Naira

Nigeria is focused on the wrong metric. Every day, we hear more about the price of dollar to naira than we do about the nation’s economic growth rate, which has fallen from an average of 5% two years ago to 3% presently. The value of the naira is hardly the end game – economic productivity is. The nation’s economic growth is key to resolving the issue of exchange rates or any potential inflationary spikes.

The lack of adequate understanding of exchange rates in developing countries explains a major portion of the ambiguity that envelopes the argument on whether to devalue or not. Some believe devaluation is a panacea, while others believe it to be a terrible move that significantly worsens economies. In the context of Nigeria’s current situation, neither of those arguments apply. Devaluation is simply one step in many, towards fixing this nation’s economy.

Nigeria is focused on the wrong metric. Every day, we hear more about the price of dollar to naira than we do about the nation’s economic growth rate, which has fallen from an average of 5% two years ago to 3% presently. The value of the naira is hardly the end game – economic productivity is. The nation’s economic growth is key to resolving the issue of exchange rates or any potential inflationary spikes.

If we are to focus on growth, here are a few things we must begin to do.

Devalue the Naira

As unpopular as this has sounded for months now, Nigeria needs to devalue the naira. We should start with closing the gap between the official and parallel market rates. Rather than this pegged currency regime, a managed currency regime will suffice for now. No, this will not mean “murdering the naira”. The naira has already fallen in true value and because we wish the naira was still N197 to a dollar does not mean that it is. If the majority of people are trading at N305, it means they’re willing to trade a higher amount of naira for the same amount of dollar than before. If the banks already charge you at N305, then the naira’s already depreciated i.e. lost some value. Same effect when a retailer adjusts his price because he’s taken his dollar to naira cost at N305. So any advantage to keeping it at N197 is tenuous at best.

The immediate reality might be different, as devaluation does not guarantee that fickle portfolio investors return to Nigeria. However, it prepares the right environment for growth as Nigeria is forced to look into policies that indeed spur growth and make the country attractive to both direct and portfolio investment.

Devaluation reduces the pressure on the naira, provides the government with a degree of policy flexibility, reduces the arbitrage in the FX market and actually supplies more naira for the government to fund necessary infrastructural upgrades. Here’s what happens when we decide to stick to our current strategy – the nation bleeds slowly and painfully. According to the latest Capital Importation report from the National Bureau of Statistics (NBS), Nigeria’s foreign inflow fell to $9.64 billion, down 53.5 percent from $20.75 billion in 2014. With our current policies in place and a general sense of policy uncertainty, investors are clearly avoiding Nigeria.

Theoretically, capital import loss should abate once such capital restrictions are eliminated as foreign investors find confidence in a country’s economic policies and reassurance in a country’s ability to move their investments without interference. The immediate reality might be different, as devaluation does not guarantee that fickle portfolio investors return to Nigeria. However, it prepares the right environment for growth as Nigeria is forced to look into policies that indeed spur growth and make the country attractive to both direct and portfolio investment.

Relax Import Restrictions

The CBN must reconsider the 41 items made invalid for purchase of foreign exchange from the interbank foreign exchange market, from Bureaux de Change and even export proceeds. The CBN claims its policies have saved us precious dollars, spurred local content creation, encouraged consumption of domestic products and created jobs. However, empirical evidence in the reality and the numbers appear a tad different from these intentions.

If the present administration is truly focused on job creation, it must see that such polices only have a negative net effect. They must then develop more direct methods of encouraging the production of local content.

As observed by the Lagos Chamber of Commerce and Industry (LCCI), the restricted items include those that are critical elements of the manufacturing process of many firms across sectors in Nigeria. Consequently, a number of manufacturing companies in Nigeria cannot source critical items and have had to scale down operations or shut down.

The numbers from the NBS’s GDP Growth Report in 2015 Q3 corroborates this downturn – Nigeria’s manufacturing sector has now seen two consecutive quarters of contraction, making it an official recession. If the present administration is truly focused on job creation, it must see that such polices only have a negative net effect. They must then develop more direct methods of encouraging the production of local content.

Provide Incentives, not Platitudes

A government adamant on the private sector switching from foreign to local inputs must provide the right incentives. Most of such inputs require a chain of processes that are costly or impossible to replicate in Nigeria, given existing infrastructural deficiencies. A determined government must look into policy and legislative changes that can be enacted in the short run to ameliorate the difficulties of finding substitutes and doing business in Nigeria.

The government can incentivise non-oil commodities exporters by facilitating the ease of exports at the port and giving tariff/tax cuts. Devaluation already provides the advantage of cheaper products for exporters; the government simply has to provide the enabling environment.

The medium to short term solution to economic growth requires the Nigerian government to prioritise capital expenditure as detailed in the 2016 budget and work towards raising the level of capital implementation from the yearly average of 40% to 80%.

The medium to short term solution to economic growth requires the Nigerian government to prioritise capital expenditure as detailed in the 2016 budget and work towards raising the level of capital implementation from the yearly average of 40% to 80%. Long-term finance through government spending, public-private partnerships, broadening of the tax base and judicious investment of a portion of pension funds are necessary to close the infrastructure gap. None of these will be a walk in the park, but the government needs to place its priorities in enablers of growth.

The private sector also has its role to play and will need to work with the government to bridge the nation’s infrastructure deficit. Government clearly does not have enough to fix this deficit, so private sector investment is crucial. However, the government will have to give the private sector good reasons to invest by reducing risk through stronger legislative guarantees. Also important, investment from the private sector will need to come from – predictably – foreign investors. However, if we’re closing off the economy to ‘save’ the naira, the chances of such investment remains tenuous.

Ignoring the illness of a patient does little to make him better, admitting he is ill and administering the proper treatment does.

The economic realities that surround us demand that we make painful, but economically sound decisions. The hard work begins with the realisation that the naira is indeed weak and misaligned in value. Our current path might keep the naira at N197 for a minority of the population, but it certainly won’t provide the right environment needed for inclusive growth. The nation certainly stands a better chance if it tries to help the naira by focusing on growth strategies rather than artificially propping it up.

Ignoring the illness of a patient does little to make him better, admitting he is ill and administering the proper treatment does. Only by admitting this to ourselves, gearing up and figuring out ways to fix this loss in value from the supply side can we possibly save the naira.

Chuba Ezekwesili is a research analyst with a focus on the Science and Technology Sector. He writes at Naijanomics.info and medium.com/@chubaezeks. He also tweets at @chubaezeks.

This opinion piece is the fifth in a six-part series that hopes to steer the current exchange rate debate towards a focus on facts, taken from economic theory, history, and evidence from Nigeria and other countries. The authors hope that Mr. President will read these pieces and reconsider his stance on the Naira and the broader question of economic growth.