23

Mar

DEVALUE ?, REMOVE SUBSIDY AND 'KILL' NIGERIANS 02112015

2015-11-02

DEVALUE ?, REMOVE SUBSIDY AND 'KILL' NIGERIANS
BY HENRY BOYO

The IMF's speculated positive prescriptions have yet to manifest as sustainable, socially empowering or employment generating models anywhere on our continent.

Thus, IMF Africa Director, Mrs. Atoinette Sayeh's recent observation on Naira Exchange rate management may provide an insight into this formidable international financial regulator's plan for Nigeria's economy. Sayeh reportedly noted at a press conference in Lima, Peru, that "...those measures introduced by CBN to restrict demand and limit access to official foreign exchange for certain imports are quite detrimental to economic activities, and invariably led to a lot of unhappiness in the private sector". 

Consequently, Sayeh, concluded that "these measures were neither sustainable or advisable", and therefore hoped "that there will be an opportunity to review forex restrictions and permit the Exchange rate to continue to adjust", because, according to her "the restrictions are "already making things harder for the average person to buy milk or to buy milk at an affordable price". Evidently, there was no mention of under nourished babies or government's insensitivity to the plight of the average Nigerian in Sayeh's comments, but it is difficult to deny the intended mental association!

Incidentally, the IMF's demand for Naira devaluation has also been echoed from various strongholds and media organs of international investment capital and speculative portfolios; notably, 'The Economist's commentary, derisively titled 'Toothpick Alert', was a bland and disdainful parody of CBN's exclusion of 41 items from access to cheaper official forex supply.

Similarly, the International banking Mogul, JP Morgan also gave notice of its decision to delist Nigeria's government bonds from its widely subscribed index, unless the Naira was devalued, and CBN also increased liberal dollar supply to the forex market, presumably, so that foreign portfolio investors, (i.e. those without factories or productive enterprises) particularly, can take out their speculative cash flows at short notice.

Evidently, further Naira devaluation would also make it much cheaper for such footloose portfolio investors to acquire both public and private equity in Nigeria for less dollar values. Ultimately, therefore, if Naira depreciation persists, more Nigerian equity prices will fall in value, way below US$0.10(Ten Cents); expectedly, before that happens, the much sought after foreign investors would have long spoken with both feet. In any event, why should we be ambushed by portfolio investors, if, as reported, "foreign holdings of Naira government bonds have fallen to less than 10 percent of the total from 27 percent in 2013?"

The above awkward realities, notwithstanding, last week, no less a person than the suspended former CBN Governor, Lamido Sanusi, presently, Emir of Kano, joined advocates for a weaker Naira, when he called for Naira devaluation as well as the removal of fuel subsidy.

According to Sanusi, "It is wrong to continue to pretend that you can keep the Naira at a certain level, when the price of oil is falling, without depleting your reserves. You have to make a choice" he advised. Sanusi warned that CBN's forex restriction was depriving key industries of imports and therefore suggested that "if we have to make a choice between economic growth and devaluation", his recommendation would be that "we protect growth". However, the Emir is clearly in denial that it will be impossible to protect growth if the Naira slide persists unchecked overtime.

Nevertheless, the ex banker, correctly recognizes that the CBN has lost control of its core mandate for price stability as, "inflation" according to him, "is already upon us"; so in addition to devaluation, His Highness, curiously, warned that unless we loosen monetary policy to help stimulate the economy with cheaper funds, and "lower CBN's key interest rate from a record high of 13 percent, we would compound an exchange rate crisis for business with high borrowing costs and declining demand".

The question, however is whether it is wise to facilitate accessibility to cheaper funds despite the subsisting irrepressible excess money supply that is primarily responsible for rising inflation and the diminishing purchasing value of all incomes, particularly the incomes of millions of Nigerians who still earn below $2/day. 

The essence of Sanusi's recommendation is that if CBN reduces its key interest rate significantly, commercial banks would follow suit and lower their rates to possibly below 20 percent from the average 25 percent currently posted. Expectedly, accessibility to cheaper funds should stimulate consumer demand and also reduce cost of loans across the board, instructively, however, unless the existing burden of systemic excess money supply is resolved, it will be reckless to reduce CBN's monetary policy rate to best practice level below 5 percent, so that single digit cost of funds can evolve across board to successfully jumpstart economic revival. 

However, it will be clearly absurd and counterproductive to introduce policies that provide cheaper funds to stimulate consumer demand when increasingly surplus cash is already a disenabling, abiding economic burden. Such strategy would be akin to pouring petrol into the already raging fire of spiraling inflation. Ultimately, if money supply remains untamed, the N1,000 note which is currently worth less than $5 may exchange for less than $1, while fuel price, even with local production, will more than quadruple with its own distortional inflationary consequences!

Sadly, our dysfunctional economy, is, probably the product of the application of such a misguided problem solving mindset, which has expectedly failed to favorably resolve our persistent debilitating challenges, with inflation, interest and Naira exchange rates or job creation and fuel subsidy.

Evidently, the present disenabling inflation rate is fueled by a subsisting burden of systemic excess money supply which forcibly predicated CBN's ongoing market operations to remove over N3,000bn from the evidently burdensome liquidity surplus with treasury debts in the 4th quarter of 2015. 

Not surprisingly, Sanusi had similarly sustained, as CBN Governor, this same distortional monetary strategy that constrains government to pay double digit interest rates for essentially sovereign, risk free loans which will ironically be sequestered as idle funds, notwithstanding the insistent cry of the real sector for access to cheaper funds to facilitate production and create jobs.

Advocates, for a weaker Naira, are always eager to explain that Naira devaluation is inevitable since fall in crude oil prices has depleted CBN's self styled "own reserves". This motley crowd of Naira bashers, however, always become unsettled when asked why Naira did not appreciate from N153 to below N100=$1, when, for example,  CBN reserves exceeded $55bn, with the controversial Excess Crude Account also in excess of $8bn. Furthermore, devaluation advocates cannot also explain why Naira exchanged consistently for N80=$1 between 1995-98, despite CBN's relatively paltry reserves of just over $4bn and barely 4 months imports cover.

Conversely, CBN's reserves, presently average about $30bn with certainly longer real imports cover than was possible pre-1999, when Naira exchanged below N100=$1; so, what exactly is the constructive rationale for the present intense pressure for further Naira devaluation.

Worse still, the usual promise that Naira devaluation would stimulate production and increase our export competitiveness, has undeniably remained unfulfilled; in retrospect, our economy has progressively become stunted as Naira depreciated over the years from stronger than N1=$1 to the current N200=$1.

Poverty will clearly deepen nationwide and severe unemployment will persist with serious social consequences if our preferred strategy is to rescue our economy by further devaluing the Naira and outrightly removing fuel subsidy as recommended by the IMF and likeminded experts like Sanusi.

Instructively, however, the Naira will begin to appreciate and gradually eliminate fuel subsidy when the CBN stops instigating the economically destructive burden of excess liquidity whenever it substitutes fresh Naira values as allocations for dollar denominated revenue.

SAVE THE NAIRA! SAVE NIGERIANS!