A person who does not have access to requisite knowledge or is unable to think rationally will usually be taken for a ride by those who know better, or is able to manipulate the perception of others. This reality has been proven over and again in the working of terrorist, militant and insurgent organisations, such as ISIS and Boko Haram. Politicians – majority of them, at least – are also adept at tailoring people’s thought patterns to suit their purposes. Perhaps, it is just human nature to want to take advantage of those we thought weak-minded.
The Nigerian economy has not been in the best of state in the last several months, no thanks to the falling oil prices. The nation’s foreign exchange (Forex) reserve has been badly depleted as a result. It is not uncommon these days to hear some say the country is broke. In spite of the low Forex reserve issue, the government has decided not to ‘devalue’ the domestic currency, the Naira. The official rate has been pegged at about N197 for several months, while the unofficial (black-market) rate has been consistently higher by more than N100 for the better part of the past 6-8 months. How realistic or believable is the claim by the government of the day that the Naira would not be devaluated?
What is Devaluation?
Devaluation usually refers to the official decision by the monetary authority in a country to lower the value of the domestic currency relative to that of a foreign reference currency. It is typically used as a means of improving the balance of payments situation in a country. The idea is that this will help increase the rate of exports while reducing that of imports.
To make this clearer, let’s say the USD (American dollar) previously exchanged to the NGN (Naira) at N160 and the Nigerian government now decides to devalue the local currency to N200 per dollar. This will make exports from the country cheaper while imports are caused to be more expensive. For example, a $50 imported product will no longer sell for N8,000 but for N10,000. It is believed the higher price will force buyers to buy less of imported items. This devaluation – in reverse – is also expected to make Nigerian exports appear cheaper to foreign buyers.
President Muhammadu Buhari has for long maintained that he would not agree to the devaluation of the Naira. He pointed out that Nigeria has not benefitted from past devaluations. This may be true because we import a lot while exporting significantly less – this does not make devaluation ideal. I don’t want to go into the argument on the helpfulness of devaluation to the Nigerian economy. The main thing I seem to have problem with is making people to think that devaluation is something we are still waiting for.
A visit to a local marketplace will reveal to you that devaluation – or, if you want to be more correct, depreciation – has been on for some time now. The prices of some items, especially food, have doubled and some have reportedly almost triple. It makes me wonder what devaluation we are still waiting for. I am a kind of person who loves to walk. There is an area I usually pass when on my walks where a woman sells garri, a food item for the ‘poor man.’ From the advertisement of the woman, I noticed the price of garri has risen by more than 100% (from N270 to N570) this year. I wonder how dollar price has somehow contributed to raise the price of garri that much. The recent fuel price hike has not been great either, at least at this time. You can find several other examples.
Those who import have continued to do so at the black-market rate, with this translating into higher prices everywhere. A good number of what we eat is imported working with this unofficial rate. The government also recently raised the price ceiling for petrol (PMS) to N145 per litre, hinting at the high rate at which oil marketers are able to source Forex as a reason. It makes me wonder what devaluation I am still waiting for.
In my layman thinking, I think it would just be better to make the devaluation official. President Buhari is reportedly now more amenable to the idea of devaluation. In economics and life generally, there are trade-offs. Some decisions will benefit certain groups more than others. The right action is not that without trade-offs, but the one that benefits the majority. I think the forces of demand and supply would have raised dollar exchange rate, but not as high as it currently is if the market forces had been allowed to dictate the rate. How would a Nigerian abroad be willing to remit money to family and relatives in Nigeria if conversion would be done at a lowly rate in the range N193-199? Little chance.
May 25th: Finally, the CBN announced yesterday afternoon/evening that it was adopting a flexible exchange rate. While that may not be described as devaluation, at least demand and supply will now determine the Naira rate. Virtually nobody was getting the dollar at the official N197 rate, anyway.