Naira devaluation and austerity measures – The Guardian

By The Citizen

The decision by the Federal Government to introduce austerity measures and to devalue the nation's currency in response to falling oil price is wrong-headed; and constitutes a mere manifestation of official economic mismanagement. The solution to the problem arising is to address the economy in a more efficient and professional manner.

After crude oil prices steadily fell by some 30 per cent and touched the oil price benchmark of US$78/barrel initially proposed in the 2015-17 Medium Term Expenditure Framework and Fiscal Strategy Paper, Finance Minister Ngozi Okonjo-Iweala summoned the media on Sunday, November 16, 2014 and announced that the Federal Government would adopt a multi-pronged austerity strategy to protect the economy from any adverse effect of oil price slump. The minister assured Nigerians that, unlike in the 1980s and '90s when outsiders proffered measures for tackling oil price slides, a competent Economic Management Team (EMT), which had been soundly managing the economy, would craft a set of policies to address the oil price shock and protect the common man. She also assured that the economic team together with the monetary policy authorities would transparently manage the economy.

But barely one week after the minister's address, the naira was devalued by 7.7 per cent in response to what the apex bank termed frivolous demand for forex. Nigerians know and have borne the negative effects of currency devaluation (and depreciation) ever since the naira, which stood at N0.5464/$1 in 1980, began to consistently lose ground to the dollar. It is necessary to look beyond the devaluation because even now, given the Dutch auction system, the CBN mid-rDAS rate of N168/$1 already overvalues the naira. And some economic analysts have predicted ominously that the naira risks being exchanged at N500/$1 in the near to medium term. That outcome will be calamitous. However, the good news is the awareness in some quarters that the exchange rate on the limit under the DAS approximates infinity. How then did the economy arrive at its bad shape and what steps should be taken in order to bring the economy to good health.

During the media address, Okonjo-Iweala played down the correct diagnosis of the economic ills and wished away, or acted in denial of, the serious problem. It is imperative for the EMT to first accept the correct economic problem before successfully pursuing the objective of securing the economic wellbeing of the common man under the unfolding 2014-15 austerity measures. Answering a question, the minister rightly rejected printing money to finance the budget in the face of falling oil prices because of the well-known serious consequences as demonstrated in Germany in the last century and more recently in Argentina and Zimbabwe.      The EMT should stop pretending in the public and accept that Nigeria too has, since the 1970s, been facing the consequences of printing money on a limited scale tailored to volumes of withheld Federation Account (FA) oil receipts. Consequently, the economy labours under more or less controlled annual excessive fiscal deficits of about 10 per cent of GDP. The outward less devastating throes of printing money to finance the oil budgets than in the other named countries result from the artificially fixed exchange rates and the wasteful use of the withheld dollars to drain away trillion of naira from the system in the name of defending the value of the naira.

However, exploiting the mismanagement of public sector oil receipts, the IMF/World Bank have over the years worked behind the scenes and sponsored economy-understanding measures such as the excess crude account (ECA) and inappropriate exchange rate fixing methods that make the economy to limp along. Any wonder that the economy, which the EMT has managed for over 10 years, is currently weighed down by absolute poverty level of 70 per cent and unemployment rate of over 23 per cent? There is a huge and widening infrastructure gap while the manufacturing sector contributes less than five per cent to GDP. Had the EMT been an honest broker, the dismal economic record would have led to a change in its approach. Indeed, simply putting an end to oil receipts and converting the oil receipts to naira revenue via deposit money banks (IMBs) and by means of the managed exchange rate fixing system for budget expenditure is all that is required to restore the economy to prime health and unleash economic boom.

It is quite revealing to examine the key IMF measures which the EMT falsely claims to have crafted for the sake of the common man. Under the austerity measures, the 2015 budget oil price benchmark has been reduced to $73/barrel. Okonjo-Iweala has said that the economy is in a position to ride out oil price as low as $60/barrel. Budget oil price benchmark is set lower than international oil price in order to encourage ECA savings and ensure prudence. Over the ECA's 10-year history, external reserves peaked at $62 billion in September 2008 (the reserves usually include ECA savings). The ECA attained a peak of $22 billion, possibly in 2008. Lately, the external reserves register $34 billion including ECA savings of $4 billion. In effect, the $28 billion draw down of external reserves and all public sector oil earnings since 2008 (let us ignore autonomous forex inflows) have been used up without any significant improvement in infrastructure and the economy.

Now, operating the ECA results in smaller budgets than available resources will otherwise support, which sidelines capital and infrastructure projects. The ECA approach actually runs foul of a long-established economic truth: it is a virtue for individuals to save but for the economy as a whole, to save incurs the paradox of thrift and produces economic stagnation or decline. Provided there exists a well-oiled budget implementation machinery or capacity, Nigeria as a developing economy is expected to utilize available revenue on a judicious mix of recurrent and capital expenditure with supplemental deficit spending on capital projects by printing money or borrowing domestically to the tune of three per cent of GDP. The state governors are right therefore to insist that all accruals to the Federation Account (FA) be shared in full. As the tiers of government implement bigger budgets to the limit of available revenue and permissible deficit level across-the-board, the economy expands faster and employs more labour and achieves greater strength to weather economic shocks than under the ECA option. The ECA is also aimed at pulling the wool over the public's eyes because the lower the oil price benchmark; and the smaller the budgets, the economy is exposed to moderated excessive fiscal deficits arising from printing money against oil receipts with economic indices wearing a false face of a little improvement. In the light of the disadvantages, the ECA should be dropped immediately. Similarly, the printing of money against budgeted public sector oil receipts should be stopped by allocating FA accruals in full and in the selfsame currencies that accrue thereto. (Dollar allocations should be by secure means.) To re-emphasise, the attendant elimination of fiscal deficits of some 10 per cent of GDP is enough to resuscitate the economy.

The IMF is not done yet as it imposed other devious plans on the withheld FA dollar proceeds. An IMF delegation came and endorsed the twin use by CBN of DAS to disburse withheld public sector forex via DMBs for documented import transactions in February 2006 and to fritter away official forex through bureaux de change (BDCs) in April 2006 for 'ask-no-question' disposal of forex to the detriment of the economy. The two channels for sale of forex are economic slow poisons administered under the policy support instrument (PSI), which the then Paris and London Clubs of creditor nations treacherously extracted from the Obasanjo administration in the 2006 external debt exit deal. The PSI abridges the country's sovereign rights, lacks legislative approval and is therefore null and void. Yet, the FG and EMT swear by it.

By nature, to sell forex using the Dutch auction system constantly depreciates the domestic currency irrespective of external reserves and oil price levels. The prospects for monetary policy management are dire. As the CBN usually keeps DAS exchange rates unchanged for a while, those rates become artificial, overvalue the naira and engender dollarization with various anti-economic activities waxing unchecked. The existence of multiple naira exchange rates signifies official guarantee of currency speculation and freedom to fix rent-yielding market segment rates. In the wake of the uncertainty about oil prices, the all-comers' access to forex heightened the so-called frivolous demand for the dollar to hold as store of value thereby precipitating the recent devaluation, which was even effected dangerously close to the general elections without any qualms. To the shame of the CBN and in a classic case of the tail wagging the dog, BDCs set the latest rDAS mid-point rate. And given the high inflation and lending rates and the predictable depreciation/devaluation of the naira, the prevailing hostile production environment will only get worse while the ranks of the masses will further swell. Amid all this, Finance Minister Ngozi Okonjo-Iweala, who not only negotiated and still upholds the PSI but also presides over departments which override the Appropriation Act by insisting that money be printed against oil receipts for financing the budgets, said during the media address, 'We will borrow concessionary (multilateral) loans to fund infrastructure. We do not want to do local borrowing.'     Her statement is a belated admission of incompetence and failure on her part, for which she ought to throw in the towel.

On the other hand, proper implementation of the managed float exchange rate fixing system that is embedded in the MTEP and Federal Appropriation Act will painlessly reverse the economic difficulties. A strong economy produces a very high proportion of what it consumes. The current high import dependency arose from policies that are prodigal with available forex at the expense of domestic production. Such policies are neither pre-development nor pro-common man but only benefit vested interests. Contrary to what the IMF-influenced EMT would like the public to believe, what is produced locally for the domestic market need not be internationally competitive, at least not initially. Domestic businesses must therefore be protected at all times with a comprehensive set of discriminatory tariffs plus varying surcharges where necessary. For example, with untilised installed manufacturing capacity as high as 50 per cent, goods that could be produced in the idle factories, (say toothpick, matches, shoes, tyres, electronics or whatever) and other goods that can be easily produced in the country should all be treated like luxury goods by clamping down on them stiff discriminatory tariffs and where appropriate, graduated surcharge not less than five times the authenticated landing cost. A well drawn-up import tariff and surcharge list, which should shut out unilateral granting of waiver by the executive arm, controls eligible demand for forex transparently and shields genuine economic actors. This is a routine list for curbing indulgent and economically destructive consumption patterns. The EMT should therefore not be allowed to give it a bad name by dubbing it as an austerity package.

With demand for forex reined in this way, sale of public and autonomous forex using the managed float system and single open forex market operated by the DMBs will firm up a stable and realistic naira exchange rate. The market will also be awash with unsold foreign exchange. DMBs will be expected as a last resort to sell the surplus forex to the CBN at the market-determined rate with the apex bank accumulating huge amounts of external reserves. Part of the reserves should be routinely available for appropriation by the Federal Government for critical infrastructure and other priority projects. Simultaneously, conditions conducive for production will evolve.

Clearly, the country possesses ample resources for self-financed rapid development. These times therefore do not call for austerity but proper management of the economy. The EMT should stop misadvising the President on economic matters.