I am NOT a fan of the International Monetary Fund. If I began to explain to you why I feel this way, it would not only distract from the issue I want to address in this post, but will also take a few years of your life from start to finish.
The IMF recently concluded its most recent Article IV "consultation" with Nigeria. Daily Trust reported the IMF asked Nigeria to devalue the Naira, while the excellent Business Day had a typically more detailed take on the IMF's "advice".
Much has been said and written about this in the Nigerian news media, and on blogs and online fora. For starters, I just want to reiterate a post I wrote not too long ago about our dysfunctional economy that does not benefit from currency devaluations. It is weird. Lots of countries in the world pray for their currency to be weaker than others; some go beyond mere prayer to artificially distort the currency market so their currency is unnaturally weak relative to their trading partners. As I said in the prior post on this subject, one of the effects of living with our dysfunctional economy so long is we Nigerians do not seem to be aware that we suffer from Big Power currency manipulation more than the Big Power's do; the United States and China go back and forth arguing about currency manipulation, but if you were serious about restructuring and "normalizing" the Nigerian economy, you would soon discover that much of what should be your competitive advantage has been erased by market manipulation by Big Powers -- including China's cheap currency as well as the much more frequently complained-about Euro-American agricultural and industrial subsidies. We do not realize how badly we are affected because we are not trying to normalize our dysfunctional economy; essentially, if the Big Powers stopped distorting the markets this instant, we would still be entirely unable to take advantage of it, so while it is theoretically important, the existence or non-existence of these distortions does not practically affect any Nigerian's life prospects in a way that would cause him to be presently angry about it.
Whatever it says in the textbooks, and whatever the IMF is pretending to be their motives and intentions, devaluing the Naira will probably not produce whatever it is they think it will produce. Policy-making in the Federal Republic is a process of loudly declaring the importance of saving $1 billion, then spending far more than $1 billion to save $1 billion while pretending you are spending nothing, immediately followed by the initiation of a new "innovative" move that you promise will revolutionize Nigeria, loudly telling everyone the new move will cost only $3 billion, though the cheapest possible cost for it is $9 billion, and the padding of corruption will mean that $15 billion will be spent .... after which point we will discover the new "innovative" move doesn't work as well as promised. And the whole thing, everything I just wrote, would all be premised on the initial declaration that we have to save $1 billion.
Nevertheless ....
Nigerians have generally been opposed to any talk of devaluation. The conversation has been predicated on the assumption that the IMF wants deliberately, and of its own volition, inflict a lower-valued Naira on Nigeria. The Central Bank Governor Sanusi Lamido Sanusi has also weighed in, disagreeing with the IMF and saying he did not think the Naira was overvalued.
The thing is, the Central Bank of Nigeria has expended around US$30 billion of our foreign reserves in the last two or three years to defend the Naira's exchange rate. It started under Charles Soludo, and continued under Sanusi Lamido Sanusi. I do not know if this policy is continuing; Sanusi very recently said the depletion of the reserves had stopped, though he appeared to say the Central Bank had been defending the Naira against "speculative attack" (as opposed to saying the CBN was sustaining the Naira at a value higher than its market value; interestingly, while the official exchange rate still hovers around =N=150/$ like the CBN wants it, on the parallel market the Naira trades at up to =N=157/$).
But my thing is, if you have spent $30 billion defending the value of the Naira, essentially spending half of your accumulated reserves to do so, would it be wrong of me to say that the Naira had already been devalued by the markets and that we have in effect spent a fortune we cannot afford to hide the reality from ourselves.
Think about what we could have done with $30 billion, both as a raw number, and as seed money to leverage even larger amounts of investment. Depending on what type of technology you use, $30 billion could have raised our electricity generation by at least 30,000 MW, which added to the 10,000 MW of theoretically-existing installed production capacity, it would take us up to 40,000 MW, which is about what South Africa generates (and is 66% of the existing capacity of Sub-Saharan Africa). Of course, our supposed existing 10,000 MW doesn't actually exist....
.... and nobody would be foolish enough to spend all of the $30 billion on one thing, even if that thing is as valuable as electricity. But what I am getting at is there are a lot of productive things you could do with $30 billion, things that would stimulate the deeper, broader and faster GDP growth our Federal Republic so desperately needs.
Instead we spent it all to achieve nothing beyond fixing the exchange rate of our Naira at a particular place .... which doesn't really do anything other than allow us to continue importing things that we should have been exporting in the first place. The absence of economic support infrastructure (like effective and efficient railways, electricity, water, etc, things $30 billion could have helped) makes us so dependent on imports of even the most basic manufactures that we have become a nation that will willingly waste $30 billion to keep imports comparatively cheap because if we allowed the Naira to devalue we wold find our existing industrial base would be in no position to truly take advantage of it. It becomes a vicious, self-reinforcing circle of waste and dysfunction.
Indeed, had we allowed the Naira to depreciate, any plan to invest that $30 billion in leveraging much more to fix our infrastructure would have instantly come up against dramatically higher prices for importing capital equipment and other input, since no such thing is produced in Nigeria or anywhere nearby in equally dysfunctional Africa. All of such imports will be in dollars (not Shillings or Rand or CFA) which would diminish the efficacy of the $30 billion. So we opted to spend it all producing nothing other than a Naira at a politically-fixed rate.
Sanusi says our foreign reserves are starting to recover, albeit at a glacially-slow pace. Events in West Asia and North Africa have driven up the barrel-price of crude oil, which is to our fiscal benefit. This is a good thing, I suppose, though it is another reminder of how important pumping out raw, unprocessed crude really is, and how comparatively unimportant are all of the sectors that in theory are supposed to benefit from currency devaluation, and that would in theory have benefited from a leveraged two or three times that $30 billion in investment in infrastructure improvement. Unproductive stuff is so much more important to our economic well-being than important stuff; it is both a cause and a consequence of dysfunction.
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