There is no doubt that President Buhari’s resolve not to devalue the naira is the correct position to take in Nigeria’s circumstance. But with inflation at over 15% and rising; with manufacturers experiencing higher cost of imported raw materials; with interest rates rising as CBN battles inflation, further raising credit cost to businesses and households, Nigerians should brace up for more pains as the misery indices mount, amid purchasing power declines. It is quite clear the economy remains a huge work in progress and not anywhere out of the woods. However, not devaluing the naira will not lead Nigeria out of its present dire economic doldrums. What makes an economy thrive is its level of productivity. The government should urgently embark on policies that will reverse the current trend of low productivity; including structural reforms, to raise non-oil export forex earnings and reduce import dependency.
Nigeria is a mono-product export country. Besides crude oil, there is nothing to export to earn foreign exchange. The collapse of global crude oil prices has adversely affected Nigeria’s forex earnings and reserves; hence the calls for devaluation. The President has argued that nothing will be gained from devaluation since Nigeria is not export-driven. He has also stressed correctly that poor Nigerians will suffer more as devaluation will fuel inflation. The ultimate aim of devaluation is to make a country’s exports cheaper and imports more expensive and less attractive. Thus, trading partners will buy more of the country’s exports, while its citizens are discouraged from importation of foreign goods. In so doing, while forex earnings increase, they are also conserved. But Nigeria is import-dependent and any further devaluation will lead to massive importation of goods and depletion of foreign reserves perhaps, to a level that can hardly support further imports. Such a situation will automatically lead to hyper-inflation and aggravate poverty, civil unrest and criminality across the country.
The current rise in inflation is not about the orthodox principle where too much money chases fewer goods and services. As it were, there has not been too much money in the economy since January 2016 to chase the goods and services on the shelves. Rather, the record inflation is the inevitable reaction of the market to the relationship between the naira and the US dollar. The market is reacting to the flexible new forex regime which replaced the de-facto fixed exchange rate regime, which officially pegged the naira at N197 to the US dollar while the volatile parallel market rate reached as high as over N370 to the dollar. Nigeria, being an import-dependent country, prices in the open market are expected to rise as a result of market reaction to the exchange rate of the naira against international trading partners.
However, whether one buys foreign or locally made goods, because all are buying from the same market and expect to replenish stock at ruling market prices, increase in prices is expected when exchange rates go against the local currency. If the parallel market rate in the country was used as the basis for the measurement, the rate of increase would have been much higher. It is not a surprise that the impact has been witnessed more in food and household items – one reason Nigeria must focus on food sufficiency.
What is happening is instructive and the right lessons must be learned. First, it confirms Nigerians’ high dependence on foreign goods and services is very unhealthy for economic stability, growth and sustainability. Second, once again, it draws attention to the need for self-sufficiency, at least in food, to prevent exogenously induced economic shocks. Third, policy frameworks, irrespective of how robust they may be, can be defiled by market expectations and reactions by economic agents. It is, therefore, not a surprise that, despite the CBN’s price and exchange rate stabilizing policies and activities, prices rose by 176 basis points, returning the country to double-digit inflation, last seen in December 2012.
The high inflation and attendant exorbitant lending rates and a persistently sliding naira have given rise to a perennial hostile production environment, thereby impeding profitable private sector investments in spite of the fact that over 70% of the financial sector lending capacity remains unutilized, even as the economy is racked in the throes of excessive fiscal deficits from the mismanagement of Federation Account (FA) dollar accruals. The excessive fiscal deficit-induced decline of the naira undermines public confidence in the naira as a store of wealth while dollarization waxes strong.
According to CBN, individuals and firms in Nigeria hold US$20 billion in domiciliary dollar accounts (down from $34 billion last year). The CBN has publicly accused bureau de changes (BDCs), many of which are owned by top politicians, of waging war against the naira and the economy: this charge applies equally to all domiciliary dollar account holders. Top Buhari administration officials are deeply involved in the economy-wrecking predilection. They all derive Shylock-like gains from the persistent depreciation of the naira and its serial devaluation at the expense of the Nigerian people.
Besides foisting a largely thieving and unpatriotic and unproductive group at the helm of national affairs, the excessive fiscal deficits also paved the way for foreign direct and portfolio investors to unduly drain away the country’s forex. The sharp fall in crude oil prices and the resultant drop in forex receipts is a blessing that has lifted the veil of official deception; exposing the fruits of long years of mismanagement of the naira, the intentional dissipation of the country’s forex earnings and the sacrifice of the national interest on the altar of greed of the unpatriotic few. A country’s currency is its economy’s lifeblood: a mismanaged currency begets poor economic conditions.
The way forward is job creation. The current very high unemployment is unacceptable as it weighs adversely on the productive capacity of the nation. Nigeria should kick-start industrialization afresh with what it has abundantly but has sidelined over the years – land resources. Nigerians can be made to be gainfully engaged in agriculture. Unfortunately, once agriculture is mentioned, many look back to the days of cutlasses, hoes and peasant farming. What is being canvassed is hi-tech mechanized agriculture, with a value chain for both raw materials and value added finished products.
Government should start by developing a Nigerian economic agenda with practicable implementation framework. That is, the agenda must be built around the people so that they can take ownership of ensuring realization of the intended objectives. Attaining this agenda requires a bottom-top approach with local governments elaborating their development plans. State governments collate, fine-tune the outcomes and produce state economic development agendas, which will be submitted to the Federal Government, for final harmonization nationwide. The harmonized position at the federal level becomes the national economic agenda, to be implemented, across the country, under an easy-to-understand framework, with in-built performance milestones, measurement criteria, monitoring and feedback systems, based on short, medium and long-term deliverables.
The outcome from such indigenous developed, citizens-owned and implemented agenda, will not only enhance productivity and cause inflation rates to trend downwards, it will also impact positively on other economic and social indices, including foreign exchange, interest and unemployment rates. The Buhari administration, and indeed, all Nigerians, should appreciate the gravity of the situation and rally not only to work against further rises in inflation but to return to single digit inflation. This is very important if the declining economic and social progress must be decelerated for all Nigerians to find credible reasons to hope for a better tomorrow.