Last week, in my maiden piece since I returned to the back page, I made two arguments in relation to the debate about whether the Naira, a non-convertible currency, should be further devalued by the Central Bank of Nigeria (CBN). The first point I made is that, in the Nigerian context, the price elasticity demand curve for foreign exchange and nearly all imported goods is vertical – there is no significant shift in relation to increases in price.
The second point I made is that the parallel market rate cannot be regarded as the true value of the Naira. This rate is currently driven by a combination of speculation, rumours, perceived risks and the desire to maintain a relative dollar wealth, rather than significant changes in the fundamentals of the Nigerian economy. In the same edition, Opeyemi Agbaje on the back page and Keith Richards on page 11 made very interesting and valid arguments for devaluation. The key summary of the arguments provided in their articles is that the market has already devalued the Naira. Given that the Naira is already devalued in the parallel market, the inflation and possible macroeconomic instability the CBN is trying to protect is already in motion, and thus the current policy is at a very huge cost because of the arbitrage opportunities.
These arguments are logical, no doubt, and it goes to buttress the point I made last week, which is that the devaluation argument is not a simple one. History supports the view that depreciation has already occurred, especially if you take into consideration how replacement costs consideration is driving up prices, but the same history supports the view that there is no limit to devaluation and arbitrage in the face of declining oil prices in Nigeria. While immediate further devaluation will take care of the perceived macroeconomic risks and credibility issues, it will unleash a new wave of demand for salary increases, and fuel crisis, just to mention few.
And there is even a more troubling tradeoff – allowing price or administrative allocation of the available reserves. Allowing price allocation will certainly mean that those that have access to the reserves, largely, do not share the national objectives of the majority of Nigerians. With administrative allocation, the greatest threat is the incentives for arbitrage. This is undeniable. At some point it may become intolerable and thus we have devaluation to validate the depreciation and reduce the opportunities. But this assumes that there is a limit to arbitrage appetite. I do not think so. The CBN thus sits between a rock and a hard place. I will, however, encourage a constant engagement between the private sector and the CBN on national priorities such as inputs across industries, supply of important products for the purpose of continuous growth and job creation.
There is no doubt that the economic damage following oil price fall has been serious. Between 2014 and 2015, government revenue declined by about 40 percent, followed by a reduction in government expenditure of about 7 percent, taking into consideration the devaluation of April 2015. However, we can either also now focus on the symptoms or begin to prepare our minds for new possibilities and opportunities. In the immediate term, the best scenario is for oil price to begin to climb. This depends on whether OPEC and non-OPEC countries are more concerned about keeping their market shares than raising oil price. The next best scenario is for government to borrow internationally in a way that will help alleviate the shortage of dollars, improve investment and deliver growth in the medium term.
However, though the present is important, the future is vital. To change the future, we must learn from history this time, and move slightly away from the fixation on devaluation. Except for few bright spots since independence, our fiscal choices have been weak, poor and naïve. We have carried out policies that continue to destroy the foundations of our growth and we scream every time oil price is low. We are screaming again now, but I bet the wailings will stop as soon as oil price is up again.
In conclusion, therefore, I will mention a few of the poor fiscal choices of the last two decades and discuss them in full next week. Given the structural problems of oil resource economics, which often gave rise to volatility, the starting point was to delink the oil resources / revenues from government budgets. Two approaches have mostly been followed – establish a benchmark price and save the rest (expectedly in a sovereign fund), and or develop robust taxation policies that ensures government budgets do not rely on oil price. The bottom line is that oil resource economies should save during booms and smoothen consumption overtime during low oil price. We have not consistently done any properly and or enough.
So, though oil accounts for less than 10 percent of Nigeria’s GDP, Nigeria’s federal government taxation income as a proportion of GDP is merely 2 percent, an irrational dependence on oil revenues. Not satisfied with the inability to manage the volatility in oil prices, save enough for a time like this, and or develop a robust tax base, we increasingly began to use our scarce resources for the importation of refined petroleum products, educate our children abroad, seek extensive health needs all over the world, and of course have parties in Dubai and the US. These are not the options followed by serious economies. This is the real world where poor economic choices and policies are punished overtime.
Ogho Okiti
