Against the backdrop of call
by a top official of the European Union to devalue the naira, opinions
favour increased productivity, not devaluation as the route out of the
current recession,
Arguably, owing to the size of the
nation’s economy which was adjudged the largest on the continent before
it slipped into the current recession, it will continue to attract
interest from both within the country and beyond. It is therefore not
surprising that different shades of solutions bordering on how to get
the economy back to buoyancy are being bandied by different economy
experts and analysts alike.
It is against the backdrop that
the European Union (EU) advised that Nigeria to further devalue its
currency. Even though the call was premised on the need to get the
economy out of recession and back on its feet, the call, expectedly
generated discourse among stakeholders.
On the one hand, some analysts see the
call as ill-timed, more so coming months after the monetary authorities
yielded to pressure and adopted a market determined exchange as against
the previous regime of regulated foreign exchange market. Besides, many
do not see the devaluation as capable of triggering inflow of FX into
the economy in isolation of other hindrances to doing business including
ability to repatriate investors’ profit. These and, other factors make
the call unwelcome among some analysts, who contended that currency
devaluation is not the solution to the economic challenges facing the
country.
Devaluation
The call to further devalue the Naira
was coming just after the World Bank called for more reforms from the
country before it could access further loans from the body.
However, the call by the EU was made by
one of its officials, Phillip Amato. According to him, recession could
not be addressed with traditional development tools adding that the
country should improve on security in the North-east and the country’s
oil rich Niger Delta.
Amato stated that, “To come out of
recession, the country has to take brave decisions, regardless of how
unpopular they may be such as fully and effectively devaluing the Naira.
“Devaluing the Naira is a measure, which
will finally reassure investors and attract new capitals to the
country. At the same time, it will further reduce imports, thereby
removing artificial forex restrictions, and removing any potential waste
of scarce resources such as the fuel subsidy.
“Improving security (in the North-east
and Niger Delta) and ease of doing business are also key factors on
which the government must urgently work to re-launch the economy,’’ he
said.
Amato, who is in the country as part of
the EU delegation on aid for trade particularly how to improve the
quality of Nigerian products to comply with international standards and
be more competitive in the global market added that, “Nigeria also
needed to take advantage of the devaluation of its currency by
diversifying its sources of foreign exchange revenue and this mainly
through boosting its non-oil exports.
Experts React
But Amato’s call does not appear to sit
well with some analysts, who spoke to THISDAY. Besides, the call was
coming on the heels of optimism that the country may have begun to crawl
out of the recession given the statement credited to the minister of
Finance in which she stated that both monetary and fiscal policies that
were initiated have begun to yield result.
Director-General, West African Institute
for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, said
he was not in support of the EU’s advice that the Naira be devalued.
According to him, “the adverse impact of the depreciation of the Naira
will not be different with devaluation.”
Ekpo explained that, “Nigeria’s major
export is crude petroleum whose price and output she has no control.
Structural reforms are needed for the Nigerian economy to be productive
and earn foreign exchange from other sources than crude oil success.”
Pointing out that, “The EU wants the
current exchange rate to be aligned with the Parallel rate,” he argued
that, “This will further worsen the present economic recession.”
He wondered why EU would “recommend
devaluation in a recession with rising unemployment.” “Inflation would
become run-away. There is high demand for forex. The problem is that of
supply. If depreciation/devaluation continues unabated, the value of the
local currency would be totally useless and Nigeria may become
Zimbabwe,” he pointed out.
Ekpo therefore urged “the government to
ignore the advice of the EU, borrow externally and domestically (avoid
Euro bonds) to spend on capital projects as well as assist states to pay
back-log of salaries.”
“In addition, it is crucial to reduce
expenditures especially the cost of governance. These measures would
minimize the effects of a recessionary economy,” he added.
Similarly, Managing Director and Chief
Economist, Africa Global Research, Standard Chartered Bank, Razia Khan,
contended that the issue with the Naira was “no longer one of
devaluation as the currency has already weakened a great deal. “
“A great number of market participants –
Nigerian as well as foreign – are calling instead for the currency
regime to be properly liberalised, as was promised in May/ June 2016.”
Khan , nevertheless, lamented the
prevailing flexible forex regime, saying “While encouraging tentative
steps were put in place, the process did not go far enough.” According
to her, “At the moment it looks as though the interbank rate is being
managed to prevent a market-determined FX rate from emerging. This means
that the shortage of FX is back, and with it all the negative
implications for the Nigerian economy, which now risks an outright
contraction in 2016.”
All of this, she expressed optimism, could be avoided with a properly functioning FX rate.
So, the renowned economist stressed
that, “It is wrong to speak of calls for devaluation.” “No one is
calling for naira devaluation. There are however significant calls for a
more freely determined currency, as Nigeria does not have the reserves
to sustain a fixed FX rate regime without doing great damage to the
underlying economy, by squeezing demand,” she added.
Aligning with the Ekpo and Khan, a
research Analyst with a foremost economy advocacy firm based in Lagos,
Rotimi Oyelere, believed devaluing the naira would not work. He recalled
that the country devalued its currency when it adopted Structural
Adjustment Programme (SAP) and the country was no better even after.
It is instructive that Nigeria has never
been in short suggestions on how to get the economy back on track. A
popular opinion on how to get quick-wins and get the economy out of
recession as quick as possible include suggestions that government must
do the needful by addressing critical and fundamental issues including
ease of doing business. Some analysts, including Oyelere opined that the
economy plunged into recession because the government failed to
articulate its economy policies early enough to garner investor
confidence that was guaranteed under the previous administration.
“It was lack of confidence, opaque
policy directions and misalignment between the fiscal and monetary
agents that led us here,” Oyelere argued.
According to him, “I definitely disagree
with the EU on this. Western institutions will always demand for
conditions that will primarily serve their interest or that of their
firms. This is based on their capitalist approach to economic issues
which has further developed the underdevelopment of developing nations.
“If we look at the Washington consensus
that resulted in Structural Adjustment Programme (SAP), nothing has
really changed. The question we should ask ourselves is why has
development eluded us almost 30 years after the implementation of SAP?
“Nigeria and Nigerians have nothing to
gain at least for now by further devaluing the currency. From my
observation, increase in general price level (inflation) is highly
driven by exchange rate because of the high importation of our
consumption commodities and even import content of industrial products
we do here. When naira falls, you see instantaneous increase in prices
of commodities, but will never see corresponding proportional fall in
prices when naira appreciate. This is because price is sticky downward,
that is what must be understood.”
Oyelere further noted: “Any economy that
depends solely on import, especially consumption goods, has nothing to
benefit by devaluing its currency. We have devalued and nothing has
really changed and nothing will change except we address the structural
factors. Others may want to argue that depreciation will facilitate
consumption switch from imported items to home-grown commodities but we
must note that our current production level cannot meet the demand even
of most agricultural produce like rice, sugar, wheat, fish, even tomato,
etc. So we must fill the gaps by importing. Hence, redirecting our
path, government should communicate confidence and security of
investment. The media team of the president, CBN and finance ministry
should speak with one voice on the economy and economic matters.”
Another analyst and Director of Centre
for Enterprise Development at the Pan African University, Mr. Peter
Bankole, noted that devaluation of the naira is not the solution to the
nation’s economic woes.
“What is very important is the
productivity of Nigeria as a country” he stated, explaining that, “if
we’re not productive as a nation even when we devalue the naira we
continue to depend on external factors.”
“So the real route out is a combination
of so many things and in some cases devaluation could be part of it but
if you take devaluation in isolation then that is a challenge because
we’re not attacking the fundamental issue that should be structured,” he
noted.
Continuing, he stated: “One, we need to
improve our productive capacity; we’re not producing enough. We’re not
even producing what we consume. Take rice for example, if we’re able to
produce the amount of rice that we eat we’re going to save a lot of
money from import.
Two, if we’re able to produce the
petroleum products that we consume we will save a lot of money. Those
two items alone will reduce bills significantly and so it is not a
question of devaluation; that becomes secondary. Let us address the
productive sector first and devaluation can be another issue.”
However, and Executive Director,
Corporate Finance, BGL Capital Ltd, Femi Ademola, said the possibility
of a future devaluation was high since the spread between the interbank
market and parallel market rates had continued to increase.
“In the case of Nigeria, it is arguable
that the CBN has taken steps to combat the recession especially with the
introduction of the flexible exchange rate.
However, the mode of its implementation
especially with the visible hands of intervention by the CBN left the
impact of the policy lower than expected. This has led to the increasing
spread between the parallel market and interbank market. This also
makes the possibility of a future devaluation of the currency to be
high,” Ademola explained
According to him, “The significant
spread between the markets is a serious concern to investors and would
reduce the attractiveness of the country to them. It would be necessary
for the CBN to allow the interbank market to accommodate all operators
in the foreign exchange market and allow all importers to access the
market.”
“Since it would increase the demand for
foreign exchange, it may also lead to the decline in the value of the
Naira against the US Dollar; effectively devaluing the currency.”
The EU may already be seeing this end result; hence the advice, he pointed out.
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