Devaluation Agents are Internal Economic Saboteurs (Unfortunately)

I AM USING THE WORDS OF MY MENTOR SANUSI LAMIDO SANUSI (THE EMIR OF KANO)

For the Naira Devaluation Promoters; it is BAD for Nigeria and Nigerians; simply put; Every time CBN and the Government devalues by 10%. Household Savings and Spending power drops by about 20%. It is simple economies; Nigeria Imports 85% of all our economic need. Meaning; that only Importers, Speculators and Bankers will be the Beneficiary. No other person or group of people benefits. Once you are a Net Importer even if it is at ratio 51:49. Your masses suffer; what PMB must do is exactly what majority of developing countries are doing; Capital Control; Manufacturers and Producers Subsidies; And Take this from Me. Developed Canada's New PM is coming in Hard on Speculation, Introducing Capital Control and will be Engaged in Deficit Spending for three years. Nigeria Need to Borrow for Deficit Infrastructural Spending to Create Jobs, Develop Infrastructure, and empower the Middle Class. Devaluation Kills the Middle Class. It only Works in an Export Dependent Economy. The Percentage of Import is too small; it will suffocate the Nigerian People to feed Importers, Speculators and Foreign Portfolios holders. Certainly, devaluations amid crisis can contribute if the conditions are good enough and are very often associated with significant economic contractions. History is quite clear on this point. The interesting question concerns what happens next. Take an economy that has been enjoying an Oil boom backed by large capital inflows in portfolio, and which then faces a sudden stop, capital flight, and crisis. Foreign lenders had been willing to finance a consumption and investment boom, but for one reason or another they panic and demand to be repaid as they always. To repay foreign loans, the once-booming oil economy must export more than it imports. To do this, it must raise exports, which requires an improvement in competitiveness relative to trading partners, which requires a reduction in wages and/or an increase in productivity. And it must reduce imports, which requires a reduction in purchases of foreign goods. How will this adjustment take place in a place like Nigeria? Certainly not painlessly, no matter how one proceeds. But the argument for devaluation is that the pain can occur relatively quickly. A big currency depreciation instantly hits consumer purchasing power and reduces wages. Purchases of foreign goods quickly fall because prices of foreign goods quickly soar. The pace of adjustment will depend on how quickly domestic industries pivot toward import replacement and exporting; that in itself a long term project not short or medium term.

DEBUNKING THE MYTH OF DEVALUATION AS PROMOTED BY INTERNAL SABOTEURS



DEVALUATION HAS BEEN EFFECTIVE? This is not True at all, Following the Financial Crisis of 2008/2009, all the countries where the national currency weakened because of a decreased demand and in those where the currency was devalued as a monetary policy measure - e.g, Russia - the drop in the exchange rate was not reflected in a positive export development.  Data for November 2008 indicate a 21% per annum drop in exports in Sweden, 22% in UK, 16% in Poland, 11% in Hungary and 17% in Russia where devaluation was a monetary policy measure. It is not just dependent on what you do; it is also dependent on what your most important trade partners do. In case of devaluation, people with fixed income (99% of Nigerians) would be the first to feel the effect of the more expensive imports and new wave of inflation on their purchasing power.  Devaluation per se does not renew competitiveness; it can only improve competitiveness if price rises do not keep up with exchange rate changes. If before devaluation was considered a factor that fosters growth and inflation, the South Asian crisis was evidence that devaluation in emerging markets acts to dampen growth because of its effects on flows of capital. As foreign capital leaves the country, the lack of financing causes a reduction of the economy and increases the pressure on the exchange rate.

THE CENTRAL BANK OF NIGERIA IS AN OLD DOGMA? In the 1970s and 1980s devaluation was often used as an instrument to raise a country's competitiveness. What it meant in fact was short-term gains from the changes in trade conditions instead of carrying out the kind of fundamental, very possibly unpopular reforms that would promote productivity and, in the long run, also competitiveness. By devaluing a country can theoretically obtain price advantages but only if other countries do not devalue their currencies: such competing devaluations were used increasingly often and the economic policy makers realized that in the long run it can lead to a collapse of the monetary systems. In order to focus on measures that would really promote competitiveness, the developed countries of Europe agreed on creating a single currency. Are we ready to assert that the well-to-do European countries did not act rationally by voluntarily throwing away the "competitiveness-enhancing magic wand" i.e. devaluation and in fact fixing their currencies against each other by introducing the euro.

DEVALUATION WILL INCREASE TAX PAYMENT? If we think that imports, made more expensive by devaluation, would bring in more taxes, we should keep in mind that import volumes would actually shrink as a result of price increases. Even if, incredibly, people would not buy less, increases in tax income would only happen through price rises or inflation. That is called "taxing the poor", since it is felt more painfully by people with lower incomes.

DEVALUATION WILL FOSTER BORROWING AND LOWER RATES? As can be seen from the experience of Poland, Hungary, and Romania and so many developing countries as well as Nigeria; where national currencies are allowed to fluctuate freely and monetary policy can affect local interest rates, it does not happen that way. A positive effect of a lowered exchange rate on exports can only persist if local resources are used for industrial production. To produce goods, Nigeria uses a great number of imported raw materials, capital and intermediate consumer goods amounting to over 70% of imports, which, in case of devaluation, would cancel out the positive, export-stimulating effect of devaluation.

WHO GAINS FROM DEVALUATION: Recent events in global trade suggest that changes in the currency exchange rates do not translate into a bonanza for the exporters and devaluation would hardly be motivation enough to open new production units in Nigeria. As a consequence, we could not expect any increase in employment and tax income from such a measure. It is true that the existing exporters would make more profit in Naira but would there be any other winners? Sure winners would be foreign hedge funds, which make money on currency fluctuations and can make large-scale transactions with the aim of putting pressure on the exchange rate and, in case of devaluations, earn millions. Any tinkering with the peg corridor would result in an increased pressure from the speculators as they would interpret them as a sign of weakness, and, even more important, would give rise to expectations for even greater fluctuations in the future and potential further measures in regard to the currency peg.

WHO LOOSES FROM DEVALUATION: We can assert without a shadow of a doubt that pensioners, employees, households with loans in Naira, farmers and businessmen would all be losers. These people would feel the influence of Devaluation lobbying almost the very next day: higher prices at the shop, higher loan payments and increased payments for gas, heat, electricity, and many other goods and services in whose production imported raw materials and resources have been uses. The increase in prices for production equipment might even paralyse certain branches of industry. As devaluation would result in immediate bankruptcy of many businesses and households, it would be a serious blow to the Nigerian banking system as well.  Lending would in all likelihood increase dramatically. It would also be a death sentence to the many exporters whose credit lines would not be extended by the banks. Devaluation would likewise have a detrimental effect on the States budget and on Nigeria's ability to fulfil its international obligations. Last but not least, it would be a "present to future generations" in the form of a foreign debt commensurate with the amount of devaluation.

No comments:

Post a Comment