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Depreciation of the naira: To be or not to be (1)

’Give me a one a one-handed economist. All my economists say, ‘on the one hand…on the other’ ’’.  – Harry S. Truman [33rd president of…

’Give me a one a one-handed economist. All my economists say, ‘on the one hand…on the other’ ’’.  – Harry S. Truman [33rd president of the USA]
      
This memorable quote, even if a frustration, approximates a dilemma President Muhammadu Buhari must come to terms with in articulating economic policies. President Truman was not only a confident man, he was not known to wink at taking decisions, as evident in the presidential order to deploy  atomic bombs on two Japanese cities in the closing stages of the second world war. Yet, the dismal science of economics presented him with this inertia-inducing dilemma, as it has always done to leaders since time immemorial. Not surprisingly, therefore, our president is reported to have asserted that he is yet to be persuaded by the neo-liberal arguments advanced in favour of devaluation (read depreciation) of the naira. I dare add that the president must be prepared to contend with yet two other idiosyncratic sayings of economists, among others.       
While Nigerians appreciate the president’s body language on this matter, we hasten to admonish that in economic matters, body language can have only transitory effect. And so, economic agents are waiting with bated breath for action, one way or the other. And it’s decision time too because, there is palpable anxiety in the land  on account of mounting economic difficulties; of the strident calls for the empaneling of the president’s economic team, and lately, a strong advocacy for an economic summit is gaining currency. It is rather unfortunate that the administration dithered in putting the economy on the front burner, giving room to non-state actors to create their own narratives on the fate of the naira and the solutions thereto, based on expert, pedestrian and the downright charlatanistic opinions. I however, recognise that the president has been pre-occupied with two cardinal programmes of our great party, the APC, namely; the anti-corruption and the counter-insurgency wars. These two programmes are having their fair shares of executive time; it is however, time for multi-tasking for the administration.
Whether the government caves in to the demands for an economic summit or settles for a synthesis of the reports of previous talk shops, it must give the economy the attention it richly deserves.    Consequently, we posit that tinkering with the value of the naira must be approached in a holistic manner. First, an examination of how the naira has come to this sorry pass is called for. Second, we will identify the objectives and/or the benefits of the much talked about devaluation. Third, we shall interrogate the arguments for devaluation by juxtaposing them with their counterfactuals. Fourth, this piece puts forward some short to medium term measures that will facilitate structural shifts in the economy. Finally, some specific recommendations that meet the requirements of the moment are put forward.
The exchange rate of a currency is its value in terms of another currency or a group of currencies, especially those of its trading partners. In the case of the naira, the United States dollar [USD] is the reference or intervention currency. In determining the value (exchange rate) of a currency, a country is, broadly speaking, at liberty to either fix or floats its currency, depending on the economic philosophies of exchange control or liberalisation respectively. Since the adoption of Structural Adjustment Programme [SAP] thirty years ago [1986], Nigeria transited from the fixed to the flexible regime, effectively submitting to market forces, even if within the dictates of a ‘’managed float’’ system.
As the devil is in the details, we do not intend to carry out a wholesale review of the implementation of SAP in Nigeria. It however suffices to bring out an important cause of our current economic malaise, which has afflicted the naira. While privatisation of state enterprises and floating of the naira proceeded a pace, other core aspects of SAP, like economic diversification, received scant attention, presumably because of the second era of oil boom (Dutch Disease) arising from the first and in deed, the second Gulf Wars. Alas, the ensuing economic phenomenon of windfall [of petrodollars] led to sharp appreciation of the naira, which in turn raised the propensity or appetite for imports.
Meanwhile, oil, being an ‘’enclave’’ economy, had, and continues to have, only minimal links to other sectors of the economy. For instance, its contribution to Gross Domestic Product [GDP] declined steadily from 15.00% in 2010 to 10.44% in 2014. Since the appreciation of the naira is largely delinked from the productive capacity of the real sector, as it were, the resulting exchange rate is adjudged to be misaligned. Here lies the fundamental problem of our beloved but beleaguered naira, still awaiting the arrival of a white knight.  An appreciating exchange rate that is misaligned comes with a number of manifestations, but the most egregious one is the existence of a dual or multiple exchange rates. The resulting arbitrages among different segments of the market leads to distortions in economic incentives. In the case of Nigeria today, this arbitrage is conservatively about 64%, far above the tolerable international limit of 5%.       Mr President may take judicious notice of this, as a probable cause of retired (and serving?) Directors of CBN preferring to invest in the BDC segment of the market, in the absence of any law debarring them. Yes, rent seeking, which is economically rational anyway, and distorted economic incentives are mutually reinforcing. 
Another major cause of the malaise afflicting the naira is the deteriorating balance of payment [BOP) position, manifesting in the sharp decline of our foreign exchange reserves. Nigerians have been regaled enough on the principal cause of this turn of events, which is still trending, to warrant any repetition here. What is of concern here is the policy response of the CBN, whose core mandates include maintenance of a stable external value of the naira. 
The plethora of the foreign exchange market circulars released by CBN in the course of 2015 range from debarring BDCs from accessing foreign exchange in both the retail Dutch Auction System [RDAS] and the interbank windows; through reversing the ‘unfettered access’ of holders of both classes of domiciliary accounts; to outright and abrupt exclusion of 41 import items from the foreign exchange market, without discriminating between complementary and competitive imports. The cumulative effect of these uncoordinated and internally incoherent policy responses is, at worst, revisionism writ large i.e. an unannounced return to the era of exchange control and, at best, excessive demand management. Indeed it is obvious to sophisticated stakeholders that with each circular issued in the course of 2015, CBN was invariably pressing a panic button. Since the CBN is a depository of economic knowledge and monetary policy competence, one can only surmise that this apparent panic mode is a consequence of the absence of a broad economic policy framework of the government that will complement monetary and exchange rate policies of the Bank, her autonomy notwithstanding.
(To be continued)
Mr Shettima is an economist, a retired deputy director of CBN and an APC chieftain.

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