Devaluation: IMF Versus Buhari - Henry Boyo

SOME officials of the International Monetary Fund recently consulted with relevant government agencies to assess the economic impact of the crash in oil revenue and the planned responses for addressing the ‘’near-term vulnerabilities’’ and those fundamental reforms required to sustain inclusive economic growth and reduce poverty.

The team’s recommendations reflect the self-evident need for reforms, which would improve fiscal discipline and reduce imbalance between our export and import values. Also, the report of February 24 re-echoed the need to broaden the tax base and implement measures to boost the ratio of non oil revenue to Gross Domestic Product.

The IMF advised that sustained private sector-driven growth requires a competitive economy, which can evolve with an exchange rate policy that is allowed “to reflect market forces”. It recommended that ‘’restrictions on access to foreign exchange” should be removed.



Although the IMF acknowledges that the Central Bank of Nigeria “lately eased monetary conditions”, the team, however, observes that there is still a ‘’need to ensure a strong and resilient financial sector that can support private sector investment across production segments (including SMEs) at reasonable funding cost’’, these recommendations simply repeat the same old self-evident prescriptions without defining the appropriate supportive medium that would guarantee a cure. For example, if you have not identified the antidote to the poison of systemic surplus naira, how can you restrain inflation and bring down the cost of funds from a clearly prohibitive 20 per cent plus to ‘’more reasonable’’ and supportive 4 -7 per cent interest rate levels that would facilitate industrial consolidation and rapid job creation.

Surprisingly, the IMF report inexplicably shifts attention from the albatross of ‘liquidity surplus’ that undeniably fuels inflation well beyond best practice models below two per cent. Or is there an unwritten law that countries like Nigeria must not also enjoy minimal inflation and truly catalytic low interest rates below six per cent to facilitate inclusive economic growth? Surely, it is not so difficult to understand that all static income earners, particularly, pensioners and other lowly paid workers will expectedly lose 50 per cent of the purchasing value of their income every five years, if inflation continuously trends closer to double digit rate.

Indeed, if the IMF team sincerely expects sustainable inclusive growth for Nigeria, there is no way they would have failed to examine the persistent cause of the systemic surplus naira, which forces the CBN to regularly commit to reckless. Some would say fraudulent, financial mismanagement to fight inflation when it compulsively sets out to restrain borrowing and consumer demand by marginally reducing the persistent irrepressible liquidity challenge, with unreasonably high interest paid on funds which CBN borrows and simply stores as sterile and idle deposits.

Not surprisingly, the banks earn over N500 billion annually from this scam!

Similarly, it is the same threat of inflation that instigates the CBN’s self-flagellating double digit Monetary Policy Rates in place of more supportive rates below two per cent adopted by Monetary Authorities in disciplined and more successful economies.

Instructively, however, if IMF’s recommendation for the ‘’removal of restrictions on access to foreign exchange’’ was adopted, the naira exchange would have since plummeted below N1000 per one dollar with serious economic and social consequences. In such event, the World Bank would step up to advance Nigeria,a dollar denominated loan, with shylock terms, to defend the naira. Regrettably, the Nigerian economy would ultimately unravel and the naira rate will unfortunately track the Ghana cedi, which eventually exchanged for over 10,000 cedi to one dollar with no respite in sight.

Nevertheless, the IMF’s recommendation that the exchange rate should be allowed ‘to reflect market forces’ may seem credible and progressive. The reality, however, is that the naira rate will continue to have absolutely no chance against the dollar if the money market remains deliberately skewed, as it is, with persistently surplus naira liquidity against rationed dollar auctions. The CBN’s monopolistic dollar auctions to banks is certainly not commercial best practice and unfortunately, deliberately provides wide latitude for forex market malpractices in banks.

It is inconceivable that the counterproductive impact of the CBN’s stranglehold on forex supply escaped the notice of the IMF team, despite their advocated faith in competitive market forces for economic growth. Clearly, if the CBN retains its distortional monopoly of dollar supply, serial naira devaluation will, as usual, become inevitable, and ultimately not even a steady rise in crude prices will save us. After all, the naira rate inexplicably remained between ‘weak and static’ even when reserves bountifully approached $60 billion when the oil market was fortuitously very buoyant for several years.

Devaluation does not hold any promise for Nigeria other than the obviously misguided and unrealistic expectation that matching official with parallel market exchange rates will attract foreign investors or ensure competitiveness of the Nigerian economy. Conversely, naira devaluation from 0-50kobo before 1979 to the present N310 to one dollar did not attract much more than about $20 billion in foreign investments, that is a paltry annual average of $540 million. Worse still, foreign investors were ‘smart’ enough to invest primarily in economically and minimally impactful but high-yielding Nigerian government’s bills and bonds!

The unusually wide gap between the official and parallel naira rates may have intuitively engendered the observation that Nigeria’s economy will only become competitive if the naira is devalued and brought closer to the street market rate. Instructively, however, despite series of naira devaluation, Nigeria’s economy remains neither diversified nor internationally competitive. Maybe, as suggested, a further devaluation to N300 per one dollar may just change our fortunes. But, such an expectation must be predicated on the parallel market rate remaining stable. Consequently, if the root cause of the deliberate market imbalance against the naira is not squarely addressed, while the street market rate continues to climb, the call for further devaluation beyond N300 to one dollar will again become clarion from misguided and self-serving experts.

Fortunately, President Buhari is not fooled by the false promises canvassed by advocates of devaluation. The President is sharply aware that the intensity of deepening poverty in Nigeria correlates with the naira’s steady depreciation, even with bountiful reserves.

Buhari certainly recognises that devaluation instigated and has sustained our economy’s debilitating brain drain and the mass migration of our youths to greener pastures.

Besides, another major devaluation will only precipitate Labour’s agitation for wage increases, while pension incomes will invariably gradually become valueless. Furthermore, the inflationary spiral instigated by a major devaluation will further reduce consumer demand and adversely affect investment decisions, with collateral damage for job creation; increased raw material costs and high cost of funds will similarly make imports cheaper than Nigerian products.

Additionally, Nigerian holders (including government) of dollar denominated loans may require 50 per cent more naira to service and repay their debts, while the increased cost of critical plant and equipment will adversely challenge the implementation of the capital budget and may further deepen the projected over 30 percent 2016 budget deficit. Invariably, the operations of critical subsectors such as power, aviation, oil and gas will also be severely challenged if the Naira suffers further devaluation.

If the dollar sells officially for N300 to one dollar and above, fuel price will spiral beyond N130 per litre and make deregulation and the saving of over N1trillion annual fuel subsidy impossible. Sadly, Nigeria’s celebrated Gross Domestic Product of $510 billion will invariably also shrink below $300 billion, while the current stock market capitalisation of about $42 billion will similarly recede below $25 billion and make the market vulnerable to an easy take over by foreign portfolio investors. In short, poverty will deepen nationwide.

In the above circumstances, Buhari must be encouraged to resist further devaluation and save the naira by finding an antidote to the poison of Excess Liquidity.

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