At the risk of flogging a dead horse…
I am absolutely for a devaluation of the Naira.
This keeps coming up and I am getting bored of explaining why devaluation makes sense (and why it is inevitable).
In the first instance, devaluation will ease pressures on foreign exchange reserves, and put us on a path to a loosening of FX restrictions, for the good of businesses everywhere. Devaluation should also improve the supply side of the FX market — foreign investors will be less reticent about bringing much needed FX into Nigeria and the government will find its objective of raising external finance to fund infrastructural and social projects easier. I acknowledge the inflation risk, but I think too much is being made of that (and the data does not support an unmanageable impact on price levels) — we need to focus on expansionary policies that drive GDP growth that is sufficient to improve lives, i.e. outstripping both population growth (2–3% p.a.) and inflation.
Our macroeconomic policy needs to shift from worrying about inflation to focusing on driving growth. One of the ways to do that is to increase agricultural output and manufacturing capacity with a view to selling into a world market that is clearly much bigger than ours. Focus on volume, not price. A weaker Naira means those exports are more competitive globally. That’s how you increase your share of global trade and grow your economy.
The best way to compete globally is by focusing on your comparative advantage, and that isn’t done simply by looking at the apparent ‘simplicity’ of the product in question. If incomes are higher because the economy is bigger (having grown faster), the fact that your toothpick is made in China really shouldn’t worry you since you are able to afford it. You can do that because you are employed in a non-toothpick making industry that sells to the outside world.
The ‘man on the street’ is already suffering. Devaluation is the first step on a path to doing something about it, instead of this masochism that means he might soon lose his job if businesses continue to suffer under the liquidity strain. If anything, devaluation will help him, by supporting export growth and diversification of the economy (his income should rise over time) and easing supply of FX into the economy (his employer will have better access to capital to run his business).
The wide spread between the official rate and the parallel market (50% currently vs. 5–10% not too long ago) should tell you that the official price is artificial, and the number of businesses complaining about ‘dollar scarcity’ should tell you that people are willing to trade even at black market prices. CBN has already published its list of restricted items, so imports are obviously being partially funded at 305/$ and inflation isn’t out of control, but small businesses are shutting down under the strain on their working capital and cash flows.
How will devaluation help? Again, by easing supply side challenges in our foreign exchange market and putting us on a path to export-led growth. There are no quick fixes to the challenges of this economy.
If you’ve followed anything I’ve written this year, you will acknowledge that, if nothing else, I am consistent in this view. Both previous posts are 10–15 minute reads, so perhaps I should just let this devaluation horse be.
For now.
E.