James Emejo in Abuja
An economist and ex-banker, Dr. Chijioke Ekechukwu has said despite some inherent benefits in the devaluation of a country’s currency, the time was not yet ripe for Nigeria to devalue the naira.
He said any attempt to devalue the local currency would only pass a huge burden over to the ultimate consumers, a situation which could worsen the hardship already experienced by Nigerians.
Speaking in an interview with THISDAY, he said explained that the impact of devaluation would be particularly hard on manufacturers who would have to repay foreign creditors at a value higher than initially envisaged.
Ekechukwu, who is also the Managing Director, Bristol Investments Limited, said proponents of devaluation had hidden the negative consequence of such move from the people.
He said: “The same people advocating for devaluation did not let Nigerians know the demerits therein. One of the demerits is that the burden will be passed over to the ultimate consumers. From the first day, inflation will creep in. The demerits are enormous. Various manufacturers today may have borrowed money from foreign creditors.
“If such was borrowed when the rate of naira was N150 per dollar for instance, and you are paying your debt at N300 per dollar, it means even if you have done well with the money you borrowed, you are going to incur losses of over 200 per cent”, he said.
“Therefore, borrowers of foreign loans are at a heavy disadvantage during devaluation; government inclusive. The real sector of the economy can only grow when there is a local capacity being built in electricity. When there is no electricity or so much is being paid for it, how will the real sector grow? Under normal economic situations, these things are supposed to be provided.
Continuing, he said: “The interest rates of banks should be single digits for local manufacturers to even start manufacturing. As far as Nigeria’s electricity remains at its comatose stage, as well as high-interest rates of banks, manufacturing sector cannot take advantages of a devalued economy. There are essential goods and services that we cannot produce in this country.
“And because we have those essential commodities that we must import, such as drugs, machinery, vehicle spare-parts, the benefits we would have gotten in devaluation will be lost during importation. We also know that during devaluation, professionals go outside the country because it will pay them more to earn their salaries in foreign currencies, and return to change them. Hence the country will lose her human capacity.”
Ekechukwu also argued that current exchange rate fluctuation was beyond the control of the Nigerian monetary authorities.
He said: “The cause is not something that Nigeria has control over, so we have to live with it. We can only forestall the effects of this decline through identifying the items being imported into the country that form 80 per cent of our importation. We then have to find the alternatives to these items. I have mentioned the petroleum products. We should also identify products that we ought not to import, such as rice. We need to form commissions that will grow other areas.”
According to him: “It is surprising to note that, even though the United Arab Emirates is a heavy oil producer, about 80 per cent of their revenues comes from tourism. This can be duplicated in Nigeria. We should also identify the nation’s mineral reserves, and deploy the technology to harness a few of them. If we don’t have this plan, it becomes difficult to even say that we are going to grow our economy in the near future.”
Nevertheless, he noted that devaluation, if done at the appropriate time could be handy for an economy which is experiencing a downturn.
He said: “It has benefits accruing to it. Nigeria is running a deficit budget, which implies that the country is going to borrow funds to finance its budget. If you are running a deficit budget and you devalue your currency, it automatically fills a funding gap that would have been caused by the deficit. If for instance you sell your oil and you receive dollars, in the process of devaluation, you will have more naira. It is a major advantage of devaluing the currency.”
Continuing, he said: “The second benefit arises from the fact that you are trying to build the real sector of your economy. When the currency is devalued, a whole lot of real sector players will come into play. Instead of looking outside for things you want to import, there will be many middle and large-scale manufacturers emanating from every sector of the economy. People, who used to import a lot, will no longer import.
“During devaluation, the local capacity of the real sector will start picking up gradually. In the long run, there will be growth in the local capacity. Devaluation is meant to grow the real sector. This is because many people are going to grow the solid areas that were hitherto not exploited.
“When a currency is devalued, a lot of agricultural products will emerge because people will no longer import the raw materials that were emanating from agricultural products. Items that were produced through agriculture will be produced locally because the cost of importation is rising, and manufacturing those agricultural products will start taking place locally.”
He said: “In real economic terms, when you devalue, it is expected that there will be enough employment because more and more people will aspire to be entrepreneurs. But this is obviously not in the short run. There will also be a direct investment into the country because with little foreign currencies, there will be a lot of money to invest. Little foreign currency can buy a lot in a devalued economy. When these things happen, in the long run, the economy will grow.
“Because there will be a lot of manufacturing taking place and less of imports, the balance of payment of the country will get better. When the balance of payment increases to the extent that you are now beginning to export more products and receive foreign currencies than you are importing, the balance of payment will improve. It is a sign that the economy is growing.”