Nigeria: Ogunmupe - Devaluation As Disincentive to Growth
By Bayo Ogunmupe
RECENTLY, the Central Bank of Nigeria (CBN) devalued our currency, the naira from N155 to N184 to the United States dollar. This measure will certainly hurt the Nigerian economy. The announcement came a few days after the federal government announced the introduction of austerity measures following the sharp fall in the price of oil in the world market. In response to the devaluation, inflation is galloping with petroleum scarcity ravaging parts of western Nigeria.
According to the CBN, devaluation was arrived at in order to curb negative speculation with the naira, particularly by the banks, which have been putting great pressure on our legal tender. The devaluation, which is plummeting by the day, is now about 10 per cent. The step was rendered inevitable by excess liquidity in the banks. In doing this, the CBN hopes to tighten the monetary policy framework by allowing some flexibility in exchange rates.
Devaluation will also stop speculative practices; stop the evaporation of the naira. While we cannot influence the increase in the price of oil, these CBN measures have been adopted without evaluating the impact on the Nigerian economy. Indeed, the net impact of a weak naira is an unsustainable spiral of inflation raising the costs of petroleum products. Sadly, the improper management of the economy and fiscal indiscipline over the years are responsible for the present anxiety. This is all the more so, as oil price had remained far above the budget benchmark for decades, peaking at about $120 per barrel earlier last year.
Earlier, the volatility of oil prices was long in evidence, but the Federal Government ignored the signals. Thus, the government should be blamed for lack of creative problem solving in not diversifying from our mono-cultural economy. Ordinarily, devaluation of the naira would not have been a problem if we had plenty of goods to export and little to import, since devaluation benefits exporters.Now we are worse of as we shall need more naira to buy goods sold in dollars. Unfortunately, Nigeria cannot manufacture much, owing to a combination of factors among which are high cost of production, high interest rates and an unstable power supply, which have hampered local industries. Interestingly, the finance minister opined that the interest of the common man is a priority in Federal Government's strategy for salvaging Nigeria's economy. We urge the government to clearly demonstrate this through clearly defined programmes and policies that would cushion the people from the effects of devaluation of the naira. Perhaps devaluation and the ensuing austerity measures would have been a blessing in disguise if it would force government to develop other revenue sources, establish fiscal discipline, cut cost of governance and establish an interest free, collateral free and discrimination free bank product to develop the country.The second disincentive to economic growth is the abdication of leadership. By this we mean that the people in power have refused to enforce and enthrone regulations, which can ensure economic growth; the overbearing attitude of our regulators, which culminates in poor attitude to work and abdication of authority and refusal to apprehend regulation violators.
Besides, most of the policies churned out by the regulatory bodies in Nigeria have over the years effectively succeeded in stifling or restricting and hindering innovation and investment. This has led to a situation where the bureaucracy dictates the pace of the growth of the economy. Another worrying issue is double taxation whereby entrepreneurs are being squeezed by multiple taxes, levies, red tape as states seek to shore up their internally generated revenues. This is why the World Bank observed that Nigerian businesses spend valuable time and resources trying to comply with a myriad of local regulations.
As World Bank said further, removing those burdensome regulations is an essential step towards a stronger private sector of the Nigerian economy. After sampling the opinions of world-renowned economists, we have come to the conclusion that the key to unveiling the troubles of the Nigerian economy is to be found in recognizing that the rebased economy has highlighted the absence of structures in our economic policy making. This means that there should be an immediate transformation from primary to domesticated value added production.
Although reports suggest that countries like Thailand, and Malaysia have experienced similar growth in the services sector, but that this in itself does not justify the composition of our Gross Domestic Product (GDP) that our rebased economy just revealed. However, world economies are measured by the strength of their industrial capabilities, which give verve to the service sector. If the service sector has revealed an uninspiring contribution of a mere seven per cent, it means that retail trade is driven by imports. This implies that the services sector put a lot of pressure on the exchange rate of the naira.
However, all over the world, economies are measured by the strength of their industries, which gives verve to the services sector. In Nigeria, the services sector is dominated by wholesale and retail trade. If our manufactures contribute seven per cent to the GDP, it means our retail trade is driven by imports. This puts a lot of pressure on the foreign exchange rates. Given that our earnings from oil are plummeting, the demand for foreign exchange to sustain our imports can only come from running down our external reserves.
Thus, the federal government should recognize the danger so posed and diversify quickly to forestall an outright collapse of the naira. In this regard, Federal Government has to plug distribution loopholes in its Agricultural Transformation Action Plan. It is noteworthy that both manufacturing and agriculture output have remained stagnant. The urgent step required is collaboration for increased productivity between the federal ministries of Agriculture and Industries, particularly in areas of private sector investment.
Indeed, the best ways to strengthen the value of the naira are one, expand the volume of non-oil exports and services and two, enhance domestic competitiveness that will reduce the demand for imported goods and services: because a pound saved is a pound earned. Howbeit, we have to expand our manufacturing sector because as long as our industries remain stagnant, for that long would unemployment remain a threat to economic development in our fatherland.