Devaluation as policy thrust causes macroeconomic instability and runaway inflationary, argues Boniface Chizea
After Presidential aspirant Atiku Abubakar announced on the campaign trail that he was going to float the Naira and considering the position he occupies as a strong contender for the Presidency of Nigeria, I thought it was our duty not to sit on the fence and keep quiet despite what we know regarding the deleterious consequences for such a policy thrust. It was better to shout out and be at peace with one’s conscience even if nobody listened. I have since then written a paper which was well considered and was generously published in which I canvassed a position which advised against such a policy thrust as such experimentations, in my humble opinion contributed in no small measure to the lackluster performance of the Nigerian economy.
Not long after that I watched an interview granted by Mustafa Chike-Obi on Arise Television where he was introduced as Economic Adviser to the Presidential hopeful Atiku Abubakar during which he expounded his views, which as himself admits are radical on the policy thrusts for giving the economy a shot in the arm and I was able to connect the dots to conclude that the position taken by Atiku Abubakar regarding floating the Naira must have been sold to him by this gentleman. Some of the content of this interview would form the kernel of this paper. I since did an enquiry on Chike-Obi’s background and found out that like myself he read Mathematics at the University of Lagos with a First Class degree and later attended Stanford University for a Master in Business Administration whilst I had my Doctorate in Business Administration from Manchester Business School in England. It would therefore appear that we cut our teeth in Economics as part of the mandatory foundational studies for our tertiary qualifications in related disciplines.
What really concentrated my attention to do this paper was a recent interview which Mustafa Chike-Obi granted during which he canvassed the view that a policy of weaker value currency could be pursued as a strategy to discourage the unbridled appetite of our citizens for importation. Well for me that was a novel position. I have been in this business since early/mid 80s. Yes it is correct to observe that one of the collateral consequences for having a weak currency is that it discourages marginal propensity to import but I have never heard it propounded as a major objective of such a strategy. Usually what one hears is that relatively weaker currency is a strategy for growing market share at the international market and sometimes for addressing balance of trade issues between countries with bilateral relations. And one of the reasons which made some economists to oppose currency devaluation in Nigeria is that we do not have the capacity to optimize this opportunity since foreign exchange earnings in excess of 80 per cent is from oil whose quantity and price are fixed for Nigeria by OPEC. And since despite best efforts we have not been able to diversify the economic base of the country; not for want of trying but probably due to lack of determined and focused implementation.
What devaluation as policy thrust or even as a fall out of policy measure has done experientially in Nigeria is to cause macroeconomic instability, precipitate runaway inflationary spiral, result in loss of productivity and jobs and worsen the misery index in the country since such importations are not amenable to be discouraged by mere increase in costs as they are structural. We cannot also in one breadth be talking of floating the currency which to all intents and purposes amounts to leaving the determination of the exchange rate of the Naira to market forces even as there is hardly any market for the dollar in the country! How do we define as a market a situation where there is only one dominant supplier; the Central Bank with multiple almost insatiable demands from economic agents? But in the context of floating currency it is illogical to still be talking of devaluation. In such a situation the most appropriate term for loss in value is depreciation. Devaluation only arises as managed loss in value of currency in a fixed exchange rate environment.
During the interview with Arise Television under reference Chike-Obi did indicate as part of the discussions on the recommendation to float the Naira that one of the first steps an Atiku Abubakar administration would take will be to jettison the official window at N305 to the dollar as he rightly observed and we agree that it is ill informed to have two values for a currency in any economy as it encourages rent seeking behaviour and fosters other distortions. But this again is not in my opinion something to terminate the following day upon assumption of office. The recommended approach will be to be cautious and deliberate. And also there is the need for a word of caution here. We must constantly bear in mind that monetary policy comes under the strict purview of the Central Bank which enjoys instrument autonomy therefore no attempt must be made to dictate to the bank. Therefore such a decision must be left for the sole consideration of the Governor of the Central Bank and it might not be right to tempt the President not to respect this autonomy. In fact the President should be receiving on going briefing from the Governor of the Central Bank during which he must insist to be carried along and thereafter he must resist the temptation to dabble into such matters in the public. This is one reason why most international commentators query the independence of Central Banks in developing countries of the world.
Chike –Obi also observed during this interview that there must be in place a policy template to grow the economy by at least 10 per cent for a number of years going forward as anything less would not cut the ice particularly as we are all concerned about the burgeoning statistic of the unemployed not minding the under employed. Growth is the only antidote; the only panacea for reducing unemployment and giving a boost to the quality of life of the citizenry, the raison de’tre of good governance. When asked how he was going to achieve that level of growth he intoned by adopting expansionary policy measures. Well as often heard; talk is cheap! Besides the inflationary consequences of expansionary policy, there is something like the absorptive capacity of the economy to be taken into account. There is a limit to the amount of cash you inject into the economy beyond which it would amount to throwing money at the problem which barely has any positive effect. In this connection there are policy guidelines to contend with such as the Fiscal Responsibility Act which clearly stipulates a maximum deficit of not more than three per cent of GDP as a result of the fears we have expressed herein. What is more in recent memory even in the best of times we have not been able to manage growth in excess of six to seven per cent. And with the latest figure in this respect at 2.38 per cent, it is most unrealistic to expect that anyone is going to formulate any policy measures which would grow the rebased GDP by 10 per cent certainly not in the foreseeable future.
It is commendable to be upfront with intentions on such policy measures. This is the preferred approach to ventilate and to get inputs which no doubt would enrich policy and ensure that we downgrade considerably experimentation which has honestly been the bane of rapid growth and development of this economy. We have a collective interest for economic conditions to improve radically and very soon but we must not inadvertently permit measures that we know would delay us as there must be a consensus that we are in a hurry to grow this economy and catalyze development.
Dr. Chizea wrote from