Devaluation: Other perspectives

In response to my piece titled, ‘My Vote Against Devaluation’, two readers – Amina Ado and Nkem Ossai – took up the challenge of sharing their own perspectives. As usual, I have edited their contributions for clarity and conciseness. As the National Assembly continues to work on the 2016 budget and the government mulls over […]

In response to my piece titled, ‘My Vote Against Devaluation’, two readers – Amina Ado and Nkem Ossai – took up the challenge of sharing their own perspectives. As usual, I have edited their contributions for clarity and conciseness. As the National Assembly continues to work on the 2016 budget and the government mulls over new policies to uplift the economy, the least we can do is keep the open marketplace of vibrant ideas in session.

We must devalue Naira
I read with interest your article in daily trust titled “my vote against devaluation. The best way to discourage imports is to make them expensive and the best way to make them expensive is through devaluation. Our domestic industries cannot compete against cheap imports because we have an overvalued exchange rate. If imports are expensive, Nigerians will buy the locally made that is now cheaper relative to imports.
Our exchange rate is overvalued because we import more than we produce. Put another way, today our main export, oil, has a lower purchasing power (lower sales price) therefore we need to reduce the purchasing power of our currency in order to buy less. If we don’t do this, we will inevitably run out of foreign exchange to pay the exporters we are buying from as they will stop selling to us on credit. Just try doing a Form A and Form M in any bank today and witness delays.
Even though we don’t export and you have argued that devaluation will not help because of that, devaluation will help because it will actually discourage imports which is what we ought to do at the moment and it will encourage local manufacturing through the price mechanism explained above. Not by bans.
As for inflation, whether we devalue or not, it is inevitable because as outlined above our currency has lost it’s purchasing power because we have fewer dollars to back up the stock of Naira we have. And loss of purchasing power is inflation. Prior to abolition of the gold standard, you back up your currency with gold. Now currency is just paper and the only back up are reserve currencies such as dollar, euro, pound sterling, Yen and later this year the Chinese Yuan. Because the US dollar is a reserve currency, the Americans need not devalue directly. But they actually did by quantitative easing (QE).
Another reason why inflation is inevitable is that the government intends to borrow a huge sum of money and an expansionary budget of that size without an increase in real productivity will lead to inflation. It will also prevent banks from lending to the much touted “real” sector as government sucks in the little money in the economy to fund its deficit. Foreign investors will not come in to invest in our bonds because they will invest in a currency that has been artificially propped up.
Now even though devaluation will cause inflation, it will not be as bad on the rural poor as you think. The reason is that the rural poor spend a large percentage on their income on non internationally tradable food items. Rent is also insignificant to their budget as they generally live in owner occupier houses.
The losers in devaluation are the rich, middle class and urban poor. By having an overvalued currency the government is subsidising air tickets, foreign schools fees, medical trips abroad and all manner of gadgets for the rich and middle class. The urban poor may lose out because food price may go up.
I will do the following if I was in charge of this economy:
* I will remove the subsidy on all petroleum products. This will allow small oil producers to start modular refineries which will also save us $s from importing refined products.
* I will devalue the currency using its theoretical value which can be calculated using the inflation and interest rate in Nigeria relative to the US dollar.
* The effect of the devaluation is that the FGN will have more Naira for its dollar oil sales. It will therefore need to borrow less.
* I will use some of the money for social policy spending targeted at the urban poor and another spending targeted at rural poor.
* I will identify certain key manufacturing activities and intervene through direct cheap loans. This can be achieved by printing money and recapitalising bank of industry (BOI). The bank can take over the loans from commercial banks or share the risk, etc.
* I will make the business environment friendlier which will allow Nigerians to unleash their creativity.
* Gradually increase VAT from 5% to 7.5% but not immediately, perhaps in 2017.
* I will have a comprehensive power plan. Massive investment is needed in this sector but it will not happen without ingenuity and a more open economy.
We the rich and upper middle class need to think long and hard about why we don’t want devaluation. I hope I made sense.
– Amina Ado ([email protected] <mailto:[email protected]>)

Dollar is gold standard
A country without fiscal manufactures needed by other nations devalues at considerable cost to itself. Except, of course, it has an emergency plan to parachute itself into manufacturing reckoning in a quick transition period. That has always been the bane of traditional austerity-based reforms in Nigeria.
Regarding the relative fixity of the dollar even in times of recession in America, you need to recognise the fact that the dollar is the main reserve currency of the international exchange system. Like gold up until the mid-1920s, it’s the ‘asset’ against which other currencies and values are weighed. Just about all nations on earth hold their reserves in US dollar, with most surplus nations in fact lending to the US as of the sheer force of the market no other economy comes close to America’s in terms of the perception of as a bastion of safety.
A devaluation would immediately bring diminution to these assets, and take away both safety and the store-of-value attaching thereto. So to that extent, a devaluation of the dollar will happen only after it ceases to play the kind of central role it plays in the global exchange system.
Nkem Ossai,  South Carolina, USA