes; while, all equity in the stock market will be reduced by 50% of their current dollar value if the dollar appreciates to N400=$1.

Incidentally, the inflationary spiral which comes with weaker Naira exchange rates will also reduce consumer demand with adverse consequences on industrial capacity utilisation, fresh direct investment and the already oppressive rate of employment. For example, while the manufacturing sector contributed more than 10% to our gross domestic product in 1986 when the Naira was N2.02=$, regrettably, however, manufacturing barely contributes less than 5% to the GDP; with today’s exchange rate of N200=$1, thus by extrapolation, a N400=$1 exchange rate will inevitably also further weaken the contribution of the industrial subsector well below 5% of GDP.

Furthermore, higher raw material costs will be induced by weaker Naira exchange rates and indisputably make “made in Nigeria” goods uncompetitive and therefore promote Nigeria as an inviting dumping ground for myriad imports.

Similarly, sustainable fiscal plans, will clearly become a challenge if dollar appreciates 100% against the current Naira rate; for example, although the annual budget size may nominally double, but such bloated budgets would barely command less than 50% of their former real values before devaluation.

Incidentally, if the dollar appreciates to N400=$1, our celebrated GDP of about $510bn with N155=$1 exchange rate, would clearly become embarrassingly devalued to just above $200bn.

Worse still, fuel price will also double beyond N200/litre (even with production from local refineries) if N400=$1, while such price hike will surely make the removal of subsidy very unpopular. Instructively, also, if fuel remains subsidized, we may need to dedicate over 20% of our annual budgets to payment of subsidy.

Evidently, from the preceding narrative, President Buhari’s phobia for Naira devaluation may be justified. However, it is difficult to see how further Naira devaluation can be avoided if low crude oil prices deplete dollar inflow while indiscriminate naira liquidity conversely remain uncaged.

The CBN’s recent notice of its intention to mop up over N800bn surplus naira values from the money market before December 2015, therefore, clearly portend potentially dark days for naira exchange rate. Furthermore, the threat from excess liquidity and inflation would similarly propel CBN’s borrowing of billions of Naira that it would simply store away as idle funds, despite the attendant oppressive interest rates of about 12-15% and the crying need of the real sector for cheap funds.

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