Mr. President, Make Us A Market
Feyi Fawehinmi

“You want Nigeria to live within its means? You dont want scarce dollars to be spent on importing things you think can be produced? That’s all fine. But the best way to achieve these things is not by trying to second guess human behaviour. It is by allowing markets to do their work”

It is quite true that a high exchange rate will lead to import reduction. And this might happen faster than through the current regime of import restriction where the lower exchange rate gives erroneous price signals to some players. However, the factor you have not incorporated is rent-seeking.

To illustrate, I’d point to the fact that Nigeria has, at least in the last decade, consistently exported more than it imported, while yet seeing the Naira lose value.

One reason for that is a steady outflow of money from Nigeria, often not through the Central Bank that could be termed capital flight. We’re talking about illicit flows of various kinds.

The CBN figures you showed above illustrate this point. Inflows far outstrip outflows.

This means that such money will continue to leave the system with the potential to lock out more valid uses of forex viz procurement of value intermediate goods and inputs to production.

While you could argue that it is not the government’s job or capability to determine the right or correct uses of forex, you would still have to square with the fact that the government is the main supplier of forex that can set and enforce terms of exchange. You will have to square with welfare perspectives and the pragmatic need to innoculate the local non-oil economy from the vagaries of oil price.

This is where I see a gap in your approach. You for example did not at all mention the inflationary impact of devaluation. One effect this probably unsustainable demand management policy has had is to limit inflation. For most Nigerians, the price of most goods they consume, their most essential goods have not yet gone up significantly. With devaluation it will happen, and it will have extremely deep effects which warrants its own discussion as a fair treatment of it can overwhelm this narrow topic.

One thing is clear, whichever policy direction is taken, Nigerians have to get used to fewer imports, cards that don’t work abroad, etc. The one thing that will change supply of forex positively in the near term is rising oil prices. Foreign Portfolio Inflows really have no net effect on supply much as they provide a float that helps with stably matching supply with demand. Foreign Direct Investment could triple, and it would still be only $6b, leaving us with a very substantial supply gap that might be (I guess) in the $20b-$30b range.

So we really should stop giving the impression that, if only stupid CBN stopped their stupid policy, we would have all the forex we need. That would be doing serious disservice to the debate.

In Summary, there are many reasons to devalue. However, we have terrible choices and horrible choices. In my view, the best argument for devaluation is that government will have more Naira to spend, that could for example be very useful in slushing its CCT programme. We need a debate that incorporates choices and one that is not ideological. We have never had real market for forex in Nigeria in my lifetime. But that is another topic.

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