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.
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