Boniface Chizea argues that floating the naira will exacerbate the poverty index in the country
Mr. Vice-President, Professor Yemi Osinbajo. I ask for your indulgence to address you through this medium following your now accustomed brilliant presentation during the mid-term review of the performance of President Muhammadu Buhari’s ministerial team. It was obviously an impressive outing. Mr VP, I have listened to your comments and have since been inundated with friends who know my position on some of the issues you raised in your presentation regarding the naira exchange rate and the need for collaboration between the tax authorities and the need for all of us to maintain hope in the ability of this administration to deliver the goods. I have taken the courage to send you this memo in my firm belief that we all have a common interest in the future prosperity of Nigeria; indeed, to capture this sentiment more succinctly, we all have an insurable interest in doing so. And also to offer an alternative narrative on the discussions on the Nigerian economy.
Here are some must-have facts about the naira exchange rate. It is the safest thing to bet on the gradual decline in the exchange rate of the naira. This rate since 1986 when this country introduced the Structural Adjustment Program aimed at achieving a diversified productive base of the Nigerian economy in order to reduce the unhealthy dependence on oil for foreign exchange inflows and to induct market forces for it. The allocation of resources, thus achieving the elimination of all subsidies has maintained a steady decline. Remember that the rate was N22 at the official counter and N86 at the alternative in 1986! And Mr. VP, that trend is unlikely to change very soon.
You will recall that when your administration took office the rate was around N 160 to the dollar. Today, at the official window, the rate is over N400 per dollar. This is the equivalent of over 150% loss in value. And the opposition you must have known will use this measure to taunt you as proof of the extent to which the economy has been mismanaged under your watch. Yes, we all need to consider the experience of the pandemic, but part of the loss in value is due to the Central Bank’s attempt to respond to criticism of multilateral financial institutions such as the International Monetary Fund to allow the market determine the exchange rate in accordance with the recommendation you have just made.
Mr. VP, there is no market for the dollar in Nigeria and that is an indisputable fact. And whatever is said now, the fact is that on several occasions in the past, the Central Bank has given notice of its intention to withdraw from the market to play the role of supplier of foreign exchange. But there were no alternative sources and the naira continued to gradually lose value only for the central bank in response to the return to the market to continue its demand management approach. Mr. VP believe me that all this talk about devaluing the naira to free up dollars held by individuals and attract investors would only have one predictable result; further loss of value of the exchange rate which will only exacerbate the poverty index in the country. I don’t know how well you are in step with the inflationary pressures today in Nigeria. This is alarming and we could be faced with unrest if the scenario of an exchange rate deterioration becomes an existential reality.
Mr. VP, the exchange rate of the naira today is a blatant case of gross undervaluation so to speak and there is no two way to do it. One sure measure we could take to substantiate this fact is to do purchasing power parity. The highest cost for a haircut today in Nigeria is N500 and that is for some nerd areas. In fact, in most places in this country today, you could get a haircut for a lot less. What is the cost of haircuts in America today? There is a video that goes around a Nigeria who got his hair cut somewhere in America and was asked to pay a hundred dollars! He cried murder blue because it equals 50,000 N!
Mr. VP the problem of the Nigerian economy has been well publicized and is known to all informed compatriots. It is simply a chronic case of a lack of a productive base which, as one would expect, has been associated with an insatiable appetite to consume what we are not producing. Over the years, we have made many bad fiscal policy choices, such as the continued importation of refined petroleum products with the associated payment of corruption infested subsidies. In fact, it is claimed today that we spend more on importing refined products than we earn on exporting crude oil.
We maintained a bloated workforce which made it difficult to correct the negative imbalance between capital and recurrent spending. This despite the Oronsaye report which recommended pruning agencies and departments but instead we saw their increase. We suffered a worst case of revenue inflow as our tax-to-GDP ratio of around 8% was deemed the lowest in the sub-region. We are also beset by a case of unreasonable flight to the treasury through rampant corruption linked to impunity.
Therefore, it is not reasonable to expect a robust and stable exchange rate for the naira. The rate we have today is due to the fact that the Central Bank has done everything possible to stem the free fall in the value of the naira through all kinds of creative manipulation despite a not-so-robust reserve situation. The gist of my message to you today is that there is no experimentation that has not been attempted to achieve a stable exchange rate. But just like you can’t make an omelet without breaking eggs, it’s hard to expect the rate to appreciate because it’s choppy by simply letting the market determine the exchange rate. What is more, the devaluation in itself is a strategy to boost exports. But Nigeria has no exports worthy of the name and therefore the devaluation would only lead to increases in import prices which would worsen the poverty index in the country. And that explains why we warmly congratulated your administration when it rightly repudiated devaluation as an economic strategy for unassailable reasons.
We agree with you that the component sections of government should operate in a cooperative manner to ensure that they are not working against the grain, especially in the areas of policy articulation. But it should be borne in mind that the Central Bank has attached to its mandate the responsibility of catalyzing the development of the Nigerian economy. Most commentators accused the CBN of entering the territory of the Ministry of Trade and Investment when it denied the official allocation of foreign currency for the importation of certain items. For shouting out loud, the Central Bank did not stop the importation of these items but made a decision which, I guess, falls within its purview as the body responsible for maintaining the external value of the naira for manage the pressure of demand by refusing to allocate official currencies.
Mr. VP thank you for your patience but please don’t let the choir float the naira to get to us. This has all been tried before, as you would expect, and it had a predictable result, otherwise we wouldn’t be where we are today. We must also keep in mind that what precipitated the current crisis was the decision to refuse official currencies at the bureau de change. In the meantime, what should be done to stem the crisis will be to devise ingenious ways to increase parallel market liquidity to stem the current free fall.
Dr. Chizea is a management consultant