By Henry Boyo
A close study of our recent economic history will suggest that the current policies adopted by the Federal Government, particularly with regard to naira devaluation and fuel price increase, are not different from the same strategies that triggered the oppressive serial abuse of naira exchange rate, in the era of former military dictator Ibrahim Babangida and thereafter sustained Nigeria’s steady slide in the rankings of the world’s poorest nations.
Invariably, therefore, the ill-advised rehash of those same options to resolve our present economic logjam will unwittingly, certainly, further deepen poverty in Nigeria.
The article entitled, “An economy on the brink”, was earlier published in this writer’s columns in the Vanguard and Daily Independent newspapers in March 2009. It is possible that the unfolding feeling of déjà vu in the following summary will disturb you. Please read on:
“The global recession has been made a scapegoat for our failed economy by leaders who hope Nigerians would forget that the economy consistently underperformed in the last decade or more, despite our abundant resource endowment, particularly, the enviable fortuitous revenue from higher crude oil prices since 2005, when export income quadrupled in dollar value. Inexplicably, however, rising unemployment, abiding double digit inflation with undignified consequences for all income earners, and reduced industrial capacity utilisation have also become our grim harvest.
Invariably, the failed structure of our monetary framework and fiscal allocations guaranteed that Nigerians became poorer even when we earned our best ever export dollar revenue surplus. Regrettably, the CBN Governor (Prof. Chukwuma Soludo) had always insisted that the failure of his monetary management to stimulate inclusive economic growth was the product of government’s unfettered ‘expansionary fiscal policies’! In other words, according to this logic, if government and the MDAs did not have so much money to spend, the economy will fare better; i.e. inflation and interest rates would fall to stimulate consumer demand and reduce cost of funds, so that industries can thrive and reduce the level of unemployment! Surprisingly, however, obviously against the CBN governor’s expectation, the present relatively paltry monthly fiscal allocations, which are traceable to the current collapse in international oil price, inexplicably coexist with even higher inflation and interest rates, with no respite for rising unemployment and gradual industrial collapse!
It is worrisome that, by its action or inaction in certain matters, government appears to be consciously providing the fuel to drive our economy faster down the slope!
First, let us briefly examine the impact of the reported ‘deliberate and strategic’ naira devaluation by about 25 per cent in November 2008. We recall the CBN governor’s confident boast, earlier last year, that Nigeria’s exceptional $63bn plus reserves would provide import demand cover for over 30 months, even if we did not earn a single dollar more! In other words, the naira rate could remain stable at around N120/$1 for up to 30 months, even if crude oil price fell to $1/barrel! Regrettably, the 25 per cent devaluation to almost N150=$1, just three months into a global recession, despite reportedly healthy reserves, must certainly be testimony, to clearly deliberate misinformation by the CBN. However, despite Soludo’s later assurances that the sudden devaluation was in fact deliberately and strategically calculated to save the economy, the cruel reality is that our people have suddenly become disempowered victims of rising prices with significant loss in the purchasing power of all naira income earners.
Householders have since been compelled to make harsh adjustments to their consumption profile and family welfare. Indeed, since labour’s earlier demand for a minimum wage of N50,000 was predicated on an inflationary rate sustained by a naira rate of N120=$1, workers may now feel justified to demand a much higher minimum wage. The expected purchasing power of future pension payments has suddenly also become demolished by this naira devaluation. Sadly, if naira depreciation persists, it will ultimately make contributions to pension funds or indeed any form of savings totally meaningless. Instructively, however, economists will tell you, that a regressive savings culture is bad for investment and economic growth!
Furthermore, devaluation has also increased the cost of industrial raw material imports by over 25 per cent, and this will inevitably also trigger higher working capital values which will attract oppressive interest rates above 20 per cent. The net result will be much higher prices for local products, in a market with significantly reduced purchasing power and consumer demand. Ultimately, ‘possibly’ inferior, but price competitive imported goods, will further degrade public demand for Made-in-Nigeria products and eventually demolish local businesses to compel a massive download of workers into an already saturated labour market; the clearly grave implications for security of lives and property of such an outcome cannot be denied!
The impact of devaluation on infrastructural enhancement is also equally distressing. Invariably, all local government, state and federal budgets were predicated on the prevailing exchange rate of about N120/$1! The inflationary spiral propelled by the CBN’s deliberately crafted 25 per cent naira devaluation will mean that government allocations may barely be sufficient for recurrent expenditure, with little or nothing left over for critical social infrastructure. Consequently, the welfare of our people will become inevitably severely compromised!
Similarly, the impact of government’s avowed deregulation of the petroleum downstream sector also deserves a closer evaluation. I recall a TV news report, during Obasanjo’s tenure, in which the incumbent NNPC GMD, expressed hope for divine intervention, so that robust crude oil prices in excess of $100/barrel should quickly tumble, so that fuel price will also fall to preempt the usual attrition over contentious higher fuel prices with organised labour. Well, in answer to this prayer, crude prices have since crashed to about $40/barrel, but, the pump price of petrol would ironically rise rather than fall, despite the prevailing much lower crude oil prices, if fuel subsidy is removed.
Consequently, if rising or falling crude oil prices both mean higher domestic fuel price, then, we should recognise that there is something fundamentally wrong, particularly with a fiscal payment framework, which compulsively propels the naira exchange rate towards further depreciation even when we earn surplus export dollars! Indeed, with such a disenabling framework, the possibility of lower fuel prices if crude oil price falls will unfortunately be cancelled by naira exchange rate depreciation, allegedly caused by reduced dollar income/supply. In this regard, it is revealing that, even when crude prices conversely skyrocketed beyond expectations, above $100/barrel, Nigerians still endured higher petrol prices, because the naira exchange rate which should have improved commensurately as a result of vast improvement in dollar reserves inexplicably, instead came under persistent pressure and remained relatively static.
Regrettably, government’s monetary policy management teams have knowingly preferred to, erroneously, describe the naira rate of exchange during those good times of premium crude prices as stable while Nigerians applauded their economic wizardry! Incidentally, despite credible reserves, there is now a margin of over N30 between the official and parallel market naira rates. However, any attempt to close the gap will only lead to further devaluation, which, in turn, will lead to higher petrol prices locally, despite the present modest $40/barrel crude oil price! If, on the other hand, crude prices rise again while the naira rate conversely depreciates or remains static, then, fuel price deregulation will surely fail again, and we may well sing ‘Zimbabwe, here we come’ as inflation and higher cost of funds spin out of control to cripple any hope for economic diversification, reduced unemployment and inclusive growth!”
The above article was written in March 2009, after the naira was devalued from N117 to N145=$1 in November 2008. The latest devaluation in June 2016 will invariably recharge the odious cycle that will further deepen poverty as inflation and cost of funds rise well above 20 per cent.
Mr. Henry Boyo thanks for reproducing your article. Could you kindly pen another article to recommend what government should do? That is, what should the CBN’s monetary policy be? Thanks.