OUTSIDE THE BOX By ALEX OTTI
I like corn and pear and when pear is out of season I manage with coconut. A few days ago, I went to buy my corn and coconut from under one of the bridges in Lagos. I noticed that the price has more than doubled from what I used to pay. The argument that ensued between Mama Sikira, my usual supplier (who was happy to me see after a long time) and I was quite interesting. Mama Sikira insisted that the price of corn had doubled because of the price of dollar. She lectured that the last time I came dollar was exchanging for less than N170 and now, when you see it, you are made to pay over N350 per dollar. My shock was not only that Mama Sikira knew the rate, but what the heck has the exchange rate got to do with corn and coconut, two items that have no foreign component? That was my business as she had finished with me, her attitude seemed to have suggested. It was either I paid the new price or I tried elsewhere. As I had my corn in the car, I reflected on the discussion with Mama Sikira, it occurred to me that while there may not be any foreign content in the corn, Mama Sikira must buy something in the market that is imported or have a foreign input, whose price may have increased with the rising exchange rate. I believe that is probably why President Muhammadu Buhari has remained adamant in refusing to devalue the naira. In the course of this write up, we shall examine how far we can go with the “no devaluation” position.
I must, however, quickly add that as we prepare for the confab on the economy recommended by my very senior friend, the ever erudite Prof. Wole Soyinka, we should not forget to invite Mama Sikira and her ilk. There has been so much debate in the media about what to do to the naira. While the Central Bank of Nigeria (CBN) has pegged its rate at about N197 to the dollar, the black market which people believe is the real market went beyond N400 to the dollar before it started coming down about two weeks ago. Clearly, CBN has been unable to bridge the gap between the two markets. In an attempt to stem the tide, CBN had come out with a list of 41 items that could no longer be imported with funds sourced from the official foreign exchange market. Some people had criticised the CBN for introducing something akin to import licensing. CBN on its part had defended its action by insisting that it did not ban the importation of the items as importers had a choice of financing through other sources.
Studies have shown that the prices of such items had increased as foreign exchange rates continued to go up. Our economy has been challenged by dwindling oil prices from an all time high of over $100 per barrel in the last one year, to the present $30 per barrel. Given that the bulk of our foreign exchange earnings come from oil, it follows that our receipts would go down in the same proportion. Unfortunately, we failed to save when oil prices were high, choosing to spend all and even borrow. We also drew down on the excess crude account. Our foreign reserves had also gone below $30 billion posing a serious risk of depletion. As the reserves were going down, CBN went into a panic mode and started restricting foreign currency sales to banks. This sent the black market on a spiral, going beyond the N400 per dollar mark. Even at that, availability became a challenge as demand gap remained wide in this market also. In the light of all these, there have been serious concern on the value of the naira and many have called for its devaluation.
The CBN and government have maintained that the naira was not going to be devalued. The rational for devaluation has been hinged on the almighty market forces which dictate that price is a function of demand and supply. Given that demand had outstripped supply, the only logical thing to happen is for price to go up. The market will therefore be cleared where demand and supply meet at an equilibrium. This is economics 101. More technical arguments have been adduced. Speculative bids and round tripping will be eliminated by devaluation given that there will be no incentive to engage in those activities if the disparity between the official and the black market rates have been removed. Scarcity of foreign exchange will disappear. Frivolous imports will be eliminated as it becomes more expensive to bring in items that are not needed. Exports will be encouraged as export proceeds will command more naira than before. Local production would be given a boost with its attendant employment generation and domestic GDP growth. Government rather than the private sector will benefit from a devalued naira as oil proceeds will command better naira value, helping it to pay off local contractors and finance its budget deficits substantially.
Crime and social tension will reduce as more people are employed and more businesses become viable owing to a more expensive dollar. Foreign investment would be encouraged as more naira will be available per dollar inflow in the foreign exchange market. Distortions in the economy will be reduced to the barest minimum given that the real value of the naira would be established. Like every other economic issue, the above postulations apply on the one hand.
But on the other hand, there are counter arguments that also make sense. First, devaluation will neither help adjust the price of oil upwards, nor will it increase the dollar supply. How will scarcity disappear when demand has not been met? Why will government outsource bringing speculators and round trippers to book to imaginary market forces when it has the Economic and Financial Crimes Commission (EFCC) and the courts at its disposal? Anti-devaluation apologists have further wondered how imports of essential products which we have no capacity to produce locally will stop. In like manner, they argue that it is fallacious to postulate that exports will be promoted as you cannot export what you have not and cannot produce. Where will the machinery and in some cases, raw materials come from given that the devalued naira will put the dollar value beyond the reach of the ordinary manufacturer? How about infrastructural deficit that adds to the cost of doing business in Nigeria? The argument about government gaining from devaluation has also been punctured by asking what the government exists for. Is it to profiteer from an unfortunate injury inflicted on the suffering people or to make life meaningful for a greater majority of the people? Talking about reduction in crime and social tension, the reverse would be the case as inflation, business closures and job loses will be the order of the day.
On foreign investors, the opponents insist that what attracts them is not necessarily devaluation as studies have shown that a lot of countries that devalued their currencies did not benefit from increased foreign investment. Most investors worry about the ease of repatriation of profit and principal and if they feel that they will get less dollars at exit than on entry, they will not come. When a country devalues by 100 per cent, an investor who exchanged a million dollars before devaluation would be converting the naira to $500 on exit less profit or dividends. So, where lies the sense in the argument that devaluation will encourage foreign direct and portfolio investment? Most importantly, there is a strong argument that devaluation rather than stabilise the economy, breeds instability and distortions, leading to inflation and reduction in GDP. My intervention would be by way of extending the argument. The first question I would like to ask goes thus, “if Nigeria did not have oil, what would have happened to the foreign exchange market?” If oil prices went down to under $10 per barrel, making oil uneconomical to produce, what would we do? How about if for some inexplicable reason, we woke up one morning to discover that either by reason of osmosis or diffusion, our reserves have disappeared? Are we all going to relocate? Some people may be wondering if one has gone out of one’s senses, but the truth is that any or all of these can happen? Oil is just like any other commodity. I believe we have become so subsidy-friendly that we seem to have anaesthetised ourselves to some of these realities.
A situation where people queue up to buy foreign exchange from CBN at subsidised rates is not sustainable. And we know for sure that some of the businesses that benefit from the subsidised foreign exchange still price their final products using black market benchmarks, some of them paying little or no tax to government. So, who is benefitting from the relatively cheap dollar? I am of the view that we need to learn some lessons from some of the shocks from the foreign exchange market and begin to adjust towards more realistic positions because, we have been through this familiar route several times. Government should focus on providing strong and reliable infrastructural base upon which efficient businesses can anchor. It is upon this that genuine and sustainable diversification of our economic base can happen. We should also strengthen regulatory and supervisory institutions to ensure that rules are obeyed.
Then institutions like CBN should begin to play their roles. CBN would therefore become a player in the foreign exchange market just like other players. CBN would sell and buy foreign exchange at prevailing rates in the foreign exchange market and by so doing engender stability in the market place. To deal with the temporary shocks and pains that will come with this reform, its implementation should be timed and phased. But it will mark the deregulation of the foreign exchange market and prepare us for eventual depletion of oil reserves or another sudden drop in prices. Please note that this is not DEVALUATION by any stretch of imagination.