It is difficult to get a grasp of the facts. Our federal government, like governments all over the world, has a tendency of trying to "manage" the information flow, otherwise known as "spin", previously known as "lie". The Nigerian media occasionally breaks investigative news, but their factual information only goes so far and is too often supplemented with rumour and conjecture.
What to make of this article in one of my favourite publications, Business Day. According to the article the Central Bank of Nigeria has spent $14 billion to prop up the value of the Naira between 1st October 2008 and 30th April 2009. The article links this defence of the Naira to the drop in our external reserves from $60 billion in September of 2008 to about $47 billion at the end of March 2009. Business Day adds the usual dash of journalistic alarmism, by pointing out that at this rate (about $2 billion a month) it would take two years to wipe out the rest of our reserves.
The exchange rate today is =N=147.50 to $1.00, and Business Day implies the rate would be weaker had the CBN not intervened.
Many things caused the drop in the Naira's value from =N=118 to $1 to the current rate, most important of which has been the fall in the price of crude oil consequent on the global recession. The author of the Business Day article believes the rate has stabilized somewhat recently in part because the price of crude oil has stabilized at around $50.00/barrel.
Another part of the pressure on the Naira comes from the fact that even as export revnues dropped, imports remained inelastic so demand for dollars remained strong even as supply of dollars dropped. It is this second issue that I want to talk about.
In theory, as the value of the Naira dropped, we would import less and export more, as import prices became relatively higher for us and export prices relatively lower for our trading partners. This is not happening for a variety of reasons. Our major export is crude oil, and it is not priced in Naira to begin with. Even if it were, crude is sensitive to the strength of the world economy, so demand drops when the world is in economic trouble. And even if we were a major, industrial exporting country like Germany, Japan or China, the global economic problems would only put us in the same difficulties as Germany and Japan (China has the massive reserves to stimulate internal consumption).
Every country in the world imports, and there is nothing wrong with importation (indeed TRADE is a wonderful thing), but there is an OPTIMAL balance of import and export, an equilibrium position when an economy is operating as it naturally should. I firmly believe Africa's biggest problem (and I stress AFRICA, not Nigeria specifically) is the fact that our economies are abnormal, unnatural and heavily distorted. There is really no way to achieve continental wealth when we are striving to milk as much as we can from an economic structure that makes no rational or logical sense. The first thing we have to figure out about Nigeria is where we fit into a natural, optimal African economy; what would be our role in restructured and functional intra-continental chains of production and consumption? From there the natural rules of the market would dictate what we import/export from/to the rest of Africa, and what we import/export from/to the rest of the world.
As it stands, Nigeria consumes too much imports relative to domestic production and productivity (much like the USA before the credit crunch), and Nigeria is too dependent on using oil revenues to finance this import consumption (much like the USA relied on uneconomic credit).
The only way to keep the economy healthy (and to protect the foreign reserves) is for imports to drop in tandem with the drop in crude oil revenues. Luxuries are not a problem, but we are reliant on imports for staples and capital goods as well.
Still, what is the best way to defend the Naira? Our currency will always be under pressure, because of the excess importation. Americans and others who hold dollars have no particular reason to chase Naira; indeed the one thing they buy from us in large magnitude is priced in dollars. On the converse end, we are structurally locked into demanding huge amounts of dollars for imports. With crude oil as the chief source of foreign exchange, the Naira value will weaken as ever-more Naira desperately chases an ever smaller pot of dollars.
If we produced more of our needs domestically, and produced more of the needs of the West and Central African sub-regions domestically .... and if we imported more of our input and finished-product requirements from the West and Central African sub-regions, it would diminish the amount of Naira chasing dollars (or Euros or Yen or whatever), which would raise the exchange rate (and establish more of a market in goods, services and currency between us and our neighbours).
This is NOT protectionism. For it to be proctectionism, we would be trying to defend industries and firms that do not meet the market's tests for survival, trying to create industries and firms that should not exist. On the contrary, in Nigeria (and elsewhere in Africa) the problem is the opposite, the fact that so many industries that SHOULD EXIST (for example, electricity generating plants) do not exist. The absence of things that should exist if our markets and economies were normal, drives decision-making and outcomes (including the value of the Naira) that are irrational, and unreflective of optimality.
The economic difficulties we are facing in 2009 (in part because of our distorted, irrational economic structure) should have been a good opportunity for us to start to slowly move ourselves closer to optimality.
Which brings me back to the question .... should we have spent $14 billion to defend the Naira's exchange rate? I know that depreciation would make life difficult for us, but only because so much of our lives are linked to dollarized imports. If the exchange rate fell to a point where dollarized importation was no longer attractive as an escape-hatch from our own lack of production/productivity, we might be forced to defend our standards of living ..... BY PRODUCING MORE NON-OIL OUTPUT.
Yes, there are bottlenecks, not least of which is the absence of vital infrastructure. I wrote an article years ago, in an online economic journal, where I argued that investing $12 billion in proper infrastructure would have been a better use for our oil windfall than buying the cancellation of our $35 billion debt. I know the debt was a burden, but my argument was that instead of negotiating with the Paris Club for debt cancellation, we should have been negotiating for a grace period of 15-to-20 years in which our interest payments would be dropped from $3 billion/annum to $1 billion/annum. It would be a good deal for them, because they would still get full payment of their (odious and exploitative) $35 billion of debt, and it would be a good deal for us because $1 billion/annum was what we could afford on annual recurrent revenue (the debt was ballooning because the balance of $2 billion we could not afford was being capitalized). But instead of having $12 billion to leverage into so much more on infrastructure, we were $12 billion less on reserves with $1 billion/annum in practical, real saved revenue -- money we were bound to start spending to service new debt, and which we have in fact begun using to service new debt.
I am left wondering the same thing about the $14 billion spent propping up the Naira. Could we have leveraged this into a much larger sum to lower the costs of production for entrepreneurs and industrialists, enabling them to take advantage of a shift away from dollarized imports when the Naira drops to a level where such imports are uneconomical? In fact, depending on HOW we chose to carry out such investment, the effect would have been an injection of $14 billion into the markets .... which would have found its way directly to capital imports or to the foreign exchange market .... which might have had the same effect as directly (and unproductively) buying Naira off the foreign exchange market.
Yes, rising prices for imports will have (hopefully temporary) effects on our standard of living, but I would argue unemployment, under-employment, and generally low incomes are a bigger cause of social, economic and political malaise in Nigeria. We talk often of under-utilization of capacity, but even if we used all of the "capaciy" we currently have, it is not enough. We desperately need to EXPAND our capacity, and use all of that expanded capacity .... and investment is the way forward, not playing games with the Naira so we can continue to import at uneconomic rates. An increase in investment necessitates a decrease in consumption, though the medium- and long-term GDP gains from investment out-strip any temporary adjustments that would be necessary.
Of course I do not have access to the government's numbers or to the Central Bank's numbers. Maybe I am wrong.
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