By Boniface Chizea
Mr. Vice President, Professor Yemi Osinbajo, I crave your indulgence to address you through this medium following your now accustomed brilliant presentation during the midterm review of the performance of President Mohammadu Buhari’s ministerial team. It was by all account an impressive outing which I suppose continues today as we read that the review is a two day affair.
Mr. VP, I listened to your comments yesterday and I have since been inundated by friends who know my stand on some of the issues you broached during your presentation with regard to the rate of exchange of the Naira and the need for collaboration between the monetary and fiscal authorities and the need for us all to keep hope alive on the ability of this administration to deliver the goods.
I have taken the courage to send you this memo in my firm belief that we all have a shared interest in the future prosperity of Nigeria; in deed to capture this sentiment more succinctly, we all have an insurable interest so to do. And also to offer an alternative narrative on discussions on the Nigerian economy. If you like to play the devil’s advocate with the firm intention to leverage on experience to plead for caution.
Mr. VP, I expect you must have heard my name as I have engaged in the Nigerian public space since the mid-eighties when I returned to this country with my doctorate degree in Business Administration from the prestigious Manchester Business School, England.
Before this time, I had studied Mathematics at the University of Lagos. So like yourself, I am a proud Akokite. I also passed through King’s College, London where I studied Operations Research (Applied Mathematics) for a master’s degree. Not being a dyed in wool economist, I am fortunately neither hoodwinked nor enamored with the theoretical postulates of economics as most of my other colleagues are. As should be expected from my background, I am an unrepentant pragmatist who would only allow himself to be guided by the light of experience.
Here are some basic incontrovertible facts about the Naira exchange rate. It is the safest thing to wedge a bet on the progressive fall in the rate of exchange of the Naira. This rate since 1986 when this country introduced the Structural Adjustment Program aimed at achieving a diversified productive base of the Nigerian economy to reduce the unwholesome dependence on oil for foreign exchange inflows and to enthrone market forces for the allocation of resources thereby achieve the elimination of all subsidies has maintained steady fall. We recall that the rate was N22 at the official window and 86 at the alternative in 1986! And Mr. VP this trend is not likely going to change very soon.
You would recall that when your administration came into office that the rate was around N160 to the dollar. Today at the official window the rate is above N400 to the dollar. This is the equivalent of over 150 per cent loss in the value. And the opposition as you must have experienced will use this metric to taunt you as evidence of the extent to which the economy has been mismanaged under your watch.
Yes we must all factor in the pandemic experience but some of the loss in value arose from the attempt by the Central Bank to answer to the criticisms by multilateral financial institutions such as the International Monetary Fund to allow the market to determine the rate of exchange in line with the recommendation you have just made.
Mr. VP, there is no market for dollar in Nigeria and that is the unadulterated fact. And regardless of what is being said now, the fact is that on a number of occasions in the past the Central Bank served notice of its intention to withdraw from the market to play the role of swing supplier of foreign exchange. But there were no alternative sources and the Naira continued to progressively loose value only for the Central Bank in response to return to the market to continue with its demand management approach.
Mr. VP, believe you me all this talk about devaluing the Naira to release dollars held by individuals and to attract investors would only have one predictable consequential result; further loss in value in the rate of exchange which will only exacerbate the misery index in the land. I don’t know to what extent you are in tune with the inflationary pressures today in Nigeria. It is alarming and we might confront unrest if the scenario of worsening rate of exchange becomes an existential reality.
Mr. VP, the rate of exchange of the Naira today is a clear cut case of gross undervaluation as it were and there are no two ways to that. One sure measure we could adopt to buttress this fact is to do Purchasing Power Parity. The highest cost of having a haircut today in Nigeria is N500 and that is for some highbrow areas. In fact in most places in this country today you could get a haircut for much less. What is the cost of haircut in America today? There is a video making the rounds of a Nigeria who went to get a haircut somewhere in America and he was asked to pay one hundred dollars! He shouted blue murder as that is the equivalent of N50,000!
Mr. VP, the problem of the Nigerian economy has been well advertised and is known by all informed compatriots. It is simply a chronic case of lack of productive base which is as should be expected has been associated with an insatiable appetite to consume what we do not produce. We have over the years made lots of wrong fiscal policy choices such as the continued importation of refined petroleum products with the associated payment of corruption infested subsidy. In fact it is today argued that we spend more on importation of refined products than we earn from the export of crude petroleum.
We have maintained a bloated workforce which had made it difficult to correct the negative imbalance between the capital and recurrent expenditure this is despite the Oronsaye report which recommended that we pare down the agencies and departments but instead we rather watched as they increased. We have endured a worse case of revenue inflow as our tax to GDP ratio of around 8 per cent has been adjudged the lowest in the sub-region. We are also assailed by a case of unconscionable leakage to the treasury by way of unbridled corruption laced with impunity.
Therefore realistically it is not reasonable to expect a robust and stable rate of exchange of the Naira. The rate we have today is because the Central Bank has gone out of its way to stem a free fall in the value of the Naira by all manner of creative manipulations despite a not so robust reserve situation.
The bottom line of my message to you today is that there is no experimentation that has not been tried for the attainment of a stable exchange rate. But just as you cannot make omelet without breaking eggs, so it is difficult to expect the rate to appreciate as it is being bandied around by simply allowing the market to determine the exchange rate. What is even more is that devaluation on its own is a strategy for boosting of exports.
But Nigeria has no exports worth its name and therefore devaluation would only lead to imported price increases which will compound the misery index in the land. And this explains why we roundly commended your administration when at inception it rightly repudiated devaluation as an economic strategy for unassailable reasons.
We agree with you that component sections of the government should operate in a cooperative manner to ensure that they do not work at wasteful cross purposes particularly in the areas of policy articulation. But we must bear in mind that the Central Bank has attached to its mandate responsibility to catalyze the development of the Nigerian economy.
Most commentators have accused the CBN that it crossed into the territory of the Ministry of Trade and Investments when it denied official allocation of foreign exchange for the importation of some items. The Central Bank for shouting out loud did not stop the importation of these items but took a decision which I suppose is within its remit as the organization that has responsibility for the maintenance of the external value of the Naira to manage the demand pressure by refusing to allocate official foreign exchange.
Mr. VP thank you for your forbearance but please let’s not allow the chorus to float the Naira to get to us. All that has been tried before as you must expect and it has had one predictable outcome otherwise we would not be where we are today. We must also bear in mind that what precipitated the current crises was the decision to deny official foreign exchange to bureau de change. In the interim may be what should be done to stem the crisis will be to devise some ingenious ways to increase liquidity to the parallel market to stem the current free fall.
Boniface Chizea, an economist and former banker writes from Lagos