Naira exchange at N 815/1$.
By Boniface Chizea
That is the screaming headline today June 21, 2023 in the popular press. This will be the weakest point Naira exchange rate will attain in recent memory all market considered. A few days ago , some commentators were in celebratory mood as they prematurely celebrated the narrowing of the rates between the official and parallel market rates. I thought that was complete mis-reading of the situation as the matter in hand remained rather fluid. But you know we have not seen nothing yet. We would hate to be doomsayers but the bottom is about to fall of the Nigerian economy into their favorite pastime.
The reality staring us all on the face is that the exchange rates sooner than later will fall through the 1,000 Naira benchmark. I have recently heard some analysts predict that the rates will settle at about 600 Naira to the dollar. That would be a most welcome development as with that occurrence the damage we now envisage that will be done to the economy will be controlled. But it is on record that we earlier cried out that this is not the way to go about solving the problem of dual exchange rates in the economy; devaluation and what we predicted is now what we are witnessing. We were mocked by dye in the wool economists who have turned berating the authorities for their reluctance to float the exchange rate of the Naira. It is fair to observe here that Adeola Fayehun of keeping it real with Adeola was on the same page as myself.
The point we made which bears repeating is that logically to solve a problem; it is trite to observe that for an effective and lasting solution, it should be no brainer that you must tackle the problem from his root cause as in a trail of cause/effect. You want to ask yourself what is the root cause of dual/multiple exchange rates in an economy and the simple straight forward answer is lack of productivity.
And since the root cause of lack of productivity is multifaceted, it is not what you want to solve over night by simply depreciating your currency as we have just done. Your exchange rate will go into a downward spin/free fall as we are now beginning to experience. Mark you , what is happening now is a tip of the iceberg!
When I read in the papers that there was rate convergence; I chuckled. The rates will not converge in the near term ,this I can tell you for free. Do we appreciate the extent of backlog in delayed transfers in the country waiting for dollars allocations? We were regaled with tales that as we float, that there will be massive inflow of dollars which will stabilize the rates! That is a remote possibility. No one will rush to bring in their dollars just because of an announcement of floating the rate of exchange in an economy that has been thoroughly mismanaged over a very long time now. There must be the inevitable wait and see period before confidence is returned to the economy, during which time considerable damage that has been done with the unemployment rate and related poverty index will deepen. It is already happening as I have never seen the extent of sudden leap in the prices of basic goods and services as has happened recently and once again, we have not seen nothing yet.
The position I have taken here is based on experience over the years. There is nothing that we are experiencing now which we did not see before. There have been all manners of tinkering with the approach to the determination of rate the rate of exchange as pressure is mounted on the authorities by multilateral financial organizations backed with our dye in the wool local economists.
We hope there will be no costly reversals this time around. Because that is the route we have travelled severally in the past. And if I may add for cold comfort, Nigeria is not alone in making this mistake. Witness the experience of Latin America countries particularly Mexico and Venezuela! Inflation in these countries got out of hand, their currency lost so much value that it was almost worthless, there was wide spread scarcity of basic goods and service to the extent that citizens have to stand in long queues for essential requirements and as the environment became suffocating ,the citizen escaped to other counties under punishing conditions in droves. With over 200 million Nigerians that is the fate that awaits us!
Someone will ask me what then should be done. Simple adopt a holistic approach to repairing the economy. Look for low hanging fruits; such as coming on stream of Dangote Refinery and banishing insurrection in parts of the country that had sentenced farm hands to spending their time in Displaced Persons Centers. Privatize local refineries immediately without minding the nationality of the new shareholders. Drastically reduce abuse in the system as is today. I admit that the market is the best approach to checkmating abuse such as unauthorized smuggling. But if we changed those deep in these corrupt practices at the helm and adopt radical automation of our processes and procedures we might make some effective progress.
The same argument goes for pump price of petrol. Increase in pump price of fuel has quick and devastating impact on inflationary impacts. The falling rate of exchange should not have the same level of impact because most economic agents hitherto fixed their exchange rates taking a cue from the parallel rates except as we have now predicted that the rates will likely go into a free fall.
We all agree that subsidy is bad for any economy as it is a veritable mis-allocation of resources. And as with the Nigerian situation, you end up subsidizing the elites and it is one proven ground for rent seeking behaviors. Even if we decided that subsidy will go, we should have been intentional about it. What arrangements have we put in place to cushion the effect of sudden jump in ? I just read in the papers, that those who patronised the water ways can no longer afford to do so. Why is the government not targeting provided alternative modes of transportation such as rail lines and water ways transportation at affordable rates for the masses? Now, when we talk of palliative, our mind simply goes to salary increases. I read in the papers the Revenue Mobilisation, Allocation and Fiscal Committee has just proposed an increase of 114% for the Presidency, governors and sundry political appointees! How insensitive can we be amidst the Palpable misery index in the land. Even if we are able to effect salary inceases; what percentage of the population (11%) will that touch?
Dr. Boniface Chizea is a former banker and economic consultant
