No, devaluation would not help the Nigerian economy

The Central Bank’s (CBN) decisions to restrict what gets imported with the “oil dollars” it provides, and to stop Bureaux des Change from accessing the foreign exchange it sells, has reignited the debate on whether the Naira should be officially devalued or not. Yet devaluation is not even the problem, as it has already partly […]

The Central Bank’s (CBN) decisions to restrict what gets imported with the “oil dollars” it provides, and to stop Bureaux des Change from accessing the foreign exchange it sells, has reignited the debate on whether the Naira should be officially devalued or not. Yet devaluation is not even the problem, as it has already partly happened. The reality is that we have a two-tier forex rate with the unofficial one threatening to rise to twice the official exchange rate.  A US Dollar, which use to sell for N126 just some few months ago, is now about N197 officially, and costs over N320 in the parallel market.
We are at a policy-junction, and the experts are not providing solid advice. President Muhammadu Buhari recently said he has not been convinced that devaluing the Naira is a good idea. He is right, because it would indeed be a disastrous policy. It was tried before, under General Ibrahim Babangida, and it proved a disaster from which we have not recovered, though high oil prices alleviated the pains for some time.
Work out the impacts right through
First, let us consider the advantages of devaluation as proclaimed by the high priests. We are told repeatedly that devaluing the Naira would make our exports attractive, discourage imports, and improve government finances. Over time, investments in export-oriented goods and services would rise along with employment and incomes. These promises are not backed by the long-time experience of any significant nation and are theoretically based on fallacies and myths.
Fallacy one: everything else would remain the same. They would not, as devaluation would work itself out right through the economy. It is poor economics to consider only one side of a problem. Fallacy two: our economy is assumed to stand alone, and is not influenced by gloats, shortages in, or policies of, other countries. How others respond would influence the outcomes.
These are only two fallacies in the thinking of devaluation priests, but they would suffice in highlighting the myths we are fed with daily.
Myth one: devaluation helps exporters.
Actually it would not. If, as is the case in Nigeria, manufactures or farmers of exportable goods are themselves importers of a lot of machinery, spares or raw materials, their costs would in turn increase, and they would lose even the current market advantages or penetrations they already have. Globally, manufacturers today actually import many of their inputs. They would end up exporting less because their production costs may end up being higher. Additionally, if the market they are exporting to is itself depressed or saturated, lower prices may not be enough to increase demands or earnings. Also, if they are already producing at full capacity, selling at lower prices only leads to reduced total earnings, unless they expand by buying more machines from abroad. Can they even continue to keep labour costs down when part of the needs of the workers must be satisfied through imports?
Myth two: imports would reduce?
The flip side of the argument is itself problematic. Imports would certainly look less attractive as we have to buy the dollar with more and more naira. But would total imports decline? Non-essential imports may, and people would try to substitute some items with cheaper, or locally produce ones. Essential imports would continue even at higher costs. Pharmaceuticals, surgical tools, chemicals, reagents, machines and their spares, raw materials and even textiles and foods would be more expensive, but their imports would continue by an elite who have grabbed most of the nation’s wealth and are used to certain life-styles. It is massive looting and pervasive inequalities that leads to some people buying Brazilian hair attachment for half a million Naira a piece, not because they don’t have hair on their heads.
Myth three: devaluation would improve the current account.
With less imports and greater export earnings the current account balance of a country should improve. But, as we have pointed out, there is every likelihood we would end up paying more for imports rather than less, and may not get any export advantage. The total effect of any currency devaluation depends on the actual elasticities (changes in response to prices) of the supply and demand for those traded goods. The more price-responsive the demand for imports and exports, the greater the effect of the devaluation will be on the country’s trade deficits and, therefore, on its balance of payments; the less elastic the demand, the greater the necessary devaluation required to eliminate a given imbalance. If there are structural reasons keeping these demands and supplies unchanged then, International Economics 101 tells us, devaluation simply leads to more hardships and distortions.
Myth four: you first make them poorer, then they can become richer
The implicit assumption is that to make our people richer we must first impoverish them. Thus, people earning N18,000 as minimum wage (or $142.85 at N126 to the Dollar) before, should keep on earning that per month. And if you devalue to say about N320 to the Dollar, their income (which would then be $56 a month) would be good for producers to now be competitive at the international arena, increasing export earnings of these lucky business men, and hopefully improve balance of payments and profits making them export more, investing more, and hopefully getting our country out of the fix it is in. In the long-run we shall be richer, and maybe their incomes can rise again. Would labour really agree to that? Won’t NLC push for the minimum wage to be higher? Would food, hospital bills, school fees and consumer goods not rise and make their demands more stringent. Isa Aremu is already talking of a minimum wage of N48,000 a month. Can you blame him, or the NLC? You export more if you can increase productivity and quality, not by keeping producers poor. A happy, healthy and educated work force is crucial to productivity in a non-colonial setting. Impoverishing me to make me richer sounds like a stupid promise.
Myth five: other factors don’t matter
Most exports are based on 12 to 18 month contracts, and such obligations are binding. New trade agreements take time to evolve. Innovations and productivity improvements also take time, and new investments have time-lags. Most changes have time lags, and those based on false or unfair practices soon unravel. The direct and indirect effects of devaluations must be fully worked out, and should not be based solely on diminished availability of “oil dollars”, just as how trading partners and competitor’s responses need to be factored into whatever we do. Many other factors are at work, not just the exchange rate of our currency, or how much the CBN has left in its vaults.
Myth six: governments would have more funds.
In theory, since most government revenue comes from the Federation Account which mostly comes as oil and gas dollars, they should have more Naira to spend as the CBN swaps the forex. However, foreign debts services, consultancy fees, and other contractual obligations are dollar-denominated so there will be little or no change in the real amounts they spend. They may even have to spend the same or more for building new infrastructure, buying drugs, equipment and other imported components of what they would want to provide for people. Travels, legal and other consultancy fees and charges, scholarships, foreign medical expenses, weapons and security gadgets, all would increase to reflect devaluation.
The reality: structural change and managed exchange rate unavoidable
In a nut-shell, President Buhari and his government have a better, more nuanced and more thorough grasp of the problems than those calling for devaluation. The CBN is merely scratching the surface by banning some items, though they should be commended even for that tokenism. The real answer however, awaits the kick-starting of the economy by the new men and women Buhari has appointed to help us in structurally changing the economy. We need to produce more food, more plastics, chemicals and components, more consumables, better schools and hospitals so as to check the drain on our foreign exchange earnings, and get us to earn more through innovation, research, productivity improvements and better husbandry of our limited resources. Devaluation is a false solution.  A managed two-tier regime may be only a second best option, but given our current realities we do not have another alternative.