IN this article, we shall discuss the impact of a weaker exchange rate on various sectors of the economy, and also consider whether or not naira devaluation is imminent and inevitable. For this exercise, we will hereafter provide answers to some of the most frequently asked questions regarding the naira exchange rate.
Why are some experts recommending that the naira rate of exchange be devalued?
Indeed, the suggestion that the naira is overvalued is not new, as even the managers of the much celebrated, yet comatose economic empowerment and development strategy, NEEDS, had, over a decade ago, indicated N180 as the appropriate equilibrium and desirable rate of exchange for the naira. Much more recently, however, the huge untamed speculative market demand for the dollar may have influenced the suggestion by some experts that the naira should be quickly devalued to avoid a catastrophic free fall.
Would the naira rate become stable with devaluation?
Historically, the naira exchange rate has suffered multiple devaluations, which evidently, did not prevent further naira depreciation over the last two decades. Consequently, another official devaluation of the naira would not necessarily induce long-term stability of the naira.
Experts have claimed that naira depreciation would increase our exports
Curiously, this argument has often been made to confuse and deceive Nigerians; interestingly, the Nigerian industrial subsector was more diversified and productive, with increasing employment opportunities when the naira exchange rate remained less than N5:
Will a weaker naira reduce inflation?
Capital No! Historically, once again, the rate of inflation remained below five per cent between 1975-85, when the naira was much stronger. In fact, a weaker exchange rate will instigate higher production cost across the board, and also fuel inflation; for example, if a manufacturer required just N100,000 to import a container load of raw materials when naira was N1:
Will a weaker naira reduce cost of funds to the real sector?
No! If anything, a weaker naira will actually instigate higher cost of funds, especially whenever we are blessed with increasing dollar revenue from crude oil.
How does a weaker naira instigate cost of funds?
A simple example may suffice; if
Consequently, the CBN would thereafter, seemingly, 'altruistically' proceed to restrain lending to customers, by offering to pay mouth-watering interest rates above 12 per cent to borrow from banks in order to reduce consumer demand and access to loans so as to control inflation. Such high returns on government's interest-free deposits, inadvertently also reduce the attraction of banks lending to the real sector.
Thus, with CBN's unconstitutional substitution of fresh naira supply for dollar revenue, the more dollars we earn, the greater will be the threat of surplus naira and the attendant regime of high interest and low exchange rates. Undoubtedly, therefore, a weaker naira will further induce unemployment and also deepen poverty nationwide.
Will a weaker naira reduce fuel prices and subsidy?
Once again, the answer is no; in actual fact, if petrol price remains at the current level of N97/litre, a weaker naira will increase the domestic price of fuel, and will also increase the value of fuel subsidy beyond N2 trillion annually. For example, we know that international crude oil price remains the benchmark for the feedstock of all refineries worldwide; thus, if 1litre of petrol sells for
Furthermore, if however, petrol continues to be sold domestically at N97/litre instead of the actual market price of about N200/litre, this would increase subsidy value to N103/litre, instead of the current N53/litre with exchange rate of N160:
Will a weaker naira reduce the dollarization of the economy and stop capital flight?
The truth, of course, is that a weak and unstable naira rate of exchange will actually promote dollarization of the economy. A continuously depreciating naira will elicit less consumer confidence in holding the local currency as a store of value. Conversely, however, a stronger and stable naira would induce confidence, and make the local currency desirable as a means of exchange and a solid store of value, at the expense of other foreign currencies.
Inevitably, therefore, the greater the intensity to forsake the naira because of continuous depreciation over time, the greater will also be the propensity for capital flight as well as the adoption of dollars, for local transactions.
In reality, a weak naira exchange rate is actually not the result of reduced earnings of dollar revenue; in fact, evidence on ground suggests that the naira rate of exchange has ironically steadily fallen simultaneously with vastly improved foreign reserves. For example, in spite of our relatively paltry reserves of
Undoubtedly, however, a weak naira is actually the product of the surplus naira instigated by CBN's monthly substitution of naira allocations for dollar revenue.
Boyo is a commentator on public finance.
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