Nigerian
Economy: INFLATION, FOREX AND THE CLAMOUR FOR DEVALUATION
(Proffering
Solution to our current Stagflation)
By
Salis, Kolawole
Yusuf (E-SKY)
*As Inflation rate jumps from 9.6% to 11.4%
(Jan, to Feb 2016) and to 12.8% (March 2016)*
In my view, the
recent uptrend in the inflation rate hitting two digits is a Structural cause
rather than a perceived Liquidity shortfall. The inflation rise was on the back
of uptick in the CPI capturing changes over time in the prices of over 740
goods and services consumed day by day in the country. This has been triggered
by the lingering adversities of Forex trading, Fuel scarcity and Power outage.
Though pegged at N197/N199 CBN official rate, the naira exchanges above N320 to
a Dollar; this I conceive as a speculative attack from the Bureau De Change
(BDC) operators.
The
consequence of the failing naira keeps pushing import prices up (mainly food)
noting that Nigeria is elephantine at import. In the same vein, the sudden
declension in fuel supply has posed untold hardship on Nigerians with
transportation linkages and thereby inflicting precarious upfront in the prices
of general commodities. Whilst there is a spurious drop in power supply, market
activities cripple and the pressure bangs on commodity prices.
Going
by the forgoing analysis, it is evident that the inflation rise is not a
Liquidity course but rather a Structural menace. As such, the remedy lies in
the ability of the Federal government and CBN to launch proactive measures in
bridging the structural loopholes; regulating Forex, restructuring NNPC in
connection with fuel scarcity, power supply among others.
In
the course of addressing the present economic challenges, Devaluation policy has
been on the call from some quarters, but this will rather mean policy
misapplication. Devaluation at this time will only further ridicule our
currency and aggravate our current problem associated with falling external
reserves. The gain associated with the devaluation policy is primarily to
promote exports through local produce via domestic industrialization.
Invariably, devaluation works well for countries with vast locally produced
commodities but ironically Nigeria have nothing readily available for export at
moment as even the country is import reliant having over 80% of its commodities
imported even to pull of common tooth pick. Devaluation on a prominent note is
meant to usher in much needed Foreign Direct Investment (FDI) and foreign capital
inflows but the current macroeconomic policy framework in the country is filled
with uncertainties, poor price mechanism, and lack of transparency which rather
suppress foreign investors’ confidence.
Nigeria
being a monoeconomy (solely dependent on oil revenue) and import dependant,
devaluing the naira will bastardize imports as both foreign and local goods will
trade in price extension. It will also aggravate the current problem associated
with foreign currency debts. Consequently, this will inflict more suffering on
the larger masses and pave way for the natural death of local investors.
Subsequently, the perception of revenue in a local currency by foreign
investors could depreciate both the value of the assets invested as well as the
loss of income when there is a change in the exchange rate. In the face of
global oil price crash (below $40 per barrel) and dwindling external reserves (below
$27.8 billion), Nigeria can’t afford devaluation, I doubt if countries with
bully reserves will even make such move because of its grievous effect on long
term growth. Hence, we mustn’t forget that it is not only Nigeria that is
facing the current global oil price crash, all OPEC countries, even U.S and none
of these countries have yet devalue their domestic currencies. However, even if
countries like U.S, Saudi Arabia alike devalue, they could afford it but I
don’t think Nigeria can afford it at this pressing time.
Albeit
devaluation is a progressive policy, it will only become necessary if the
government is unable to inprove its revenue base from other sources, and say
oil price declines further below $38/$40 per barrel for a protracted period of
time, then there may be no other viable option than to devalue the naira.
Aside
from the fear of inadequate reserves, another possible challenge that
devaluation may pose is the trouble of stabilizing naira back after it has been
devalued. This has always required tactical framework and lot time horizon.
In
the interim, the country lacks policy direction and the absence of policy is a
recipe for economic anarchy. In lieu of this, there is need for the government to
set up dynamic Economic team to formulate strong economic blueprint that will
drive the economy’s short and long term growth.
In
the face of the present economic woes, the discussion should not be about the
devaluation of the naira but rather developing a policy framework that will
reduce economic uncertainty. There is need for the government to review the
Forex policy forthwith; exchange rate should be made flexible with free flow
other than the fixed exchange rate regime. Beyond the quantitative easing
posture, following sizable volatility in FX markets which has resulted in
widening parallel-interbank premiums, CBN could make
pronouncements on developments over the naira with a view to easing some restrictions.
CBN should retain policy parameters on all fronts while commencing
administrative measures aimed at easing illiquidity across FX markets.
Similarly, the role of Oil companies and Banks should be put into active play;
CBN should allow oil companies and banks to sell dollars to BDC operators as an
intermediate measure to reduce pressure on naira. In the same vein, government
should develop a pricing mechanism that is sustainable, predictable and
transparent so as minimize discretion in the allocation of foreign exchange and
in turn help boost investors’ confidence.
For
a country to grow you mustn’t depend on foreigners to develop your economy for
you, as such, government should make genuine efforts towards securing local
production and developing local industries to propel import substitution. Government
should formulate favourable policies that will speed up MSMEs’ gowth and
increase their contribution to GDP. Granting tax rebate and holidays to local
manufacturers and entrepreneurs will serve as great incentives to
industrialization.
Without
doubt, it is indeed a working time for every stakeholder in the country for the
country to surmount its present economic challenges.
Author: Salis, kolawole E-SKY
(+234)
8032467356
>E-SKY is An
Economist and Research Analyst in corporate practice
Dated: Friday 18th April,
2016.
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