'Naira is Overvalued'! Says IMF: By Les Leba

Source: huhuonline.com
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'The International Monetary Fund (IMF) said on Thursday that the naira was overvalued and that more exchange rate flexibility would be needed to prevent the Central Bank of Nigeria from running down the foreign currency reserves to fix the rate.   The Fund said  in Washington DC, USA that the CBN might need to increase benchmark interest rates further and weaken its currency to curb inflation, following the increase in public spending'.   The above is an excerpt from a news report titled 'Naira is Overvalued, IMF Tells CBN' on page 19 of the Punch Newspaper of Friday, 18/2/2011.     My reaction to above report was a spontaneous exclamation that 'we are done for!', as it was clear that rising and increasing consumer prices and higher interest rates consequent upon adoption of IMF's recommendation will further deepen poverty in Nigeria!     There is no doubt about the considerable influence of IMF support and supervision agencies on the operations of our economy, particularly our monetary framework and policies!   Indeed, the Fund showed the extent of its commitment to pressing adoption of its prescriptions, when the emoluments of one of its officials, on secondment as our Finance Minister were underwritten in dollars in the recent past.   The result of that enterprise, of course, was our gleeful separation from about $20bn of our reserves, in what was affectionately termed as 'debt forgiveness'!   Meanwhile, rising unemployment, unbridled inflation and reduced industrial capacity with lending rates above 20% prevailed against the realistic expectation of Nigerians, for the goodwill of having our economy managed by IMF technocrats!    We were obviously oblivious to the age-old reference to loyalty of the piper to his benefactor when we accepted the 'imposition'!   Nigerians will recall that the main cause of our economic downturn and increasing abject poverty of the masses can be traced to IMF-sponsored Structural Adjustment Program (SAP), to which then President Babangida acceded.    The major thrust of SAP was the devaluation of the naira.   IMF held that naira was grossly overvalued, in spite of bourgeoning industrial landscape, increasing job opportunities, and wages and salaries commanding significant purchasing power.   The resultant grossly devalued naira quickly induced brain drain, as experienced lecturers, professors, doctors, nurses, engineers and scientists fled to greener pastures, where, in spite of the regret of social dislocation, they were assured of incomes that could maintain their dignity and self-worth.   Soon after the exodus, the quality of education at all levels dropped remarkably; today, we are still nowhere near recovery.   Rapid naira devaluation sounded the death knell for otherwise prospering commercial and industrial conurbations in the country, as production costs skyrocketed, and cash flow challenges could not be favourably resolved with lending rates above 20%!   The unanticipated spiraling cost of critical imports of parts and equipment also dealt injurious blows on the state of social infrastructure as hospitals, power stations, steel complexes and diverse consumer industries were destabilized.   The net product became a ghostly industrial landscape, and hundreds of thousands of Nigerians lost their jobs.   The continuous, officially sanctioned naira devaluation to its present rate of N152=$1 has finally reduced incomes of over 50% of Nigerians to below United Nation's poverty benchmark of $2 per day;   a grim reality, which has led thousands of young desperate Nigerians to traverse inhospitable deserts and stormy seas in search of a better life.     Some critics have likened the migration to the slave trade era, but   the difference this time is that, the slaves willingly find their ways to the 'camps' either by hook or crook!   The above gives a fair picture of the socially destructive impact of SAP with naira devaluation as its arrowhead.   My concern, therefore, at the present IMF call for further naira devaluation, is the sad recognition of the prospect of aggravated poverty, which will inevitably be its product in the light of our historical antecedent.   However, some observers may consider such perspective as alarmist and note that the IMF recommendation is without binding force!   Even if there is no overt imposition, the reality is that, IMF has generally had its way in 'third world' countries, and our national experiences confirm same.   Other analysts may conclude that the IMF report is actually notice of a 'done deal' and sooner than later, naira will be devalued by more than 10%; in other words, naira may exchange for dollar at over N175=$1!   Curiously, one of the reasons for IMF's recommendation for naira devaluation was to halt capital flight or forestall 'one-way bets in foreign exchange market' according to IMF parlance!   But regrettably, this overt recommendation for a devalued naira will only spur the already buoyant market for dollar and consequently precipitate the Fund's prediction of capital flight, which may then make naira devaluation subsequently inevitable!   This may appear to some as a case of working to the answer, but unfortunately, such circuitous exchange rate masterminding will work against our economic recovery and do much damage to the demand base of our economy as all income values, particularly those of the poor, whittle under the plague of rising prices!   A lower valued naira will make it very difficult if not impossible to remove fuel subsidy and instead earn revenue from a fuel sales tax as in other countries, like the US and UK with crude oil endowments.   In place of revenue from a sales tax, we will continue to pay more than the current value of over N500bn as fuel subsidies every year.     Yes, the bloated quantum naira sums consequent on devaluation will, no doubt, nominally increase monthly revenue allocations to the three tiers of government, but these bigger naira allocations will command less purchasing value and still present insurmountable challenges for best practice monetary policy management as CBN's albatross of ever-present scourge of 'too much cash or excess liquidity' will become exacerbated and require increasing public borrowings to remove such excess cash from the market to dampen   inflationary spiral.   The adoption of such a liquidity control strategy accounts for a large chunk of over N500bn currently paid as interest and service charges for moneys borrowed by CBN in its failed efforts to bring about single digit inflationary rate over the years!   To be fair, IMF also recognizes the inflationary threat caused by what it describes as the '…pro-cyclical fiscal stance and an accommodative monetary policy' of the government and thus quickly recommended an antidote of 'monetary tightening' policies; in lay man's language, this means that current lending rates of 20 - 22% should be induced to rise way above these already investment prohibitive rates, so as to halt the prospect of further inflation!   The reality, of course, is that much higher cost of funds coupled with higher industrial replacement costs as a result of naira devaluation will certainly restrain any progress to industrial consolidation or expansion and worsen an already depressed labour market!

                                                                              It should become obvious from the above that there is no window of victory in any sector of Nigeria's economic and social endeavour that IMF's recommendations for a lower valued naira and higher cost of borrowing can possibly deliver!   It is curious that in spite of its intimidating credentials as the custodian of best Central Banking practices, the IMF fails to see the huge disconnect in the structure of our money market, where, in spite of a CBN benchmark rate of about 6%, deposits attract less than 4% concurrently with lending rates of over 20%!   I am baffled that the Fund's experts do not see anything wrong in the present monetary framework where CBN pays huge naira allocations into the bank accounts of the three tiers of government one day only to return within a few days to borrow much of these moneys back at an average cost of about 10%.   Meanwhile, the IMF recognizes that such high interest charges for sovereign debts are inappropriate and yet it makes no recommendations to remedy this anomaly, which saps hundreds of billions of naira every year from government revenue with adverse impact on the amount available for infrastructural enhancement!   This is a very high cost to pay for the joy of removing presumed 'excess cash' from the system for warehousing in CBN vaults and accounting records in failed attempts to subdue the rage of inflation!   The paradox, of course, is that this liquidity mop up and monetary tightening occurs side by side with CBN's acknowledgement that banks are cash-strapped and have to be pampered with ample cash injections to heal their wounds, before they can perform their role as the strong backbone of a resilient and prosperous economy.   We have doggedly and faithfully followed this cycle in spite of glaring evidence of its failure to jumpstart the economy and the obvious deepening poverty over the years.   Whether or not the IMF can be excused for not recognising these glaring contradictions in the operation of Nigeria's monetary policy is another matter, but the Fund's comment in the Bloomberg report under reference that 'Nigeria has weathered the global economic recession and its own domestic banking crisis reasonably well' may suggest either mischief or innocent ignorance of the Nigerian economy.

  Objective analysts will insist that Nigeria's economy has remained in the doldrums since the mid 1980s, during which period, unemployment has continued to soar unabated, such that unemployment rates always significantly exceeded the rate in those countries, which were victims and villains of the global recession!   The same can be said for the rate of inflation and the level of interest rates!   If truth must be told, global recession was not the primary causative factor for the economic wilderness which Nigeria finds itself!   We have ceaselessly argued in this column that the real poison in the matrix of fiscal and monetary policy management in Nigeria is CBN's substitution of bloated naira sums for dollar component of monthly distributable revenue!   It is inexplicable that IMF does not recognize this pungent reality, and the Fund's recommendation for an even 'greater exchange rate flexibility to forestall the depletion of our foreign reserves' is even more perplexing!   How much more liberal can you get after the unforced error of CBN's monthly allocations of billions of otherwise scarce dollar reserves directly to Bureau de Change for onward sales to looters of the treasury, sponsors of capital flight and smugglers of contraband goods?   It is baffling that the IMF fails to see anything wrong in this practice, or indeed, to identify such dollar allocations as a major contributor to depletion of our foreign reserves.   Questions can be raised on whether or not IMF's unsolicited advices are truly altruistic or are discrete and convoluted strategies to separate us from our wealth with the same inconsequential rewards of a poorly negotiated partnership agreement similar to the slave trade era.