Naira Devaluation And Increased Interest Rates - by Olufemi Boyede

According to economist Alex Saez, an eHow contributor, “Currency devaluation is a reduction in the value of a country’s money on the foreign market. The strength of money can fluctuate independently or intentionally, depending on the exchange system in place.” 

Successive Nigerian administrations have experimented with the two alternatives of either “fixing” the exchange rate of the Naira at a determined point or allowing “free market economy” to determine the exchange rate of our currency. There was even a time when Nigeria operated the two options side by side by having the “official exchange rate” (N22/$) and then the going market rate which rose sometimes to as high as N100 to one US dollar. However, for quite a number of years now, the exchange rate has remained “stable” at about N155 to the dollar.

The Central Bank of Nigeria, however, rose from its Monetary Policy Committee meeting of Tuesday, November 25, 2014, to announce a new exchange rate for the naira. By this decision, the naira will now exchange for 168 to one US dollar. Of course, minutes after this announcement, the Bureau de Charge operators and parallel market have also raised the stakes as the average Nigerian would now require close to N185 to purchase one dollar.

The CBN governor, Godwin Emefiele, also announced that the meeting equally decided to increase the Monetary Policy Rate by 100 basis point from 12 per cent to 13 per cent.

The MPR is the rate at which banks borrow from the CBN to cover their immediate cash shortfalls. This, of course, means that Nigerian entrepreneurs, industrialists and exporters would now source for the hitherto almost impossible-to-secure-working capital at a higher interest rate.

While it is in the purview of government to determine, at any point in time, the policies and measures it considers most appropriate to address economic realities and situations, we do deem it necessary to critically examine the likely impact of these two “bullets” on Nigeria’s already ailing non-oil export sector. This is even more critical at a time like this when we are clamouring for a National Response Squad on the nation’s non-oil exports.

There is no gainsaying the fact that Nigerian exporters are competing with foreign conglomerates and multinationals who have the advantage of borrowing from their home financial systems at little above five per cent. The Nigerian exporter must agree to rates as high as 27 per cent if he must access working capital. The international market prices of most of Nigeria’s products are determined outside Nigeria. We produce what we do not consume and consume what we do now produce. In terms of market access, the Nigerian exporter conducts his market research and organises his own market-penetration activities at his own cost. This is in addition to the fact that the Nigerian manufacturer-exporter is more or less a Local Government of his own, having to provide his own water and power. Secondly, a lot of people would erroneously assume that devaluation means more naira per dollar for the exporter. It is usually felt that a devaluation of the exchange rate will make exports more competitive and appear cheaper to foreigners. This should, ordinarily, increase demand for exports. But if we stop a little bit to consider the replacement costs for machinery and equipment and other raw materials and inputs needed to produce for exports and the quantum of naira that these would entail, then, we will understand that the new CBN measure is actually a double jeopardy for Nigeria’s exports.

Originally, when the Structural Adjustment Programme was introduced in 1986, the government of the day had foreseen just such a situation and had made provision for the Export Price Adjustment Scheme. Unfortunately, this has never been activated. It therefore stands to very strong reason that now is the time, more than any other time before, that the Nigerian exporter requires the export expansion grant to cushion these austerity measures.

It is good to justify the introduction of these measures as a panacea for economic recession and dwindling oil fortunes. But it would also make a lot of sense, if we, as a nation, were taking a holistic approach and therefore providing necessary hedges for such heavy economic impacts.

Ideally, when a country devalues, its major immediate target should be to increase its exports. Increase in export production helps to increase the revenue base of the nation’s economy. In order to do this, all necessary efforts are required to ginger up the production base whether it be in agricultural commodities or in industrial products. A country’s balance of payment imbalance is corrected when export revenues are increased and imports reduced. We are all living witnesses to a time in our generation’s history when the naira was strong enough to purchase two British Pounds Sterling. During those glorious days, the mainstay of our nation’s economy were the groundnuts pyramids in the North, the cocoa plantations in the West and the rubber and oil palm estates in the East/ South-South areas. The receipts from these non-oil resources provided the mainstay of our foreign exchange earnings, which is also one of the key factors in valuing a country’s currency and its exchange rate vis-a-vis other currencies.

As we maintained in one of our recent articles, the international marketplace is a fiercely competitive economic battlefield. Other nations continue to evolve incentives and support instruments that keep their exports and exporters ahead of competition. We even cited the example of Australia that has a basket of 34 different incentives for her exporters and South Africa that has about 37 different export promotion agencies – almost one for every export sector. Unfortunately, of the 18 incentives released for the purpose of creating and sustaining a diversified economic base for Nigeria in 1986, only one, the Export Expansion Grant, is currently operational. More unfortunately, even the EEG has been rendered comatose since the past 18 months or so as the Nigeria Customs Service no longer honours the Negotiable Duty Credit Certificate, the instrument with which the EEG is administered.