Devaluation is grossly overrated
by Simon Kolawole
On Monday, Vice-President Yemi Osinbajo might have made his boldest pitch yet for his expected presidential bid in 2023. Speaking at the administration’s midterm retreat — with President Muhammadu Buhari and Mr Godwin Emefiele, the governor of the Central Bank of Nigeria (CBN), in the room — Osinbajo appeared to have broken ranks with the government over its forex policy, faulting the demand management strategy and declaring the exchange rate as “artificially low” and “negatively affecting” the inflow of foreign exchange into the economy. The solution, he proposed, was to move “our rates” to be “reflective of the market” to encourage an inflow of “new dollars”.
The VP also raised issues with CBN’s direct intervention programmes which, he said, make it look like there is a competition between the monetary and fiscal authorities. (Interestingly, Osinbajo is the chairman of the steering committee of the Infrastructure Corporation of Nigeria Ltd, another brainchild of the CBN). His call for synergy between monetary and fiscal authorities is definitely in order and his worries over the potential room for arbitrage with multiple 💱 rates are valid. But my little concern was that these are basic house-keeping issues that the VP should not be discussing on TV. We outsiders may get the impression that this government is divided against itself.
By being publicly critical of this administration’s demand management policy — which seeks to reduce forex outflow by curtailing importation of goods not considered as essential, such as rice and private jets — Osinbajo might also have sent a strong message to certain constituencies that he is his own man. That is, “Osinbajonomics” is going to be different from “Buharinomics”. This should please the World Bank/International Monetary Fund (IMF) and some Nigerian experts who have always maintained that for the country to attract foreign capital and boost forex supply, the naira has to be floated. They argue that like water, the national currency will eventually find its level.
Osinbajo’s position was quite clear and unambiguous, despite the attempted clarification by his media team. My first response was: “Shots fired!” Buhari has spoken openly against devaluation since he came to power. Why would the VP be openly critical of a policy that clearly has the imprimatur of the president all over it? Why make such comments at a televised forum? Why shout at someone you can whisper to? Was it an error of judgment? The headlines thereafter said Osinbajo called for devaluation. No matter his intention, the ordinary interpretation on the streets would be that the vice-president was campaigning for more hardship on Nigerian masses.
Nevertheless, the clarification begged the question: is devaluation a dirty word? In my own admittedly limited knowledge of economics, there could be justifications for devaluation. Three instantly come to mind (1) to make non-commodity exports cheaper in the global markets (2) to stimulate foreign investment (3) to encourage forex inflow into the system — as the vice-president himself was trying to suggest when he said “we can’t get new dollars into the system where the exchange rate is artificially low”. That is why I still do not understand why his media team tried to take back or re-phrase his words thereafter, saying he was only talking about eliminating arbitrage.
My point of departure with the vice-president is that he committed the same error as is the wont of many Nigerian neo-liberal economists and economic analysts: preaching the gospel of “seek ye first devaluation and every other thing shall be added unto thee”. Devaluation is packaged as the ultimate solution to all forex problems. The claim is that the moment you devalue your currency, foreign investors will come rushing in with tonnes of dollars. That is rather over-optimistic. There are many things that determine forex inflow. Devaluation is just one of them. And there is a limit to what devaluation can achieve in a poorly structured economy such as ours. That is my position.
For instance, while the VP was criticising CBN’s demand management policy, he was loudly silent on the elephant in the room: fuel subsidy. It is estimated that by the end of the year, the subsidy bill will be around N2tr. This is already a very big problem for public finance, but there is another sticky dimension. Ages ago, the NNPC used to sell its share of oil to earn “new dollars” and boost our reserves. However, the corporation now operates a direct sale direct purchase (DSDP) swap system under which we give crude to foreign refineries in exchange for refined products. That means no dollar exchanges hands. And that means billions of “new dollars” will not enter CBN reserves.
To be fair to the VP, arbitrage is serious economic distortion. The difference of N160 between official and parallel rates is huge. The CBN has argued that with the stringent rules in place and the calibre of those now getting forex legitimately — such as government agencies, manufacturers and airlines, etc — the room for arbitrage has shrunk. The parallel market, the CBN insists, accounts for less than 7% of our forex transactions. Nevertheless, eradicating arbitrage is a very simple “procedure”: just devalue the naira from N412/$ to N572/$. If supply issues persist, devalue again. But be assured that if rising cost of living leads to another #EndSARS uprising, our experts will be nowhere to be found.
To what do I liken this gospel of devaluation? It is like constantly repainting a commercial bus to make it attractive to passengers, whereas the seats are tattered, the air conditioning is broken and the engine is failing. We can keep devaluing the naira hoping to attract “new dollars” but our fundamental structural problems remain. While the value of the local currency may be a factor in attracting foreign investment, it is neither the sole nor the most important determinant. Capitalists also look critically at country risks. If the value of local currency was the magic pill, Zimbabwe and Venezuela would be the biggest recipients of “new dollars”. There are surely other factors at play.
In a country where separatists, kidnappers, herders, bandits and terrorists are having a ball, devaluation cannot be the tonic for “new dollars”. We have a country where there appears to be an official policy to muscle out some investors. The attorney-general just woke up one morning and said he dreamt that MTN evaded tax and immediately slammed a bill of $2bn on them. The information minister has been working overtime trying to chase Multichoice out of Nigeria. Potential foreign investors see all these things. They are aware of the hostile business environment, the frustrating legal system, the chaotic ports and the bureaucracy. But we somehow think devaluation is the cure.
Without a doubt, devaluation can temporarily relieve some symptoms and bring some inflow — with “temporarily” being the operative word. As a matter of fact, the CBN has been adjusting the exchange rate since 2016 while throwing even the kitchen sink to save the naira from drowning. The rate was N197/$ six years ago and is now N412/$. But, truth be told, devaluation as a tool of attracting foreign exchange is not sustainable, neither is it a sure pathway to economic development. The larger issue is: how do we attract multiple sources of forex into the economy so that we are not hopelessly tied to oil revenues and devaluation? How can we export more?
The fundamental flaws of our economy have always been there — papered over by cycles of oil boom. When oil revenues are high, we go binging. When oil revenues are low, we go begging. When oil prices crashed in the early 1980s, we faced our first major challenge in the oil era. It was a mess. Inflation went through the roof. Our reserves were so down we were no longer creditworthy to import essential commodities. We had to queue up to buy rice and tin milk. Civil servants were being owed salaries for up to seven months. Things were so bad that after the military took power, it was a major event on NTA Network News anytime workers were going to receive one-month pay cheque.
Under our current circumstances, the CBN has an option: it can actually fold its arms and watch the country go up in flames as government finances plummet and fiscal policies remain in disarray. Civil servants will be owed salaries for months and thousands will be retrenched. Forex demand will keep ballooning. The CBN governor will just be devaluing the naira every Monday to encourage “new dollars” and eliminate arbitrage. Easy-peasy! But by the time we reach N5000/$, our problems will still remain unsolved — because our economic structure is warped and the fundamentals are not solid. Panadol can never treat high blood pressure, no matter the relief it gives for a migraine.
I would love to be CBN governor if oil price is $80/barrel, production is over 2mb/d, revenues are in excess of $4bn monthly, reserves are $60bn, forex demand is $2bn, and the fiscal authorities are playing their part. I would just be sleeping and snoring. The real challenge comes when revenues are low and fiscal policies are all over the place. That is when everybody begins to see our nakedness. That is when it becomes more obvious that the foundations of our economy are fickle and feeble. There is no way devaluation can take the place of a proper restructuring of the economy. We need law and order, infrastructure and security for a conducive and productive investment climate.
We say we want to diversify exports to attract more non-oil forex inflow, but it is easier for a Nigerian entrepreneur to go to the moon than to export a bag of garlic through our shambolic ports. These are issues obstructing our progress. Osinbajo oversees the presidential committee on ease of doing business and should help tackle these hinderances. Really, devaluation is the easiest thing for any CBN governor to do. But with our structural and infrastructural deficiencies, it will not guarantee capital inflows. Instead, it can lead to more misery for an economy that relies heavily on imports, including food and intermediate goods. We cannot devalue our way to economic prosperity.
AND FOUR OTHER THINGS
Every time, we say we want more investments in the Nigeria. Every time, we do something that promotes the exactly opposite. According to Order 3 Rule 6 of the Tax Appeal Tribunal (Procedure) rules approved by the ministry of finance in June 2021, if you disagree with a tax assessment by the Federal Inland Revenue Service (FIRS), you have to first pay 50% of the amount before you can dispute it. This is directly in conflict with Paragraph 15(7) of the FIRS Act which allows the appellant to pay the lower amount between 50% of tax paid the previous year and the current assessment. The new rule opens up tax payers to blackmail and extortion and will hurt businesses. Dissonance.
The federal government has given two options to its workers: be vaccinated against COVID-19 or come with a negative test result, otherwise you can’t go to office from December 1. This comes with many dangers. Some will buy vaccination cards just to obey the directive. The anti-vax propaganda will grow more wings as every new death will be blamed on the vaccine. More so, government machinery may grind to a halt if unvaccinated key officers can’t come to work. Even though I am double-vaccinated, I am not in support of the new rule. Vaccination is an emotional issue for millions of people, most of whom have been brainwashed, so I prefer persuasion to coercion. Caution.
There has been excitement everywhere over the decision of the senate to allow electronic transmission of election results as well as direct primaries in which every member of a party will vote to pick candidates. However, I am sorry to say this: didn’t we say PVC would finally put an end to rigging in Nigeria? Why are we still worried about rigging six years after? You see, we always think the problem is the system. I keep saying the problem is the operators of the system. The problem is Nigerians. If Nigerians don’t change, Nigeria won’t change. I must admit, though, that I am enjoying the extremely optimistic public reaction. Unfortunately, it is these expectations that kill us. Gullible.
Crude oil price hit a three-year high of $85/barrel on Friday. Bad news for Nigeria. For one, our subsidy bill just went up, yet again. So, expect more deductions for “under recovery” by the Nigerian National Petroleum Corporation (NNPC) as we continue to use our forex to import millions of petrol for the rest of West Africa. Also, we are currently producing 1.25mb/d, way below our export quota — we are short by 360,000b/d. That is a lot of money we are losing every day. Our gain from price rise will, therefore, be marginal. What’s more, businesses that depend on diesel will now pay higher costs. Don’t say I am unpatriotic but I now prefer crude oil at $50/barrel or less. Beneficial.