This is the last in a six-part series that hopes to steer the current exchange rate debate away from uninformed analysis to one focused on facts, taken from economic theory, history, and evidence from Nigeria and other countries that have undergone periods of currency crisis. It is our hope that Mr. President will read these pieces and reconsider his stance on the Naira and the broader question of economic growth. Counterfeit nairaAs we have read from the articles in this series, the naira problem is not one that is unique or new to Nigeria. The question then, is how we respond to what increasingly looks like a long term collapse of the price of crude oil.
Although there will be arguments made in favour of maintaining the currency peg, the reality is the costs far outweigh the benefits. The administratively fixed peg only postpones the inevitable future adjustment; a future adjustment with future pains that increase with every day the official exchange rate distances itself from reality.
“A fixed exchange rate looks stable but it hides accumulated problems.”
This reality about exchange rates is the reason why many countries around the world have moved to more flexible exchange rate regimes. In the 1970s about 70% of countries pegged their currencies to some other currency, usually the US dollar. By the late 1990s only 29% did so. The lesson in most countries is always the same: fixing currencies has very few benefits but lots of real costs, especially during periods of economic shocks.
It’s All About Productivity
The reason why most countries have moved to more flexible regimes is because the costs of fixing currencies is usually borne not only by the governments but by businesses, especially with regards to their productivity. And productivity is what the economy is really all about. Can our farmers move from producing 6 tons of yams per hectare to producing 15 tons per hectare? Can our financial sector expand their services to the poor in Nigeria and to customers in more countries? Can our oil industry move from refining less than 10% of domestic demand to exporting excess refined fuels? Can our manufacturing move from producing low value products like toothpicks, to high value products like cell phones?
These are the real challenges that we face. A devaluation, or the lack of it does little to tackle these challenges. However, a failure to devalue means the government spending its time, and a large part of its resources, pursuing a fixed naira goal that has no real impact on the real productivity of its people. A policy that will probably see the economy continue to stagnate. The
Foundations For Failed Election Promises
Importantly for the government, getting the economy back on track is crucial for its ability to implement election promises.The government plans to raise taxes to record levels from VAT, CIT, and customs duties but that will be more difficult if the economy continues to stagnate.
The government plans to fund its deficit by raising money from the domestic market but that will also be difficult, and cost a lot more, if bond buyers have no confidence in the economy. The same applies to the government’s plans to sell eurobonds or borrow from other international sources. Success will depend on the confidence that international investors have in the economy.
Even the fight against Boko Haram, to some extent, rests on the ability of the economy to absorb the millions of youths who would need sources of livelihood.
Making the right choices
Mr. President repeatedly said during the campaign trail that he was a reformed democrat and was convinced by the collapse of the old Soviet Union. Perhaps then it is time for the President to abandon the same failed policies that to a large extent were responsible for the Soviet collapse. Although different factors played their roles, one of the key causes was economic stagnation. Economic stagnation that was to a large extent driven by state-led price fixing of everything from exchange rates to fuel to sugar to bread.
Here in Nigeria we see similar echoes of state led collapse in certain sectors of the economy. The government controlled and fixed prices for refined fuels and slowly but surely the downstream section of the oil industry has collapsed. The government controlled and fixed prices for electricity and the power sector, at least until recently, continued its slide into oblivion. The naira is the next on the chopping block and the attempts to fix the price of the naira via administrative measures will slowly but surely lead to the continued stagnation of the Nigerian economy. We know because we have been here before ironically partly under the same president.
Unfortunately with a four-year electoral cycle, there is no time to be lost by waiting to see what happens. Economic stagnation would have serious consequences for everything the APC administration plans to achieve during its four-year mandate. It would be a shame if the Buhari regime fails over a policy choice that really should not even be debated.
Mr. President, “A wise man doesn’t just know what he knows, he knows what he doesn’t know”. Please be the wise man.
By Nonso Obikili