The Central Bank, Devaluation and The Economy

The Nigerian economy is under enormous stress, depending on the kind of socio-economic fundamentals being examined. Some commentators perceive that since the growth rate is positive (almost 6 per cent) and inflation is single-digit (8.6 per cent) and foreign exchange could cover at least 3 months of imports, then the economy is on the right trajectory. However, when one looks at the high rate of unemployment, the high incidence of poverty, the dwindling provision of basic services such as water, electric power, healthcare, education, etc, then the economy is definitely under stress. The high lending rates do not favour the real sector; the decayed hard infrastructure suggests that the growth of the economy is not sustainable.



The monoculture and primary stage of the economy could not withstand the recent negative shock in oil prices. Consequently, the sharp decline in revenue from oil prompted sub-national governments to owe several months of salaries to workers. The last administration finally confessed that it borrowed for two years not just to pay salaries but also to finance the budget, further cementing the fiscal crisis. The unending structural problems in the economy, the deterioration in the provision of social services, the implementation of neo-liberal economic policies and the inability to fund recurrent and capital expenditures could be a pointer to an impending recession.

The free fall in oil prices resulting in the depletion of the economy’s foreign exchange reserves prompted the Central Bank of Nigeria, CBN, to take several decisions to protect the domestic currency and the economy. The change in the band of the naira to the US dollar led to the depreciation of the domestic currency. The question to address is whether devaluation and/or depreciation (induced by market forces) is healthy for an export-import dependent economy. Theoretically, devaluation should allow an economy to export more, make imports to be expensive and earn substantial revenue for government. In the Nigerian context, the major export is crude petroleum and the country has no control over its price and quantity.

However, it seems the CBN chose to control the leakage in the pool of foreign reserves due to the persistent revenue loss as a result of the sharp decline in global oil prices. Under its mandate of price stability pursued under monetary and exchange rate regulation, the Bank, in my opinion, after removing the Wholesale Dutch Auction System, WDAS, and Retail Dutch Auction System, RDAS, analysed the utilisation of foreign exchange by businessmen and others and realised that foreign exchange in Nigeria is used to bring in petroleum products, private jets and the flotsam and jetsam of the industrialised world such as rice, toothpicks, private toilet rolls, pins, incense, tomatoes, soaps, cosmetics, etc. Except for petroleum products, the CBN directed that these items are not valid for forex, and they, thus, are processed for export through bureaux de changes, BDCs. The apex bank’s directive, however, does not include on the list of petroleum products, for obvious reasons. The petroleum sector needs urgent reforms so that in no distant future, the economy would refine enough crude for domestic use and export.

There has been some reservation on this directive of the Central Bank. However, the idea behind the policy is to help conserve foreign reserves, encourage and challenge domestic and would be entrepreneurs to produce these items locally and generate employment. With inflation at single-digit, the CBN should focus on bringing down the lending rates which hover around 25 per cent.

Some of the listed items, like private airplanes and jets, are used by the elite class. With the widening inequality and poverty in the economy, why should private jets flood the country airspace even if the forex is outside the interbank window? The present administration should ban, outright, certain goods entering the economy. The step taken by the CBN in the foreign exchange market it manages is in the right direction. The apostle of market forces searching for an equilibrium exchange rate would never find it. Any point on the demand and supply curves of foreign exchange is the price of the domestic currency vis-à-vis its foreign counterpart. The bulk of foreign exchange in the Nigerian economy is from government and the CBN has the mandate to manage such based on the dynamics of the economy. In practice, a market-determined foreign exchange rate does not exist. It is a text-book concoction; the so-called market and/or equilibrium-determined price is only a guide.

A government, thinking strategically, has a duty to protect its currency and economy, especially when the currency is not convertible. A peep into history would reveal that the Asian Tigers and other emerging economies took steps to protect their local industries and economies for a considerable period of time. Thereafter, when they opened up, the rest of the world was amazed.

The notion that trade stimulates growth and development is an empirical matter, particularly for developing countries like Nigeria. Is Nigeria trading with its partners on equal terms? Is Nigeria exporting manufactured or semi-manufactured goods to other countries? What is the contribution of the manufacturing sector’s export to GDP? Straightaway, the trade between Nigeria and her partners globally is unequal – factor endowments are different and the Nigerian economy is still at the level of primary production. Therefore, the country can decide which countries to trade with.

The Central Bank has done its bit. What is required is a complementary and accommodating fiscal policy to ensure sustained growth and inclusive development of the economy. The list of items not valid for foreign exchange under the CBN window can be manufactured in Nigeria. What is urgently needed are great strategies to encourage local entrepreneurs to take the bull by the horn by producing the de-listed items.

Ekpo, a professor of Economics, is Director-General, West African Institute for Financial and Economic Management (WAIFEM), Lagos

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