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Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff - Politics - Nairaland

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Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by stephanie11: 1:02pm On Sep 12
The naira should be floated to find its exchange rate value on the market if Nigeria’s economy is to become productive, instead of relying on oil revenues, a dependency that has plunged our country and our citizens deeper and deeper into fiscal bankruptcy and individual poverty. Ending the elusive quest for a “strong” currency when the economic fundamentals do not support it will be painful in the short run (we have already undergone several years of devaluations forced by these fundamentals, so what’s new?) but will be beneficial in the longer term.

The notion of an artificially strong currency remains attractive for three fundamental reasons: 1. We are fundamentally an import economy, and imports are priced in dollars and other “reserve” currencies in international trade.

2. There is a lack of economic knowledge both in policy-making governance circles and in the wider population.

3. Based on the two factors earlier cited, politicians want to remain “popular” and lack the political will to do what is required to set the economy on a truly productive path. Some “technocrats”, for self-serving reasons, sing and clap along instead of providing the necessary advice and guidance.

In taking this approach, as well as others such as subsidies on consumption instead of on production, structural poverty has been entrenched in Nigeria and the Nigerian economy has remained uncompetitive in a global context, for far too long.

To measure the naira only relative to the dollar and other foreign currencies is to miss a fine point – that it matters as well to differentiate what the naira equivalent of one dollar can buy in Nigeria from what one dollar can buy in America-what economists call “purchasing power parity” – what your currency can purchase for you in your national market as a way to measure GDP and GDP per capita. This approach to measuring economies arose because sometimes currencies are manipulated, and so measuring against such currencies may not yield a fully accurate picture. As someone so brilliantly put it on a WHatsapp post I read, “in the US, a dollar may not buy you more than a bottle of water, while N500 will buy you a pack of 12 of the same bottles of water in Nigeria!”

Because we are an import economy, we want to maintain an artificially strong naira/dollar exchange rate, to subsidize the import habit of our elite, or our ability to pay school fees of our wards abroad – understandable, given the decline of education in Nigeria, but not the solution to a problem that needs to be fixed.

We produce and export nothing that is value-added. Over 90% of our forex comes from oil. When an economy lacks “complexity” (value-added manufacturing as a ratio of GDP) but depends on exports of natural commodities or minerals, the exchange rate value of its currency is determined almost exclusively by the level of its foreign reserves, which accrues mainly from income from such commodity or resource exports. These reserves determine how many months of imports such a country can pay for.

So when oil prices are high for a long period, the reserves swell, and the (say) naira value relative to foreign currencies rises. When the oil price crashes, our reserves are depleted. When reserve levels indicate that a country’s ability to pay for up to six imports is threatened, market forces weaken the strength of the currency (naira in this instance). The value of the currency crashes, because that value is not underpinned by diversified exports that earn revenues as is the case with mature economies. If oil were $100 per barrel for a long period, for example, and our reserves rose to $80 billion, the naira value relative to the dollar will go up. But we have little control over the vagaries of the oil price.

Commodity dependence therefore exposes a country to currency instability except the country builds up huge reserves (eg Saudi Arabia and the Gulf countries which long ago invested heavily in oil refining AND have huge sovereign wealth funds (we arrived at the sovereign wealth party about 40 years late!) in addition to exporting crude. It is OBVIOUS in such cases that there is backing for that legal tender in terms that are relevant internationally. The naira is not so fortunate because our economy is “naked” and globally uncompetitive.

What all this means is that the Central Bank of Nigeria’s efforts to “defend” the naira are like Sisyphus rolling the proverbial huge boulder up the hill, only for it to surely come rolling back down, economically speaking. It weakens the very value of the naira it is defending because the dollar supplies come from the external reserves, but is politically “expedient” because it creates an impression of patriotic nationalism. By the end of the first quarter of 2020, for example, the Bank is reported to have spent approximately $4 billion on naira Defence in the forex market by supplying the market with dollars.

But it’s all just populism. Foreign investors have exited, and forex is not coming in as investments aren’t at a level that can create confidence.

So the only way to reposition our economy is to shift it from an import-oriented one to one that is export-oriented. For as long as CBN continues to subsidize the value of the naira this will not happen, because they are creating incentives for an import orientation.

Forex “ban” makes the matter worse. Local productivity often is not enough to meet the gap in demand for the previously imported products. Smuggling booms. Meanwhile, in a frontier economy, “cabals” have reportedly had access to the naira at CBN rates, so they obtain huge amounts of subsidized dollars, and turn around to sell the dollars at the street market rates with huge profits. Arbitrage reigns. The black market booms.

But if CBN devalues the naira decisively rather than tentatively, or allows it find its value in the market, this will create an incentive to manufacture locally and EXPORT in order to earn forex. Because imports become more expensive.

But other policies must accompany this approach. The absence of those policies is why series of devaluations have not solved the problems, but only import inflation. This is death by a thousand cuts.

The necessary accompanying policy thrust is trade policy. Instead of forex bans, anyone should be able to import (yes, they will need forex to do so)but slap high tariffs (revenues for the government!) on imports deemed luxury items. Policy support should be provided to enable local production of such goods to be cheaper than foreign imports. That way, rich people can buy expensive imported goods, poorer people can buy cheaper “local-made”. More exports, more forex, and eventually the value of the naira stabilizes. The “cheap” exchange rate of the naira (from the perspective of foreign trade partners) will lead to greater orders of Nigerian manufactures, which = more forex earnings. Foreign investors seeking profit will also flood the country that is seen as a large and profitable market with dollars because the market is “open” and trade transparent. This will also help stabilize the naira.

But this is difficult when Nigeria is being mortgaged to a country like China. If our government treats China as a financial lifeline, can we slap the appropriate tariffs on imports from China which are so cheaply produced that it makes production in Nigeria uncompetitive? This is part of a broader problem of the absence of a worldview that includes a strategy to rise in the world, including economically.

Ideally, citizens should be well prepared, communicated to and educated about these kinds of necessary reforms. And we know that vested interests will often seek to short-circuit such reforms to still game the system. It’s like highway robbery on an unsafe road. You may be OK in the early part of the journey, but could (God forbid) run into robbers in the last mile. The role of vested-interest rent-seeking in Nigeria’s economy has been a dominant one for far too long. The phenomenon is not unique to Nigeria, but that’s no excuse. Our concern is about our country and our people and creating an enabling environment for real development. Getting right the balance betweeen the role of the state and that of markets is one of the most important factors in development. I hope that, as President Muhammadu Buhari pursues the Vision 2050, we can get these fundamentals right.

https://politicsnigeria.com/subsidizing-the-naira-blocks-nigerias-economic-takeoff/

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Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by GamalNasser: 1:07pm On Sep 12
Freely floating the Naira under the current govt would be quite Dangerous..The stability of a countrys currency is directly tied to the quality bof leadership

34 Likes 1 Share

Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by slivertongue: 1:22pm On Sep 12
sounding academic but true
Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by yungpowers(m): 1:22pm On Sep 12
Tribalism will never allow our youths vote for such a product.
They'll rather vote for vegetables who'll mortgage their future.
Nigerians deserve Buhari. angry angry

88 Likes 7 Shares

Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by Ventura1: 1:23pm On Sep 12
More reason Nigeria needs a Revolution, a reset is needed to fix the country.

I perfectly agree with Moghalu on the fact
If CBN devalues the naira decisively rather than tentatively, or allows it find its value in the market, this will create an incentive to manufacture locally and EXPORT in order to earn forex. Because imports become more expensive.

26 Likes 3 Shares

Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by armadeo(m): 1:24pm On Sep 12
Really
Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by dokie: 1:24pm On Sep 12
good
Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by laosy(m): 1:24pm On Sep 12
Abegi, I didn't read all those okoto up there but I knew they're talking about one useless currency spoiled by our useless leaders.

3 Likes 1 Share

Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by sholatech(m): 1:25pm On Sep 12
I totally agree with all points Moghalu highlighted. We need to float the naira. Let imports get expensive & we look inwards to meet our needs. Our foreign items & services consumption patterns are not in tandem with Nigerian economic blues

16 Likes 1 Share

Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by AmigoDeDon(m): 1:25pm On Sep 12
End of Naira
Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by Jafar1: 1:25pm On Sep 12
One doesn't need a soothsayer to know to know this government mean no good to the masses..

2 Likes

Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by jericco1(m): 1:25pm On Sep 12
All these things are just theories. Easier said than done undecided

18 Likes 3 Shares

Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by AFULA(m): 1:26pm On Sep 12
okay
Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by Efizzi: 1:26pm On Sep 12
Nigeria Economy is not straight line. Doing this under the current administration will be a disaster amidst the current economic hardship. It will be a total Disaster. We need to have a sound government with good economic team in place before we can reason this.

13 Likes 2 Shares

Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by Dangrace01: 1:26pm On Sep 12
Great.

I don't know who has noticed many companies in Nigeria are selling their machinery as scrap. Many companies are closing down check scrap market and you'll be shocked

I have seen a clean private jet sold as scrap

7 Likes

Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by Finnese001: 1:26pm On Sep 12
Okay
Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by AbijaJ: 1:26pm On Sep 12
If FG try am, Nigerians go vex and the overthrow govt. Even Moghalu himself wouldn't dare try it as a sitting president.

23 Likes 2 Shares

Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by MoxxxxO123(m): 1:27pm On Sep 12
It will be risky floating the currency in the present situations of the country and the current administration have got alot of clueless individuals in some sensitive positions.maybe next time but a welcome idea.

6 Likes

Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by ivandragon: 1:28pm On Sep 12
The presentation is idealistic & eco-financial centric, & therein lies its flaws.

Economic growth more often than not, cannot be divorced from political leadership. Political leadership drives economic growth & it is that political leadership that ensures that the necessary structures & processes needed to drive economic growth are present.

On the issue of being import dependent on food, it's a misnomer & gives a false reading.

Some of the biggest food importers are also some of the largest economies... So it is not the amount of food being imported that is the problem, it is that the government has not created that enabling structure to encourage local production beyond mere rhetorics.

Loans meant for farmers often end up as largesse for the political elites.

The lands that would have been used by sincere farmers are being bought up by those in power & used for less productive purposes.

The mind set that imports have to stop is flawed... What government needs to do is provide the structures fro local products to compete favourably with foreign imports & also get these foreign imports to invest in local production...

8 Likes

Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by dalass(f): 1:28pm On Sep 12
Subsidizing naira.... We subsidize fuel, phcn tariff, biw naira? undecided

Ayam not understanding cool shocked
Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by Ogaemmii: 1:29pm On Sep 12
Subsidizing naira by defending it is a sound economic policy for its current predicament. Floating our currency at this junction will be a recipe for disaster. If we float Naira, It means there is a possibility for Naira to trade at 1000 naira/$1. What would be the economic ramifications of this possibility?
Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by PureGoldh(m): 1:29pm On Sep 12
Dx country matter no be here

The people handling various essential portfolio in dx country are too selfish that they have engulfed the country's economy indirectly

2 Likes

Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by rottennaija(m): 1:29pm On Sep 12
Ventura1:
More reason Nigeria needs a Revolution, a reset is needed to fix the country.

What sort of revolution? Thee Libya King? Where is Libya now after the revolution with the hope and promise of a better society?

Sometime, we need to calm down.

15 Likes

Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by Ekejoestar(m): 1:30pm On Sep 12
Its not a matter of letting the naira float but i think that the govt should encourage local production.
BTW. do you know that the cost of the production of the #50 note is worth more than the #50 note itself but to make matters worse all nigerian note is produced abroad. So my point is that this corntree is bleeding profusely.
Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by surgical: 1:30pm On Sep 12
So this guy is not different from other copy and paste economist,just regurgitating text book theories,without original thought or consideration for the peculiarity of the nation,his suggestions is a recipe for disaster

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Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by Vyzz: 1:30pm On Sep 12
rottennaija:


What sort of revolution? Thee Libya King? Where is Libya now after the revolution with the hope and promise of a better society?

Sometime, we need to calm down.


Ogam Nigeria needs revolution...


It can't get worse

1 Like

Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by Equity15(m): 1:30pm On Sep 12
This man sef..whatever they want to do.now is not the right time abeg
Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by Freesingle(m): 1:31pm On Sep 12
The Japanese and Chinese currencies are relatively low compared to the united States dollar but they have a strong and competitive economy. Industrialization is the way forward

14 Likes

Re: Kingsley Moghalu: Subsidizing The Naira Blocks Nigeria’s Economic Takeoff by dalass(f): 1:32pm On Sep 12
rottennaija:


What sort of revolution? Thee Libya King? Where is Libya now after the revolution with the hope and promise of a better society?

Sometime, we need to calm down.

Libyan money and economy is still better than Nigeria's..... Many Nigerians are still going there!

Even under our democracy, poor economy, hralth, education, insecurity still endemic... We can't surely continue this way

5 Likes

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