October 17, (THEWILL) – There are some basic and incontrovertible facts about the exchange rate of the naira that must not be overlooked as the debate on the troubled foreign exchange market rages. It is the safest thing to wedge a bet on the progressive fall in the rate of exchange of the naira, but this calls for caution. This rate since 1986 has maintained a steady fall. This was when Nigeria introduced the Structural Adjustment Programme (SAP) aimed at achieving a diversified productive base of the domestic economy.
The aim was to reduce the unwholesome dependence on oil for foreign exchange inflows and to enthrone market forces for the allocation of resources, thereby achieving the elimination of all subsidies. These measures did not halt the trend in the steady fall of the local currency value. We recall that the rate was N22 at the official window and N86 at the alternative in1986! This trend is not likely going to change very soon.
We recall that when the Muhammadu Buhari-led administration came into office in May 2015, the exchange rate was around N160 to the dollar. Today at the official window the rate is above N400 to the dollar. This is the equivalent of over 150 per cent loss in the value. Critics of the government would, expectedly, use this metric to taunt it as evidence of the extent to which the economy has been mismanaged under its watch.
Yes, we must all factor in the pandemic experience. However, part of the loss in value arose from the attempt by the Central Bank of Nigeria to answer the criticisms by multilateral financial institutions, such as the International Monetary Fund, to allow the market to determine the rate of exchange in line with the views of many.
The truth is this: There is no market for dollars in Nigeria and that is the unadulterated fact. And regardless of what is being said now, the fact is that on a number of occasions in the past the Central Bank served notice of its intention to withdraw from the market to play the role of swing supplier of foreign exchange. But there were no alternative sources and the naira continued to progressively lose value only for the Central Bank to return to the market to continue with its demand management approach.
As a matter of fact, all this talk about devaluing the naira to release dollars held by individuals and to attract investors would only have one predictable consequential result; further loss in value in the rate of exchange, which will only exacerbate the misery index in the land. I don’t know to what extent many of us are in tune with the inflationary pressures today in Nigeria. It is alarming and we might confront unrest, if the scenario of worsening rate of exchange becomes an existential reality.
The rate of exchange of the naira today is a clear-cut case of gross undervaluation as it were and there are no two ways to that. One sure measure we could adopt to buttress this fact is to do Purchasing Power Parity. The highest cost of having a haircut today in Nigeria is N500 and that is for some highbrow areas. In fact, in most places in this country today you could get a haircut for much less. What is the cost of a haircut in America today? There is a video making the rounds of a Nigerian who went to get a haircut somewhere in America and he was asked to pay one hundred dollars! He shouted blue murder as that is the equivalent of N50,000!
The problem of the Nigerian economy has been well advertised and it is known by all informed compatriots. It is simply a chronic case of lack of productive base, which, as should be expected, has been associated with an insatiable appetite to consume what we do not produce. We have over the years made lots of wrong fiscal policy choices, such as the continued importation of refined petroleum products with the associated payment of corruption infested subsidy. In fact, it is argued that we spend more on importation of refined products than we earn from the export of crude petroleum.
We have maintained a bloated workforce, which has made it difficult to correct the negative imbalance between the capital and recurrent expenditure. This is despite the Stephen Oronsaye report which recommended that we pare down the agencies and departments; but instead, we rather watched as they increased. We have endured a worse case of revenue inflow as our tax-to-GDP ratio of around eight per cent has been adjudged the lowest in the sub-region. We are also assailed by a case of unconscionable leakage to the treasury by way of unbridled corruption laced with impunity.
Therefore, realistically, it is not reasonable to expect a robust and stable rnaira exchange rate. The rate we have today is because the Central Bank has gone out of its way to stem a free fall in the value of the naira by all manner of creative manipulations despite a not so robust reserve situation. The bottom line is that there is no experiment that has not been tried for the attainment of a stable exchange rate. But just as you cannot make an omelet without breaking eggs, so it is difficult to expect the rate to appreciate as it is being bandied around by simply allowing the market to determine the exchange rate.
What is even of more concern is that devaluation on its own is a strategy for boosting exports. But Nigeria has no exports worth its name. Therefore, devaluation will only lead to imported price increases which will in turn compound the misery index in the land. And this explains why we roundly commended this government when at inception it rightly repudiated devaluation as an economic strategy for unassailable reasons.
We agree with the view that the component sections of the government should operate in a co-operative manner to ensure that they do not work at wasteful cross-purposes, particularly in the areas of policy articulation. But we must bear in mind that the Central Bank has attached to its mandate responsibility to catalyse the development of the Nigerian economy.
Most commentators have accused the Central Bank that it crossed into the territory of the Ministry of Trade and Investments when it denied official allocation of foreign exchange for the importation of some items. The apex bank, for crying out loud, did not stop the importation of these items. However, it took a decision which is believed to be within its remit as the authority that has responsibility for the maintenance of the external value of the naira to manage the demand pressure by refusing to allocate official foreign exchange.
Let us not allow the chorus to float the naira to get to us. All that has been tried before and it has had one predictable outcome; otherwise we would not be where we are today. We must also bear in mind that what precipitated the current crises was the decision to deny official foreign exchange to bureau de change. In the interim, what should be done to stem the crisis will be to devise some ingenious ways to increase liquidity to the parallel market to stem the current free fall.
•Dr Boniface Chizea is an Economist and CEO, BIC Consultancy Services.
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