Donald Tusk, European Council President
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, report Kunle Aderinokun and Olaseni Durojaiye
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.
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.
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.