Still On Proponents Of Naira Devaluaion | Independent Newspapers Limited
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Still On Proponents Of Naira Devaluaion

Posted: Jun 21, 2016 at 2:00 am   /   by   /   comments (1)

By Chris Enyinnaya

There will never be an overproduction in the knowledge market and so proponents of Naira devaluation continue to write with the basis of their argument on what plays out in exchange rate determination in largely formal economies, which is wrong when juxtaposed with the Nigerian peculiar economy.

They write about defending Naira in an open economy, like Nigeria, where foreign trade accounts for a significant proportion of Gross Domestic Product  and exchange rate linking the domestic  with the world economy. Under this scenario, exchange rate is the most important price which influences most other prices and indeed the general price level. Thus, exchange rate levels and movements have far-reaching implications for inflation, price incentives, fiscal viability, export competitiveness, efficiency in resource allocation, international confidence and balance of payment equilibrium.

The above argument was put forward by one of the proponents of Naira devaluation , who I respect and will not want to mention his name, in article “ Rescuing  And Defending Naira “ in the Guardian of 23rd May 2016.

This write-up is not a rejoinder to that article because we are all entitled to our opinion. But when we are writing on a subject boardering on Economics of Money and Banking  where the bottom line assumption is ‘ceteris paribus’ (all things being equal) then there will never be an end to that discourse because all things are never equal, and most importantly since Economics cannot be said to be an exact science.

What is exact in this case is the country called Nigeria, which lies, in the equatorial zone of Africa with Naira as her currency. In my earlier write up of 20th May 2016 in this paper titled: “Naira Devaluation Proponents Got It Wrong”, I did say that the problem we have in Nigeria is that our foreign trained intelligentsia find it difficult to apply foreign ideas to solve local problems. That is where those of us who passed through Nigerian Universities and the Universities also   passed through us have an advantage because we did not only study Money and Banking in Nigeria, we also studied Nigerian Financial System.

In the first place, economic policies work perfectly in a formal economy in capitalist systems of Europe and America where our intelligentsia obtained their PhDs studying Economics as applied to formal economies whereas Nigeria is largely informal. That is why Central Bank of Nigeria Monetary Policies targeted at curtailing inflation, moderating prices and interest rates   as well as exchange rates are largely ineffective because 70% of money in circulation is outside the banking system.

Secondly, the issue of export competitiveness in international value of Naira does not apply to Nigerian situation because our major export commodity is crude oil. Production quota is  fixed by OPEC and with it the price per barrel while the invoice is tied to the US Dollar. What does that say? Nigeria will sell her crude oil at the same price with crude oil of other countries with the same quality be it Bonny Light or Escravos.

Thirdly, Naira is not a convertible currency so we invoice our exports in US Dollars. If we devalue Naira how will Nigeria’s crude oil be more competitive when Naira is not the currency of trade?

Fourthly, proponents of Naira devaluation have often dwelt on supply of US Dollars to the market which cannot match demand . Nigeria being an import dependent economy with de-regulated foreign exchange market, there will never be an end to devaluation because demand will always outstrip supply. So why engage in a journey without end?

The point this writer is making is pointedly this: Naira cannot be successfully defended with monetary policy tools alone since Nigerian economy is largely an informal economy.

Since the 1970s, the Central Bank of Nigeria (CBN) has been wooing Nigerians to open bank accounts and conduct commercial transactions through the banking system. We are in 2016 and CBN is still wooing Nigerians to open bank accounts even with incentives without recording much success. That will tell you how difficult it is to make Nigerian economy a formal economy and our compatriots who studied in Europe and America are busy advocating theories that work in formal economies.

Naira can only be defended successfully by the CBN wielding the big stick on those who want to Dollarise the Nigerian economy. Why should payment of school fees , hotel bills, house rent and other services be made in Dollar when Naira is our legal tender currency issued and controlled by CBN. To tighten the noose further, the use of Dollar by counterparties in business should be outlawed. Any person that earns foreign currency, or brings foreign currency into Nigeria must go to an authorised dealer or buyer and exchange it to Naira at CBN approved rate before spending it as it is done abroad.

Why should the CBN allow Radio stations, Television houses and the print media to be giving information about the exchange rate of Naira to The US Dollar and other currencies in the black market to the general public when that market is an illegal market. By doing so the CBN unwittingly is giving an endorsement to an illegal market whereas it has statutory duty to manage the circulation of foreign currencies in Nigeria.

The CBN should put machineries in motion to fish out traders in the so-called black market and deal with them as economic sabotours because that is what they are especially now that CBN no longer sells foreign exchange directly to Bureau De Exchange.  That was what Prof, Charles Soludo”s CBN did and was able to drive traders in the black market out of business by making the CBN rate and black market rate to be almost the same such Nigerians avoided the black market in favour of the banks and BDCs at that time.

We all tell the success story of Asian giant Malaysia, but we ignore the fact is advocating is what they did to defend their currency. Naira exchange rate is deteriorating because currency speculators trade with Naira as if it were a commodity. Paper money is not a commodity that should be traded the way you trade with share certificates in Nigerian Stock Exchange. Naira denotes the sovereignty of Nigeria, pray, which country in the world trades her sovereignty for profit?

By the time the CBN succeeds in driving black market and currency speculators underground, the value of Naira will firm up. Proponents of Naira devaluation are asking for a repeat of 1986 bitter experience when manufacturing companies in industrial zones across the country collapsed. The best way to defend the Naira remains a head –on collision with currency speculators who devalue Naira un-officially. Need we say more?


Comments (1)

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