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What Will Save The Naira?
By A.A. ADABA
(Twitter @adaba2015)
Let me declare upfront that I stand with President Mohammadu Buhari on his position on devaluation of the naira. The President is not an economist but he has insisted he has to be convinced that devaluation is the only option open to Naira. The President is obviously listening to his gut feeling and leaders must be guided by gut feelings sometimes. It is very difficult to convince me either and with a modest knowledge of economics I wish to use purely basic monetary argument, socio economic situation in Nigeria and logic to “confuse” Mr President more so that it becomes extremely difficult to convince him. Let me explain:
I learnt in my ECN 101 class that money, in any currency and wherever it finds itself, is defined as any circulating medium of exchange. The key word here is circulating. It is the principle of circulation that makes the concept of Velocity of Money very important in monetary economics. Pardon me if I’m being technical here.
This concept of money expects that a given amount of money is used again and again to finance people’s purchases of goods and services. It exchanges hands. The money one person spends for goods and services at any given moment can be used later by the recipient of that money to purchase yet other goods and services thus transferring money within the economy. In other words, a particular $10 or N100 bill can be used 10 times in a year in different transactions as it circulates and exchanges hands and that means the velocity of that money is 10 and the $10, in this instance, would have become $10 X 10 = $100. It is a much more complex calculation but let’s just accept it in this simplistic form while we leave the monetary economists to worry about the complex.
Velocity of money, i.e how fluid the circulation of money is in any economy, influences inflation, value of a currency and a lot of other economic indicators “ceteris paribus”. That is why economies where money is made to circulate freely either through cash or electronic payment system have robust economic fundamentals. The concept of “ceteris paribus” is very crucial in the study of cause and effect relationship between two specific variables. It helps economists to think deeper before propounding any solution.
We need to understand first this basic concept of money before we can understand the ailment that has afflicted our naira. The naira is worsening against foreign currencies at a ridiculous rate. Unfortunately for us in Nigeria, there is a lot of our socio economic activities and lifestyle attached to the foreign exchange. We are an import dependent country and we have a huge foreign currency need including needs to meet payments of invisible items such as school fees and medicals. Any foreign school is better than the very good schools in Nigeria, and indeed we have very good private schools now in Nigeria especially universities. We therefore need a huge amount of FX on a regular basis. The FX sources into the country through which we can meet these lifestyle needs are varied and diverse including foreign remittances.
Sadly, a substantial amount of the foreign currency that could have been circulating, that we could have been using for importation and other FX based transactions have been rendered sterile by corrupt politicians. They have, over the years, stolen us blind, converted the naira stolen into FX, combined that with the FX stolen and hidden a huge amount of foreign currency in unimaginable places in their raw cash form because they do not want to take them to the banks for fear of being traced. This has therefore reduced the velocity of FX as a medium of exchange in an import dependent economy. That becomes double jeopardy for our poor naira.
The FX needs are increasing and accumulating daily while we do not get enough FX into circulation because of lower foreign exchange income on account of low oil prices and low exports. The country’s foreign reserve is low and other FX sources which normally flow into our economy through export proceeds, diaspora remittances and other sources are being mopped up, locked up and made sterile by thieving government officials and their cohorts who have ravaged and looted our commonwealth for over 6 years. This explains why banks and even Bureau de Change don’t have FX for even the minutest transaction. That should be strange and curious. The irony of it is that it is through these same institutions that the corrupt government officials and politicians mopped up the FX which should have been circulating freely only to hide them in private vaults. Sometimes the evil you aid come back to haunt you.
Now, the abuse of naira did not stop there. Because Naira is readily available and there is still a lot of proceeds of corruption in Naira, and there is an increasing pent up demand for FX, the FX market has been turned into a bazaar market. If you have attended a bazaar you will understand what this means. Goods are never bought at their fair value in a bazaar. If I hold a $100 bill up now, because of the zero velocity of dollar which is the result of artificial scarcity created by some people, those who need dollar badly will be quoting outrageous rates to get it off me desperately and for different reasons. That is gross abuse of our local currency which does not reflect the true state of our economy. This therefore means that there is no amount of FX that government or the Private Sector can pump into the FX market now that will quench this FX bazaar mentality. Nobody uses the bazaar price of goods as benchmark when shopping for same goods in open market. Under this scenario does it then make sense to devalue our Naira based on this anomaly? Remember the dictum of “ceteris paribus”.
Now, there have been calls that the government should devalue Naira. What a shame, especially when such calls come from those who should know and who should understand the concept of “ceteris paribus: all things being equal” in economics. We are in a situation where all things are not equal in Nigeria and prescribing devaluation under this circumstance is a very lazy approach towards solving this complex problem. There are static variables to be solved before we can even prescribe any major economic antidote and those static variables are corruption and what has become economic terrorism by key players in the last dispensation who have stashed a lot of foreign currency into private vaults. If you understand programming, you will appreciate the effect of static variable as different from ordinary variables. When a patient has shortage of blood and at the same time the patient is bleeding, the first thing to do is to first stop the bleeding otherwise every drop of blood infused will be wasted. That describes the situation Naira is today.
Nigeria is facing economic terrorism and the earlier this administration realizes it the closer we would be to the solution and the more urgent all tiers of government would be in solving it. I am not in doubt that a lot of money is available to the economic saboteurs to be deployed to embarrass and bring down this administration through economic terrorism. Every unit of foreign exchange will be genuinely and remotely made to face the bazaar market against our naira to the point where frustration rises among the populace.
From the picture I have painted above, we are not likely to see the end of the FX bazaar if the fundamental problems are not addressed. If we devalue naira today, dollar will exchange for N1,000 within a couple of weeks as devaluation will not address supply and mopping up of FX immediately. Many people calling for devaluation do not seem to understand or take into consideration the complexity of the problems this administration and indeed Nigeria is facing or they are just being mischievous. It is easier to carry $5m across the border and run away than to carry N1billion.
For us to understand the risk we face in devaluation, it is important to identify the people who will immediately benefit from this devaluation of the Naira. Not the local manufacturers or importers, we do not produce much anyway. Not the common people, not the rich, not even the economy. It is these same corrupt politicians who have stashed up dollars and pounds sterling in odd places. They will be able to throw just a little of their looted funds into the economy and get so much naira. They will be able to use little dollars to sponsor crime and insurgency because it gives them so much Naira. They will be able to destabilize and distract government using just a little of their looted funds to buy over a people that are suffering the burden of devaluation. They will be able to lure our women into prostitution and men into drug trafficking and alcoholism. They will further worsen our values as a people. They will destroy our institutions with the little foreign exchange they release into a devalued economy. They will only have to change a few dollars to buy people’s inheritance, their lands, houses and other possessions which they opted to sell because of economic hardship and inability to meet daily needs. They will succeed in decimating the little number of upper middle class who have their wealth in naira and throw the lower middle class into the poverty basket. They will make men to lose their voices and we would be at their mercy. We will all suffer the consequences of devaluation but not our collective enemies who have brought us to this situation. What we are experiencing is pure economic terrorism combined with some economic misfortune and the result of our past misdeeds and total lack of national vision.
Indeed, we are lucky to have at this time a leader coming during the most difficult life of our nation in the last 40 years. If it were the man of yesterday, perhaps, we would have been a failed nation. Nigerians need to support Mr President at this time and show great understanding. This economic terrorism is real. It is nothing we have ever faced before as a nation. Never! Its effect is devastating.
We would simply be playing into the hands of our collective enemies, the economic saboteurs and looters, in ways described above if we devalue the Naira which is possibly their major objective when they were mismanaging the economy, thieving in foreign currency and ruining Nigeria. Mr President cannot afford to succumb to the cry for devaluation. It would have been an option worthy of consideration if “all things were equal”.
What then is the way forward? It’s going to be a tough long journey and as a people we must be ready to come to terms with it and drop some old bad habits, make sacrifices and be more patriotic. Nigerians must be ready to collectively defend their currency while government is pursuing looters and working towards economic revival. We must curb our appetite for foreign products. We must find a way to reduce how much we pay to foreign countries for school fees and medicals which is the result of our past misdeeds and lack of vision. It is ridiculous that almost $1billion is paid by Nigerians annually as school fees in Ghana. If you add that to school fees paid in Europe, America and Asia then it becomes a real monster. Crude oil export alone cannot save the pressure on the value of Naira with this lifestyle. We need to curb all that make us to demand more foreign exchange on a daily basis. This can only be a short term measure to ease the pressure on Naira.
The easiest solution to the sorry state of the Naira would have been to beg the US government to change the colour of dollars in order to compel the thieves to bring out the stolen dollars they have buried inside farms and soak away pits and other places and take to the banks. Of course this is not likely to happen. We therefore need a creative solution. If the foreign currencies buried in farms, water tanks and private vaults find their ways to the banks supply will improve. We must therefore find a way to bring this sterile FX back into the banking system. Options abound. If, through some ingenuity, we are able to achieve this, we would see Naira appreciate to par value with the official rate. We experienced this during the electioneering campaign when dollar flooded the market and naira rallied.
In the meantime, we have to continue to manage the FX situation until the government is able to get a substantial part of the looted funds back into the system. I totally support the CBN measures in making FX available at the official rate only for necessities provided there are measures to check round tripping through over inflation of invoices. A few people will have to be used as scape goats if there is round tripping as is being highly speculated. This is why the war against corruption and economic sabotage must be total and if you permit me, it must be vicious but within the law. This government cannot afford to look back on it. It is estimated that not less than $50billion may be in the hands of less than 10,000 Nigerians and in cash hidden in private vaults and other places across this country. I am not one to doubt these figures. I think the figure is much higher. The thieving and mopping up of dollars did not just start. Over $200billion is estimated to be in foreign accounts across the world. These are foreign currencies that should have been in our foreign reserves and belonging to you and I but which some badly brought up, poorly educated and greedy individuals have appropriated to themselves. We must fish them out. Our anti-corruption agencies must be creative and develop the eye of the Eagle. Our judiciary must support the war to save this country.
Ifeanyi Ubah knows what he is talking about when he said he can bring down the exchange rate to N200/USD. With the right strategy it can even be less in the short to medium term. Our economists propounding devaluation as a solution need to balance academic theories with street knowledge, native wisdom and ability to think outside the box. We don’t need the knowledge of nuclear science to know that the current rate is artificial and does not reflect the true state of an economy where foreign remittances is substantial.
We are faced with the red sea which is a bleak economic situation and temptation to devalue the naira. The rod we hold in our hands is total war against corruption and economic sabotage, speedy prosecution of looters and total recovery of looted funds and other assets of convicted economic saboteurs. These are the keys to unlock the true value of the naira. We cannot afford to look back on this war and it must be total. It is going to be a long tough journey to economic recovery but we are a resilient people. We will get to the bottom before we start climbing up again. The consolation is that with this leadership (and the right team across board) Nigerians may start behaving well as decent individuals and as a country. And hopefully we would never have cause to pass through this path ever again. Leadership by example is key both in the public sector and the private sector. It is even more important in different religious organisations.
I am with President Mohammadu Buhari fully in saying NO to devaluation of the Naira and it is because “all things are not equal”. I think that makes more common sense.
