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Home Opinion

Beyond the lines of “Devaluation”

Admin by Admin
31 October 2021
in Opinion
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Beyond the lines of “Devaluation”

Naira vs Dollar (Photo: Getty Images)

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By Mohammed Baba Goro

The issue of foreign exchange has been on the front burner in Nigeria’s media space for a while now. Unfortunately, the debate has been so over-flogged that one could hardly know who to cue behind for economic sense and/or who to blame about the helpless fall of Nigerian naira.  Recently, the vice president of Nigeria, Professor Yemi  Osibanjo, who by every sense could be categorised amongst personalities with intellectual power, also frankly spoke that the Central Bank should devalue the country’s currency, naira. But, that is not the only strongest weapon that could kill the werewolf.

As an economic policy, Devaluation is simply referred to as the official reduction in the value of a country’s currency in relation to another or other countries’ currencies: say, Nigeria’s “Naira” with the United States “dollar”. Assuming the current exchange rate is thus:  N410 against  $1 and the CBN decides to devalue the naira by, say, 25 per cent, the naira value will decline, and the new rate will be around N512 to 513 against $1 and against the initial rate of N410. This would make the export of goods and services cheaper and importation dearer. As easy as it sounds, it is easy, but CBN will have high inflation to grapple with.

Ordinarily, that should be a path to take, but the question on the lips of every rational Nigerian is that what massive goods do Nigeria produce? This is a million-dollar question on the lips of every Nigerian for a country that, 60 years after her political independence, still struggles for her economic Independence – Nigeria still imports everything it needs, including essential food items like maise, rice beans and unfortunately, recently, even egg.

Nigeria had to lift a ban last year to import maize for poultry farmers. According to a statistic, the national average for Nigeria’s maize need is about 15million metric tonnes but can only produce 10million, going about with a huge deficit that could have been an opportunity for a source of forex. Even though rice production has increased, the country can still not satisfy its teeming and growing population of over 200 million. This is on the one hand. On the other hand, about 30 per cent of the country’s foreign exchange earnings go to the importation of petroleum products.

The National Bureau of Statistics (NBS) released another mind-boggling stats that the importation of agricultural products has increased by over 140 per cent year-on-year. Devaluation is primarily an “Expenditure-switching policy” that basically switches spending from imported goods to domestically produced goods and for exports.

But judging from the above facts and figures, one would deduce that local production that should drive export and reduce pressure on meagre forex is practically not there. So, “Beyond the lines of Devaluation” is productivity! Productivity!! And productivity!!!

Significantly, production of not only primary products but adding value to raw products so as to create more jobs, generate more revenues, build the needed infrastructures and consequently transform the economy. Brazil in 2011 devalued its currency to spur export without tackling the underlined structural problems and ended up worse off.

So let’s go back to the theory, and the economic argument should be, what determines the exchange rate?

Gustav Cassel, in the ’20s, propounded the purchasing power parity theory, which explains that the determination of two inconvertible paper currencies is determined by the equality of their purchasing power. What this means is that the exchange rate between two countries is determined by the level of their relative prices of goods and services.

A look at Nigeria’s inflation rate, coming from above 18 per cent, would tell you why we are at an exchange rate crisis and why we need to look inwardly and produce more locally. Though the Mint-gold parity theory is no longer in tune with the modern economic practices, but even the Balance of payment parity theory has its link with a country’s productivity level. Therefore, the government should deal with the fundamental and structural rigidities in productivity, trade, security, and infrastructure. Watch naira take her good position and fair value and stop forcing the monetary authority to over-stretch its instruments.

Mohammed Baba Goro can be contacted via babs9770@gmail.com.
Tags: CBNDevaluationDollarEconomyNaira
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Comments 2

  1. Salisu Tswasha says:
    8 months ago

    A well analysed and carefully crafted statistics and publication. Thumbs up

    Reply
  2. Salisu Tswasha says:
    8 months ago

    A well analysed and carefully crafted statistics and publication
    Thumbs up

    Reply

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