Naira, Distortions, Devaluation and De-Dollarisation, By Simbo Olorunfemi

For almost four decades, Nigeria has been going round in circles, trapped in the wilderness of a Structural Adjustment Programme (SAP), which was supposed to take her to the Promised Land, but is obviously yet to, and which the proponents will argue is our fault. Nigeria remains marooned in no man’s land, sapped of the little she had before SAP, and left with a misaligned economic structure.

Time and again, people look back, wondering at what might have been, unsure of how to get out of where Nigeria has found herself, with the added pressure of an exploding population, depleting income from a wasting asset, a huge infrastructure gap, youth unemployment and a global economic order different from what she had accustomed herself to, alongside the inability of the elite to drive a consensus around what will move the country forward.

In all these years, one administration after the other, the country has largely remained betrothed to the philosophical template of SAP, forced upon her by the free market apostles, with the boom and bust cycles occasioned by fluctuations in international oil prices being the trigger between the two seasons, even if some economic managers in the past appropriated momentary gains to their prowess.

The only departure, slight as that has been, is the current government, with its social protection and investment programmes and temporary closure of land borders, policies that left the free marketers fuming. It has been same of same and when things go awry, these experts pull off the ladder, arguing that things are only that way because the government has not been bold to withdraw subsidies, implement supposed cost-reflective tariffs or implement some other anti-social programmes.

It is always that the government did not dip the knife deep enough in the back of the people. But how far do we go, before we query if this might just be a journey gone astray? How deep does the knife have to go before we explore alternative routes out of the wilderness?

Five long years back, I was in a debate with one of the free-market economists who not only sees the market as the magic bullet but calls those with alternative viewpoints to his as a danger to the wellbeing of the country. The debate centred on the devaluation of the naira. That was in January 2016 when the economy was in dire straits, and the naira was officially exchanging at about N200 to $1, and the country was just about to slide into recession. The government was being hounded by the experts for what they labelled a ‘command and control’ approach. Like my economist-friend, they argued that the naira needed to be further devalued.

So, I pointedly asked what the ideal exchange rate was in their book and what benefits would come with it. This was his response: “For example now, if Nigerian devalues or fixes naira at N320 to $1, many imported finished goods and goods made with imported inputs will become unaffordable. Banks would be willing to lend to businesses who come up with plans to make substitutes, especially if they know Nigeria/the government can credibly maintain this rate. In fact when oil export prices recovers, it would be smart of the FGN/CBN to maintain the $1-N320 rate to keep protecting local investment.”

This appeared straightforward enough, but I struggled to make sense of the prescription. So, he enlisted the assistance of Samuel Diminas to “explain it in way that’s more intelligible: African countries, laid waste by bad and incompetent leaders across all sectors of the society, are quick to cook up conspiracy theories blaming the West, IMF, World Bank etc. for their problems. They sell to the gullible public the idea that IMF/World Bank/the West wants them to devalue their currency, eliminate subsidies etc. The issue of international development funds requesting for currency devaluation of subsidised and artificially pegged currencies is true, this position is a no-brainer even amongst sensible and intelligent citizens of these countries with a basic understanding of economics…You can’t be driving around in very long convoys of top of the range Beemers and Benzos, flying around with fleets of PJs (private jets), subsidising the local currency at exorbitant and unsustainable rates, subsidising imported fuel consumption, proposing free feeding for school children etc. while begging for funding to achieve and maintain that which you can ill-afford. What makes this even more ludicrous is that these expenditures are the major sources of intractable fraud and mismanagement…What does the IMF want from Nigeria, for example? Absolutely nothing.

A barrel of palm oil costs more than a barrel of crude oil today, the 2015 annual budget of Chevron ($35 billion) is larger than the annual budget of Nigeria for the same period. Apple has over $100 billion in stashed offshore cash, compared to Nigeria’s external reserves of less than $30 billion…It is important to put things in perspective, if you are broke, and you go begging to borrow money to spend on subsidies, your ‘banker’ may point out that it doesn’t make sense to lend money to sponsor the subsidy of the local currency, share food in schools and buy more BMWs, at a time when earnings have dropped by more than 60% of preceding year.”

So I reached out to Rick Rowden for a response: “In fact, Africa has had difficulty industrialising because its leaders drank the Kool-Aid of free markets and free trade proffered by the World Bank, the IMF, and the best university economics departments over the last 30 years. Of particular harm has been the insistence that African countries forswear the use of industrial policies such as temporary trade protection, subsidised credit, preferential taxes, and publically supported R&D. As a result, African countries have abandoned these key tools, which they could have used to build up their domestic manufacturing sectors. Free market advocates told African countries that such “state intervention” in the economy usually does more harm than good, because governments shouldn’t be in the business of trying to “pick winners,” and that this is best left to the market. Africans were told to simply privatise, liberalise, deregulate, and get the so-called economic fundamentals right. The free market would take care of the rest. But this advice neglects the actual history of how rich countries themselves have effectively used industrial policies for 400 years, beginning with the U.K. and Europe and ending with the “four tigers” of East Asia and China. This inconvenient history contradicted free market maxims and so has been largely stripped from the economics curriculum in most universities.”

He shot back: “… Yes China, Taiwan etc. intervened by keeping the value of their currencies low so they could discourage imports and make their exports cheaper for foreigners including Nigerians. At various episodes in our economic history, what did we do with high value naira? Buy Uncle Bens rice – I was surprised this is so expensive no one buys when living in England. Buy Horlicks, go to Dubai and London, buy Hyundais and Kia and Honda cars in thousands and engage in pretend manufacturing – 70% of the inputs are imports.”

I responded thus: “The understanding available to me does not tally with the one you have shared. It was in fact devaluation, as advised by IMF and executed by IBB that led to the collapse of manufacturing, which Nigeria has never recovered from. Inputs for local industries became more expensive, outputs non-competitive, purchasing power eroded, while foreign products came in through smuggling and unfavourable international trade agreements and that is how our industrial estates became ghost towns. The argument you make here was made in 1985 and we know where it got us. Exchange rate does impact on manufacturing, as affordability of products pushed out comes in. What products will we be producing with the poor infrastructure, power and all that will be competitive? I do not see how N320/$1 protects local investment. It will be our ruin… How will the devaluation of the naira simply induce the production of local alternatives, when the conditions on the ground simply do not support such? How does a devalued naira help? How will locally-produced goods become cheaper when the costs of the importation of machinery and other inputs would have gone up? “

I reminded him of the position by another economist, ‘Tope Fasua, that “devaluation as a silver bullet is something recommended by those who hold a people in disdain and know nothing about their economy… and couldn’t care less, and it NEVER works”, but he would not have it. Another economist, Kehinde Emoruwa weighed in, “that devaluation is not a viable option for a mono-cultural and import dependent economy like ours! While it works for the industrialised countries with (a) variety of manufactured goods to sell to the rest of the world (export dependent) ours’ is import dependent (which is an opposite of the latter). Devaluation works basically, in dual ways, thus: it makes your locally made products cheaper and competitive against those of foreign counterparts/competitors. Thus, the domestic consumers (finds) locally made goods cheaper and the imported ones more expensive. Hence, demand favours the locally made goods. It worked for Britain in 1967 (now for me archaic) because Britons then turned to British made goods as against made in Germany or France or Spain etc. But in our own case we don’t have the industrial base, we are not producing (for export), we lack the capacity to be competitive, today we are import dependent. Devaluation will only translate into hyper-inflation.”

Abubakar Gambo asked: “You want to develop industries? Do what the developed countries did when they were at our current stage. Shamelessly protect local industries by imposing heavy tariffs on imports and use the proceeds to subsidise the industries until they become strong enough to stand on their own. Samsung had to spend 27 years before breaking even, now they’re the biggest electronics company in the world.” But our friend would not have it. To him, a strong naira would only encourage wasteful spending on imports.

But the final word was that of Oyeyemi Oliyide, who warned that our friend’s “proposal will see the local companies using their borrowed money from our local banks to purchase their manufacturing tools and resources at the exchange rate of N320 to $1, which will then shoot up the cost of production/manufacturing and then make them sell at almost the amount they would have imported the finished goods. Then the cycle continues and we will have to devalue further… maybe N806 to $1 as I saw in a dream (a) few months ago. God help us ooo… We need to stand against devaluation as advised by the economists to whom we should not leave the matter of our economy.”

This was January 2016 and by August, the rate went as high as N348/$1, and by December, it was N300/$1. Of course, the economists are quick to remind us of ceteris paribus, but the benefits that were supposed to come with exchange rate of N320 to $1 were nowhere to be found. Rather, the Central Bank of Nigeria (CBN) has been under tremendous pressure from the same experts, querying the wisdom in her stout defence of the currency at around N360/$1 from 2018, until the recent slide being witnessed. Nigeria has not witnessed the gains the experts tell us will accrue from a devalued naira, rather local production has continued to suffer, yet they insist the way out is further devaluation.

The interesting thing is that some of the commentary around the value of the naira is actually misguided and misdirected. The Nigerian mind has been so dollarised that there is an obsession with the currency even within quarters whose livelihoods have little or no bearing to it. The Nigerian mind has been so dollarised that some imagine that the only benchmark for assessing the state of affairs in the nation is the exchange rate. It is a narrow, reductionist and simplistic thinking, as many who would do so are oblivious of the mechanics behind the exchange rate. Indeed, the dollarisation of thought is largely elitist; that appropriation of a narrow window-view as reality for the people, whereas it might be far off. But that has been latched on to by the aspirational class who now engage in dollar talk, as well.

Yet, for the majority of Nigerians, their livelihoods are not founded around the dollar or the exchange rate. The single largest contributor to the nation’s GDP is agriculture and the dollar input in that sector is less than significant. Agriculture and trade accounts for more than 40 per cent of the country’s GDP. Indeed, the Nigerian economy, as imagined by the elite and a lot of public commentary, differs from what it is in reality. Nigeria is largely a service economy, which is mostly informal, with a lot of activities therein not properly captured. There is always so much talk about diversification of the economy, whereas in reality, the economy is actually diversified. It is diversified across over 40 sectors. What is not sufficiently diversified is government’s revenue source, not the economy. And even on that, the non-oil sector is now weighing in more, with the highest contribution in decades, coming in 2019. The GDP is a better representation of Nigeria than its revenue portfolio.

It is amusing that some think the question of exchange rate is a recent phenomenon, for which the current government should carry the can. The battle over which way to go between a floating exchange rate and a fixed exchange rate, and other variations in between, is one that has been with us for long. The surge in oil revenue between 1979 and 85 had “elicited such profligacy that real income began to decline rapidly, as much as 60 percent between 1980 and 1983, when Nigeria recorded a negative growth rate of -6.7 percent and a budget deficit rising to 13 percent of GDP”, according to Claude Ake. The debate became intense in 1985 under General Babangida with the bid for a loan from the International Monetary Fund (IMF), which Nigerians protested against.

The government designed the Structural Adjust programme (SAP), which “proposed trade liberalisation; an import levy as a disincentive to imports; incentives for exports, especially non-oil exports; a reduction of the petroleum subsidy; privatisation; and a balanced budget, (but) the World Bank and IMF rejected this program, because it did not include the devaluation of the naira. The regime eventually adopted a revised SAP to meet that objection. The major elements of the new adjustment program were implemented between July 1986 and December 1987, the most important being exchange-rate adjustment. A floating exchange-rate system consisting of two tiers was established.”

That birthed the battle between those who think the way to go is to devalue currency, privatise public assets, take funding away from social services, etc., and those of us who advocate growing the economy from the bottom, thinking local, energising the informal sector and funding social services – education and health – to improve the quality of life. This has been on for almost 40 years.

The deficiencies of the Nigerian economy and the desired objectives for rectification have hardly ever changed. When the Babangida administration launched the Structural Adjustment Programme in 1986, the objectives were to restore a healthy balance of payments; diversify the productive base of the economy; minimise dependence on oil and imported inputs; alter and realign aggregate domestic expenditure with production and consumption patterns; and push the economy onto the path of non-inflationary and sustainable growth and development. While a World Bank study in the immediate 1990s attributed a positive impact on aggregate output to SAP, it was also evident from the same study that manufacturing was adversely affected, even with growth at an average of 5.1 per cent over the adjustment period 1986-91. SAP heralded the shift towards a service economy. As observed by Claude Ake: “While the contribution of manufacturing to GDP was stagnating, that of finance and insurance rose from 3.11 percent in 1986 to 8.7 percent in 1991…Non-oil exports did not increase markedly as had been expected. In 1992 non-oil exports accounted for a negligible 3.6 percent of export earnings, while the share of oil was 77.3 percent…The indebtedness of Nigeria has increased over the adjustment period. The debt stock, which was only $18.9 billion before the SAP period, had risen to $33.2 billion by 1991.”
Yet, the experts have hardly changed their course of action over time, and the solution has remained the same. They have been consistent in their argument that the naira is overvalued and have continued to push for devaluation.

The Structural Adjustment Programme (SAP) came up with the Second-tier Foreign Exchange Market (SFEM) and later Foreign Exchange Market to address this. The results were soon evident. From an exchange rate of N1 to $1 at the beginning of 1989, by the end of the year, it was already N4/$1. Ernest Shonekan, the most prominent voice in the private sector at the time, had this to say about the situation: “Given the high dependence of the Nigerian economy on imports generally – and we sometimes tend to forget this bottom-line situation – the adjustment of the naira exchange value, although desirable, has resulted in devastating impact on cost of business. Today, the catalogue of woes for industry and commerce include high working capital, long lead time for imports, sharply reduced margins, collapsed volume and depressed turnover. Resulting from all of this, the start-up cost of new business has escalated with unrewardingly long payback period. This will definitely not induce additional investment and it is therefore likely to delay the resumption of growth.”

That was 1987, but Chief Shonekan might as well have been writing in 2017, 30 years later, and the experts are still saying the same thing: “devalue further, place the country’s fate in the hands of the market.” If the challenge has always been that of a non-productive economy, which is import-dependent, with the source of public revenue tied to one product whose price fluctuates around all sorts of variables beyond control, how do you envisage attaining stability in the exchange rate without intervention? How does a devalued local currency promote growth and development, with the exchange rate impacting negatively on the cost of local products and land borders left ajar to foreign products that come in on the back of misused ECOWAS protocols or through barefaced smuggling?

The Central Bank of Nigeria (CBN) must be wondering what to do to achieve its objectives to “preserve the value of the domestic currency, maintain a favourable external reserves position and ensure external balance without compromising the need for internal balance and the overall goal of macroeconomic stability.” All sorts have been thrown in – SFEM, FEM, IFEM, AFEM, complete floating, Dutch auction system (DAS), guided deregulation. It has been difficult achieving or sustaining set objectives.

Just like other developing countries, Nigeria followed the trend of accumulating foreign exchange reserves to ensure that a government or its agency has backup funds, if their national currency rapidly devalues. The reserves are those external assets that are readily available to and controlled by a country’s monetary authorities. They comprise foreign currencies, other assets denominated in foreign currencies, gold reserves, special drawing rights (SDRs) and IMF reserve positions. They are employed for “direct financing of international payments imbalances or for indirect regulation of the magnitude of such imbalances via intervention in foreign exchange markets in order to affect the exchange rate of the country’s currency”. While the rule of thumb traditionally was for these countries to hold enough reserves to be able to take care of at least three months of imports, the “Guidotti rule” has since displaced that, with the guideline being that countries should hold enough reserves to cover all foreign debt that is short-term or maturing within one year.

While Nigeria has steadily grown its reserves over the years – from $3.4 billion in 1996 to as high as $62.08 in 2008, fluctuating between $30 and $45 billion since then, it is difficult to see the correlation between that and a stronger naira, even if the debt stock has also risen within the same period. But given the ration of short term debt to reserves that has hovered around the optimal level, other benefits such as increase in foreign portfolio investment and appreciation of the currency ought to be noticeable, barring other variables. But it would appear that there are some unknown or unacknowledged variables that would always find a way, making the objective of attaining a fair value for the naira, following this route, possibly a wild goose chase.

Yet, it appears to be the only path our experts are ready to follow. We keep looking outward when we should be looking inwards. Some talk about keeping the land borders shut, as they have been and curtail the importation of non-essentials. How do you sell that? The elites and their vuvuzelas are still up in arms over the RESTRICTION on rice importation. CBN took off 41 non-essential items off the official window for forex; some labelled it a ban and condemned it. There was outcry over the recent restriction on the importation of maize. People want an exchange rate of N1/$1 but they want to eat Basmati rice, bring water in from Mexico, wine from France and go on holiday all over the world, but cannot connect the dots.

But to then proceed on the premise that the import-dependent appetite can only be cured through devaluation of the currency, as had been argued by our friend, is to prescribe amiss. Those accustomed to the wasteful spending are unlikely to curb it, simply because the price shoots up, as this parasitic leisure class are given more to conspicuous consumption and driven by what Veblen refers to as “invidious comparison” and “pecuniary emulation”, rather than rational choices. The answer to that is to slap on them the luxury tax, not force Nigerians to swallow the bitter pill for what only ails a minuscule segment, while pushing the currency down the cliff.

Our experts are insistent in their argument for the market, but Claude Ake disagrees with that: “The market cannot be and never has been a strategy of economic growth, even in the experience of the North. The North, exercising the prerogative of victory in the long-drawn-out contest of paradigms of society, has reinvented development as an ideological emblem. The history of economic growth in the North has been sanitized and recast as a celebration of the North. The rigors of primitive accumulation and the process of proletarianization have been glossed over, as have the contradictions of the market that bred statism and the welfare state, without which capitalism may well have collapsed. Also forgotten is colonialism and its contribution to economic development. What now exists is a simplified view of economic development, which posits that underdevelopment was initially universal and that every country can grow out of it by following policies that are known, tested, and unfailing. Thus the late starters are saddled with the singular burden of carrying out an abstract and misleading conception of development that does not reflect the realities of their own history or even the histories of the North. Because Africa, in particular, is guided by fictitious concepts and is working with blunt instruments, its social transformation has been unduly difficult.”

Professor Adebayo Adedeji submitted that “the imposition of the policy of liberalisation on an economy that is very uncompetitive is counter-productive. Measures to make the economy competitive should first be put in place as a prerequisite to liberalisation and marketisation.”

In 1967, the American dollar became Nigeria’s primary foreign reserve currency, and it has been so till date. The dollarisation of the international economy is one of the gains of America’s soft power, as these countries, including Nigeria, actually ‘subsidise’ the American economy directly through seignorage and indirectly through the sterilisation effect which enables it to run up deficits without the need for corresponding monetary actions. Beyond the subsidy is the domination of the minds here by a foreign currency. I doubt that there is any country in the world where the exchange rate in the parallel market is given as much publicity as we see in Nigeria, that it even drives thought and conversation, even in formal circles.

We need to first shut the world out of our minds, away from the dollar, to be able to do anything meaningful at home. We need to de-dollarise our minds. There is a lot that needs to be done in terms of the de-dollarisation of the economy but more importantly, our psyche. There is a lot of room for internal growth with little or no external support. We need a refocus and greater discipline in all facets of national life, as Ernest Shonekan argued that “successful economic management requires discipline.” Indeed, “the more disciplined a society as a whole becomes, the more hardworking and efficient it becomes, and the more efficient its economy also becomes,” Professor Adebayo Adedeji posited. The present sustenance of Nigeria and her immediate future lies with a disciplined unlocking of the potentials embedded in the peculiarities of her largely informal economy to design a bottom-up unique pathway to economic development.

* 15. 09. 2021

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