We need to Reset the Nigerian Economy
Some months ago, I made an assertion that I was against the devaluation of the local currency, the Naira. I am still against the idea even much more than the President of Nigeria, Muhammadu Buhari, is. This might be a little confusing for those who have followed my rants on Twitter over the past few months. Bear with me, I will explain.
There are apparently two very loud camps about the local currency. One camp is the anti-devaluation camp, of which I am one, and the other is the devaluation camp, of which I am technically one. Sounds confusing? Stay with me.
People who don't want devaluation cite all the reasons behind their stance and it all makes perfect sense. One the Naira is devalued, everything, especially fuel price, will become expensive overnight. The fact that the Naira is still at N199 at the CBN is why we can still get fuel to buy at N86.50 ($0.43) per liter today. Devaluing the Naira will automatically lead to a rise in fuel price, and price hike beyond 15 - 20% will surely lead to a civil unrest in Nigeria. Workers will demand for a raise in minimum wage, public transporters will hike cost of transportation by at least 25%, and there will be another round of strikes and streets protests. That is not something the Government wants to see and I don't blame Mr. Buhari for taking this hard stance against devaluing the Naira. Another problem with devaluing the Naira is that the black market rate will automatically move up in tandem with this devaluation. Right now the black market is at about 50% premium to the official rate, but there is nothing to stop this premium from rising to 75% if the CBN decides to devalue by 25%. So this will only make things worse.
If you ask the devaluation camp the way forward, they will tell you CBN is doing the right thing by managing demand. Unfortunately, this demand has shifted to the black market and the premium to the official rate is more volatile than oil price itself. They will also tell you that, with time oil prices will recover and then things will be easier and then it will also be easier to take some of these "hard decisions". But here lies the Nigerian problem, when oil prices rise, things revert to status quo... we start mis-pending again, and when oil price comes down again, as it always does, the arguments will re-start. If we don't devalue now and oil prices remain depressed, we will run out of foreign reserves sooner or later and then the job losses, fuel price hike, etc will eventually happen.
People who want devaluation want us to make those hard decisions now. But therein lies the problem. Like I pointed out earlier, if we devalue by 25%, black market premium is likely to move by 75%, and things will remain as hard as they are, at another level. Devaluation is not likely to lead to lower demand of foreign currency because Nigeria is highly import dependent, and the black market premium effectively ensures that CBN doesn't get any foreign currency from Nigerians who export stuff. Why would anyone sell their hard-earned dollars to the CBN at say N240 when black market is commanding at least N350? Another problem with devaluation is that CBN sets a new rate for the Naira and then continue to use the reserves to defend it at that level. Sooner or later, if oil prices remain depressed, we will still run out of dollars and then job losses, fuel price hike, etc will eventually happen.
Ultimately, whether we devalue or not, we will still run out of foreign reserves. So what is the way forward? It is time to reset the Nigerian economy. We need to re-write the rules. Unfortunately, the effect of re-writing these rules will lead to most of the things that will happen if we devalue today. But it will put us in a batter place where Nigeria can actually save. Exporters will have no incentive to sell their foreign currency to mallams when they can sell directly to the CBN. Nigeria will also be better prepared to handle the next cycle of oil price shock and will even have incentives to diversify sources of foreign currency from sales of crude oil.
The way forward, as I see it, is to float the local currency. CBN should stop quoting dollar rates. Let everyone operate on a single price determined by the market. This will snuff out speculative activities as CBN will no longer provide an anchor for them to price the dollars. All those dollars that are hiding in dorm accounts will be released to the market if CBN lets go of the Naira-USD peg, and the Naira might even appreciate as we have seen in the market today.
This is not the silver bullet that will make all our problems go away overnight, but it will put us in the path of creating a more robust economy that will encourage free trade, which is the bedrock of economic growth.