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The naira was devalued about six weeks ago and the immediate impact was seen in the rising cost of domestic and foreign goods in Nigerian markets. The governor of the Nigerian central bank, Godwin Emefiele, has again warned of an imminent devaluation by stating that the naira is overvalued. One of the main goals of the CBN is to protect the value of the domestic currency, and devaluation is definitely one of the ways it can destroy the value of the currency. The condition for the devaluation of a currency did not exist at the time of the currency devaluation in May of this year. In fact, the condition that would result in a devaluation in favor of a country was and is not recently in the case of Nigeria. All of this recent devaluation was for political convenience rather than economic salvation. Thus, a review of all devaluations shows that economic conditions will ultimately deteriorate.
Devaluation is an official reduction in the value of a domestic currency relative to the value of a foreign currency, particularly those currencies that are internationally accepted for transactions. That is, unlike the devaluation of the national currency, in which the market forces of demand and supply are active and which is a natural way to adjust the value of the currency, the devaluation is a deliberate act of the monetary authority. Depreciation can be reversed into appreciation by the same market forces as an economy improves. Not so with devaluation. The devaluation of one currency against another is expected to make the depreciating country’s exports cheaper and more attractive to foreign importers, but to make imports from other countries expensive to discourage citizens of the depreciating country from importing. This means that more capital will flow into the country than will flow out, which should inevitably improve the balance of payments and, over time, lead to an appreciation of the devalued currency and an improvement in economic conditions.
The above scenario assumes that the country devaluing its currency has a large number of exports that are required by other countries and has control over the prices of those goods. On the import side, such a country’s production units are heavily dependent on domestic inputs, so it can control imports without affecting domestic production. Nigeria is an import dependent economy in terms of importing raw materials for production and even importing for consumption of essential raw materials such as refined petroleum and food. We have no control over the price and production of our main exports of crude oil and even agricultural exports like cocoa beans, cashews and sesame seeds. Oil production is determined by OPEC and the price is determined by international market forces, while the prices of agricultural production are also determined by the international price mechanism. Nigeria is clearly failing on both sides of exports and imports and the need to be careful about devaluation is very important. But the CBN was busily devaluing the naira, regardless of the impact on domestic prices, domestic production, and the reactions of foreign investors who have to convert their profits into foreign currencies for repatriation. The devaluation action was always political, as I will explain later.
The economic consequences of the devaluation on the current economic structure are medium to long term and more damaging. With the statement that the naira is overrated, the CBN governor has already warned against further devaluation. This is what the International Monetary Fund usually makes when it wants a country to devalue its currency. The Ethiopian currency is one dollar at 43.01 Birr; Ghana’s currency of 5.89 cedi to one dollar; Liberian currency from 171.50 Liberian dollars to one US dollar; or Kenya‘s 108 shillings for one US dollar is not overvalued, how is it that Nigeria’s N411.50 can be said to be overvalued if we claim to be the number one economy in Africa, which means we have a higher gross domestic product than these countries?
The economy is currently down due to the propensity or addiction to borrowing from the tax authorities and the resulting enormous revenue that is made available to service debts as well as to pay off debts due. Keynesian economic theory, which supports deficit budgeting to lead an economy out of recession, despite all the warnings we have given in the past, did not recommend rampant foreign borrowing that has serious and detrimental effects on economic growth and development like us currently experiencing it. The monetary authority is now on its own path to wreck the economy in what the immediate past and planned devaluation of the naira will bring.
Three weeks before the devaluation was announced, the National Bureau of Statistics reported that the Nigerian economy had emerged from the recession and that oil prices were beginning to improve, raising hopes for a better economic situation. The situation on site therefore did not justify the devaluation of the national currency; but it created a glimmer of hope for a better economy. Immediately the naira was devalued in May 2021 and the black market price of the dollar rose from around N380: 1 US dollar to N450 and later almost N 500: 1 US dollar state of the citizens. It is hoped this will be reflected in the NBS’s June 2021 inflation numbers, as Nigerian statistics are hard to trust. Aside from the increased poverty and widening income inequality resulting from this unique devaluation and corruption-related waste of finances, many of the manufacturing companies are now considering moving to neighboring countries with moderate production costs. That will be another loss of jobs, loss of government revenue from taxes, and an increase in poverty.
But why should the CBN devalue the currency when statistics show the economy is improving? I can think of two plausible answers. First, the numbers on the economy were manipulated to reflect what was not there. The data was more of a political gimmick than economic realities. An excuse that the economy is doing well because politics is mostly about appearances. Second, the devaluation should create a kind of money illusion among state actors and of course the opposition parties that the economy is really on a growth path.
Due to the devaluation, the naira value of money shared by states will be higher than it should be, as dollar oil proceeds will be monetized in naira. For example, instead of getting 2 billion times 350 times 350, which is what the exchange rate should be, the state would now get 2 billion times 450 or 500 times. What a kind of political gimmick regardless of the precarious economic effects associated with it in the medium for too long! This has always been the trend in the devaluation of naira and therefore we have never benefited from any devaluation. The economic structure was never programmed to benefit from devaluation. The Nigerian economy has not and cannot achieve what economists call the Marshall Lerner condition for devaluation, in which the elasticity of imports and exports must show unity after devaluation. That is, devaluation reduces imports and improves exports. The devaluation of the Nigerian currency is a disservice to the economy as it has only temporary political assistance.
I took the time to read an IMF article on devaluation that was taped on the door of my great teacher of blessed memory, Professor Bade Onimode, in 1985. The summary of the article read that devaluing a country’s currency should always be the last option due to its devastating impact on the deteriorating economic situation and its inability to save such an economy when there is a problem with the diversification of production and the lack of it consists of several tradable goods for export. This is the characteristic that the Nigerian economy has always shown. Due to the recent recalibration of the economic structure, some economic sectors are on the rise, but the oil sector still dominates in terms of national income. So the economy remains weak, sick and depressed. Any further devaluation of the naira will exacerbate the inflation trend, increase unemployment and income inequality and promote the existence of domestic and foreign investors from Nigeria! We warned of rampant external loan acquisitions that the regime ignored at its own risk, and we are now making revenue to service huge debts rather than spending it on development. This is another warning.
- Tella is Professor of Economics, Olabisi Onabanjo University, Ago Iwoye
- Eze Onyekpere’s column returns next week
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