₦airaland Forum

The Central Bank of Nigeria has taken a firm stand on the issue of devaluation of naira and this is in tandem with the position of the Federal Government. A divergent opinion between government and the Bank would have resulted in someone losing his job. As a starting point, it is necessary to clarify some concepts. Currency devaluation refers to a deliberate downward adjustment of a country’s currency relative to another currency with the latter being usually a key or reference currency used in international financial markets. Currency depreciation on the other hand, though results in the same downward value adjustment, is caused by the forces of demand and supply rather than use of administrative force by the monetary authorities. This occurs when a country adopts a flexible or floating exchange rate regime.

The monetary authorities of a country cannot deliberately adjust downward the value of the domestic currency without a motive. This is often done under a fixed exchange rate regime on the notion that the domestic currency is overvalued and making its export products unduly expensive. So, the devaluation should serve as an incentive to foreigners to purchase export products and invariably results in capital inflow to strengthen the balance of payment position and consequently improve the foreign reserves cum the value of the domestic currency.Currency depreciation has the same effects as devaluation in that for both cases, exports become cheaper for foreigners and imports become expensive to nationals. If devaluation or depreciation improves exports and consequently capital inflow cum increased reserves, the currency will automatically appreciate under a market determined exchange rate regime but a deliberate revaluation is required under a fixed exchange rate regime. It is noteworthy that people often use both terms interchangeably but economists should not do so.

The above, serving as background to understanding the difference between the two concepts, necessarily provides the impetus for further exploration of the real issues involved in the current case with Nigeria. Since 1986 when the country, like many African countries, adopted the World Bank/IMF Structural Adjustment Programme, popularly called SAP, the exchange rate regime, as part of the package, had shifted from fixed to floating mode. The floating exchange rate regime can be described as clean or dirty depending on whether the central bank allows the market to determine the exchange rate (clean) or intervene in the working of the market through using its foreign reserve to buy and sell foreign currency to manipulate the value of the domestic currency (dirty). Given the imperfections in the market, particularly for developing countries like Nigeria, most countries have to intervene to reduce volatility of the exchange rate. However, the ability to intervene depends on the strength of the foreign reserve which on its own, depends on the receipts largely from exports and payments for imports.



Is the call for the Central Bank of Nigeria to devalue naira hinged on improving demand for Nigeria’s exports? There are indications that contributions of non-oil exports improved in recent times. Notwithstanding, the CBN statistics show that contributions of oil exports to total exports remained over 80 per cent and the current economic crisis could not have brought the country to its knees if truly the non-oil exports have improved. Even then, the prices of oil and non-oil exports are determined outside the control of the country.

For devaluation to stimulate exports and resultant capital inflow, the country must produce goods which it has control on either the output or the price. This is usually linked to manufactured goods. The rebasing of the economic data in 2013 shows that both agriculture and service sectors contributed more significantly to the economy than manufacturing. The manufacturing sector that was growing very fast in the 1970s and early 1980s has seen a downward trend since the late 1980 after the adoption of the SAP. The deregulation of the economy which resulted in massive depreciation of the naira did not help the import-dependent manufacturing sector. The sector remains import-dependent till now. The inability of the sector to grow is responsible for the unemployment we are witnessing today since the manufacturing sector generates more employment than any other sector.

There were arguments that the current value of the naira is discouraging foreign direct investment and making domestic production very expensive. Nigeria is second only to South Africa in FDI to Africa but over 80 per cent goes to the oil sector, not manufacturing. This has been the case for over three decades and cannot change now because of the so-called overvalued naira. There has been a policy of increasing local content of inputs into manufacturing processes since the Third National Development Plan in the 1970s, yet a survey of inputs of manufacturing companies in the country would show that for most of them, over 80 per cent of their inputs are imported. Most manufacturing outfits in South Africa, the second largest economy in Africa and an industrial economy, have achieved over 70 per cent local content thereby reducing use of foreign currency. There is the need for the Manufacturing Association of Nigeria to provide the data for their members.

The whole country has been turned into the world’s retail store such that no building is completed without a shop. There is no encouragement for inventions in the country because there are no structures to promote massive production and commercialisation of such inventions. I watched a television programme recently where inventions by Nigerians won awards at global level. That would not be the first time and in other climes, investors will show interests immediately and promote massive production of the inventions. Our industrialists are more interested in importing materials that can be produced here because it also allows them to engage in illicit funds transfer via over-invoicing of imports.

The major factors affecting the manufacturing sector are not the value of the naira but infrastructural deficiency, particularly electricity and transport, and, of course, high cost of borrowing. We can then add import dependency and the attendant foreign exchange bottleneck as well as importation of finished consumer goods to compete with expensive local products. This last point simply indicates that the government was right in banning some products. The World Bank, IMF and some foreign collaborators have condemned the Federal Government’s stance on the refusal to devalue the naira and ban some products. There is the need to ask them about which export products will benefit from such devaluation. During the 1997 Asian financial crisis, the countries affected had to engage in some regulation of their economies, particularly movement of currency and importation until there were improvements. After their economies stabilised, they dismantled the regulation. As usual, the IMF cried foul but was ignored mainly by Malaysia which was the first to get out of the problem without support from the IMF.

Recently, China devalued its currency and these international financial institutions are condemning her. They opined that it could lead to currency crises around the world. China can afford to devalue because it is an industrialised economy that produces export manufactured goods sold all over the world. Nigeria that has no such power is being encouraged to devalue its currency. What a contradiction?

Since the CBN has adopted floating exchange rate regime, it can support the naira up to the point that it has foreign reserves to do so. As the ability to support declines, the value of naira will depreciate and find its level. The currency can appreciate thereafter if perchance, the international market improves for oil and gas with consequent improved reserves position or domestic production increases with less demand for foreign inputs, elimination of illicit capital transfer, significant mopping up of liquidity in private home through, for instance, swapping colours of N500 and N1000 to reduce speculative attack on naira, as well as fighting corruption to a standstill. Currency appreciation and depreciation are the way to go.

Tella is a Professor of Economics, Department of Economics,

Olabisi Onabanjo University,

Ago-Iwoye

Source : http://punchng.com/2015/11/3108

I'm yet to decide

Well structured article.

I don't understand economic jargons

tobimillar:
I don't understand economic jargons

I think we need economic expert here

It's silly of the IMF to condemn the devaluation of the Chinese currency when China is a highly industrialized and manufacturing nation, and then turn around to prescribe the same thing for our oil based economy, whose prices and output we do not control, meaning we cannot benefit from the core motive of devaluation which is to encourage the growth of our foreign reserves through increased capital in-flow triggered by cheaper exports which would then boost the Naira.

The senselessness of IMF's desire for Nigeria to devalue our currency while crying about China's devaluation underlines the fact that these shylocks are only protecting their western interests. We are still recovering from their recommended SAP policy in '86.

They can go to hell. Depreciation it is.

Devaluation of the naira isn't necessarily an unpleasant thing if the demand elasticity of our imports and exports are not inelastic. Nigerians depend heavily on imports to the point that even if foreign prices of such commodities rises, quantity demanded will fall, but not to a significant level to affect exchange rate. The major reason for this is lack of import substituting companies in the country.

The Marshall Lerner Condition states that a real devaluation (or a real depreciation) of the currency will improve the trade balance if the sum of the elasticities (in absolute values) of the demand for imports and exports with respect to the real exchange rate is greater than one. In other words the level of dependency of Nigerians on Import, and other countries dependency on our own exportable commodities is the factor that will determine whether devaluation or depreciation will restore B.O.P imbalances. If the level of both dependency is highly sensitive to price changes, then devaluation can make a difference. However, this is not the case since our dependency of imports is tremendous and even our exportable commodities do not compete internationally with other commodities.

Nevertheless, i believe the idea behind the devaluation isn't necessarily to restore exchange rates to previous levels in the short run. The idea is to enable CBN make monetary plans and targets that can keep those rates at a stable level. Depreciation as caused by market forces is erratic and can't allow CBN fight the fluctuations (with the little forex reserve we have) while making necessary monetary plans and forecasts. Though the quality of such plans will what will make the difference in the long run.