• The Poison In Further Naira Devaluation – Independent Newspaper Nigeria

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     By: Sir Henry Olujimi Boyo (Les Leba) first published in August 2015  

    Intro:

    This week’s republication dis­cusses the issues that arise as a result of Naira devaluation. The article presents quotes from var­ious publications that urge for devaluation despite the threat it poses to Nigeria’s economic wel­fare. The article also presents a brief historic overview and timeline for added context as it presents arguments that defend against devaluation due to the risks to society and development. The reader will find this republi­cation to be appropriate and still relevant given the current state of the economy and unchanging patterns of decision making by Nigeria’s leaders.

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    As you read through the below article taking note of previous events or rates, keep in mind its year of publication (2015), a clear indication that Nigeria’s econom­ic situation is yet to improve even after all this time.

    (See www.betternaijanow. com for this series and more articles by the Late Sir Henry Boyo)

    The Punch edition of 16th July, 2015, carried an Agency report titled “CBN has no option but to devalue Naira”; in which, Ravi Bhatia, a Director in ‘Standard and Poors’, an International Rating Agency, observed that in spite of the recent measures by the CBN, “another devaluation… possibly by more than 15 percent, is inevitable” to satisfy the expec­tations of overseas investors. The report, also noted that financial moguls, JP Morgan had earlier warned in June 2015, that it could eject Nigeria from its benchmark index by year end, “unless it re­stored liquidity to currency mar­kets to allow foreign investors to transact with minimal hurdles”.

    In another report titled “CBN may fail Hedge fund speculators’ betting on Naira devaluation”, in Business Day edition of 22/7/15, Sewa Wusa, Head of Research and Development of Sterling Cap­ital observed that “the onus lies on the CBN to devalue the Naira before it is too late”; according to Wusa, “what is actually pushing the Naira southward is the ban­ning of 41 items from the forex market”.

    Similarly, research analysts at FBN Capital Plc in the same report, also counseled that “de­valuation fears are discouraging the offshore community from re-en­try”.

    Indeed, in the Punch edition of 26/6/15, in a report, titled “Bank CEOs call for further Nai­ra devaluation”, the Group Man­aging Director of First Bank Plc, Bisi Onasanya, warned, at a CEO roundtable organized by ‘Bloomberg (an international Financial media house) and the Nigerian Stock Exchange, that “the banks could not support the Naira at the present artificial lev­el of less than N200 in the official market”, and therefore called “for further devaluation of the curren­cy”. Onasanya insisted that “the rate is not sustainable, and the lon­ger we continue to hold unto this (rate), the more we send signals to the international market that we are not serious as a country”. Besides, according to Onasanya, “the economy will be at a standstill unless there is some adjustment to the present level of the Naira.”

    Similarly, Mr. Femi Olaloku, the Executive Director, Treasury and International Business of UBA, who represented his CEO, at the roundtable talks also cho­rused that “there should be a little adjustment in the currency”…and therefore suggested that “interest rates would have to be increased for (external) funds to come in, to support our quest for diversifying our economy, broaden our income base, and restore liquidity in the forex market.”

    Indeed, some financial inter­est groups have uncharitably engaged in an open smear cam­paign to rubbish CBN’s efforts to maintain sanity in the forex market; for example, the other­wise long established and re­spected International Financial Media House, “The Economist” brazenly questioned the compe­tence of Godwin Emefiele as CBN Governor and in a venomously simplistic article titled “Nigeria’s Currency: Toothpick alert”, also ridiculed his attempt to control forex demand.

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    The overriding message, none­theless, is loud and clear; specula­tive overseas investors and their media organs are in agreement with the movers and shakers in Nigeria’s banking industry to demand further reduction in the Naira’s exchange rate beyond N199=$1; additionally, these in­terest groups want CBN to also instigate higher rates of interest within the Nigerian economy, so as to promote the profitability of speculative foreign investors.

    But the question is, what would happen to Nigeria’s economy and the social welfare of our people, if Emefiele and the CBN are in­timidated and stampeded by the clarion call of these internation­al and domestic financial hawks, to further devalue the Naira and also increase domestic rates of interest, for government borrow­ings and real sector credit?

    Well, let us examine the po­tential sectoral impact of fur­ther Naira devaluation. Indeed, Naira devaluation is probably the most potent weapon against the prosperity of Nigerians. Ni­geria’s migration from a poten­tial industrial power house with bustling social affluence, to a subdued and stumbling economy clearly began with the adoption of IMF’s Structural Adjustment Programme during Babangida’s regime: the chorus from Interna­tional Agencies, at that time, was also that falling oil prices with an unserviced debt burden and the consequent restriction of trade credit to Nigeria, were the prod­ucts of an allegedly overvalued Naira exchange rate.

    Ultimately, the overwhelming pressure from International Fi­nance Agencies, with the govern­ment’s craving for international support for another illegal mil­itary junta, precipitated serial Naira devaluations from less than N2 to over N22=$1 by 1993. This rash decapitation of the naira exchange rate pauperized Nigerians, including University professors and technocrats and tragically triggered the brain drain to more stable economies in Europe and America; sadly, this disenabling phenomenon has since gathered speed and persists till date, as beneficiaries of our individual and collective sacrific­es still abandon service to their country in preference for dollar pay packets abroad.

    Indeed, wages and salaries soon became decimated by the un­yielding devaluation, such that it became necessary for most Nige­rians, particularly civil servants to make awkward adjustments and engage in ‘extra-curricular’ activities to supplement their paltry incomes; although the im­pact of Naira devaluation may not have been the origin of cor­ruption in Nigeria, it certainly contributed to its spread as well as public apathy to the disease as more Nigerians became benefi­ciaries of the wages of corrup­tion.

    Clearly, Babangida’s decision to drastically devalue the Naira did not recognize its impact on fuel price; indeed, the notion of fuel subsidy apparently became inevitable with Naira devalua­tion. Regrettably, successive ad­ministrations have remained in denial of this relationship and the most recent devaluations from N155 to N199=$1 within 4 months also triggered another 20 percent rise in fuel prices de­spite the irony of prevailing low­er crude oil prices. Consequent­ly, additional Naira devaluation above 20 percent as demanded by overseas ‘investors’ would only stoke fuel prices and make sub­sidy removal a major challenge for Buhari’s administration; ul­timately, with such devaluation, fuel subsidy will exceed the al­leged burden of about N1tn annu­ally and account for over 20 per­cent of expenditure, if Federal budgets still remain below N5tn.

    Furthermore, an additional 20 percent devaluation, will also re­duce minimum monthly wage to about $75, down from almost $120 less than 5 years ago; indeed, with inflation consistently nearer 10 percent, the current minimum wage undeniably buys much less than was earlier possible, with an inevitable collateral reduction in consumer demand and new investment decisions.

    Consequently, if the CBN now yields to the current pressure to promote higher interest rates, the cost of government borrowings will inch closer to 20 percent to impress overseas investors; in this event, cost of funds to the real sector may also approach 30 percent to further discourage investments, reduce capacity utilization and employment op­portunities, and also turn the possibility of diversifying our economy to a mirage.

    In other words, higher interest rates will constrain job creation and also increase a debt burden that will be serviced by future generations at rates of interest which are clearly oppressive and anti-growth.

    Nonetheless, some analysts still suggest that weaker Nai­ra exchange rates will promote Nigerian exports; regrettably, Nigeria’s non-oil exports have continued to dwindle as the Nai­ra exchange rate collapsed over­time from stronger than N1=$1 to N200=$1!

    Instructively, the strategies to rescue the Naira Exchange rate has consistently related to the reduction of dollar demand; however, in view of the apparent failures, it may now be time to recognize the unceasing system­ic excess supply of Naira as the actual villain; clearly, a market with surplus Naira constantly chasing rations of dollar supply will always constrain Naira ap­preciation.

    SAVE THE NAIRA, SAVE NI­GERIANS!!!

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