Naira Devaluation: Tinubu Repeating Babangida’s Error – NAE
…warns Nigeria’s policymakers against accepting every IMF’s advice
The Nigeria Association of Economists (NAE) has advised President Bola Tinubu to look deep into his recent economic policies and see that he is currently repeating an error made by former Head of State, General Ibrahim Babangida in the devaluation of naira.
Prof Innocent Eleazu, President of NAE said that the Central Bank of Nigeria (CBN) allowed the naira to drop as much as 36% on the official market, days after Tinubu suspended former CBN Governor, Godwin Emefiele a situation that turned out to prove that the CBN devalued the naira by 7.6% against the dollar.
Eleazu warned that Nigeria should not have attempted devaluation of the naira again because of the painful history of devaluation during the Babangida administration when the naira was devalued in 1986 on the advice of the International Monetary Fund (IMF) against the advice of most Nigerian Economists including himself.
“The General Ibrahim Babangida Military Administration marked a turning point. Nigeria suffered a massive devaluation of the naira, exchange rate at $1.75 to the naira in 1986, Most Nigerian economists condemned the devaluation in the strongest term. Ibrahim Babangida responded that he did not devalue the naira and that what he did was merely to revise the naira.
“The President Bola Tinubu Administration employed the same Babangida’s tactics. For example, the Central Bank stated that it allowed the naira currency to drop as much as 36% on the official market. In other words, the Central Bank devalued the naira by 36% yet refused to admit that the naira has been devalued. As of June 14, 2023, the naira exchange rate was 630/$1.
“The parallel market exchange rate which is popularly called the black market stood at 750/$1. Unfortunately, it is the same 1986 Babangida’s costly mistakes of devaluation of the naira that President Bola Tinubu Administration has repeated or duplicated.”
Eleazu however said that devaluation which he says is a Government Policy that lowers the nation’s exchange rate so that its currency is worth less than it had been relative to foreign currencies is not a terrible economic policy, but must be done when it is appropriate not without plans.
According to him, it is a sound economic policy to devalue a nation’s currency if the policymakers want to sell more of the nation’s products through International trade which most likely will result in mass production and mass consumption that enhance the living standards of the overwhelming majority of the citizenry.
He said that devaluation has exactly the same effects as the decrease of prices that results in an increase in sales/revenues in an economy.
“If I may ask: Why would policymakers want to devalue the nation’s currency the naira? Is it because the policymakers want to reduce the price of oil to increase the sales of oil and/or reduce the prices of the nation’s products to sell more of Nigeria’s products in International trade? I don’t understand,” Eleazu said.
The renowned economist said that Nigeria as a one-product-economy that has unfortunately refused to diversify depends mainly on oil for its foreign exchange right now, which is evident in the unprecedented shortage of consumer goods and services in the country.
Eleazu said that the devaluation of the naira will have serious consequences as it lowers the nation’s exchange rate so that its currency is worthless than it had been relative to other foreign currencies.
He said that the above implies that Nigeria needs more foreign exchange to buy the same goods and services it bought previously.
“For example, if Nigeria were buying certain foreign goods or services at N100 (one hundred Naira} before the devaluation, it will now cost N150 to buy the same goods or services. Unfortunately, it has exactly the same effects in the Nigerian market.
“For example, if it costs N450 to buy one small size of peak milk before the devaluation, it will now cost N550 to buy the same small size of peak milk after devaluation.
“Put professionally more naira will pursue few goods This is how we get a substantial increase of prices of goods and services after devaluation that inevitably destabilizes prices/economy and shakes the confidence of foreign investors as well as local investors.”
He said that devaluation will also increase Nigeria’s National Debt which stood at $77T (seventy-seven trillion dollars) as of February 22, 2022.
“For every N100 Nigeria spent, N61 is used to service its national debt. Despite the huge financial burden on Nigeria, I read recently that the International Monetary Fund (IMF) is encouraging Nigeria to borrow more money to finance the budget deficit.
“It will be recalled that it was the same International Monetary Fund (IMF) that advised General Ibrahim Babangida Rtd in 1986 to devalue the naira.
“It is the same IMF that has endorsed the unification of the naira without mentioning the word devaluation. What Nigeria’s policymakers don’t understand or refused to understand is whose best interest the International Monetary Fund {IMF) is working for.”
He said that a few other implications of the devaluation of the naira that must not be ignored include that Nigeria’s creditworthiness in the International market will be seriously in doubt which will affect foreign investment, ability to borrow, and capital flight.
He said that there are only two criteria for foreign investment in any country namely political stability and economic stability, which Nigeria needs to be very careful about considering the nation’s current situation.
Eleazu recommended solutions which he described as concrete measures any nation can take to avoid devaluation of its currency, in the case of naira and Nigeria which he said are: increased productivity and another country’s currency as a legal tender.
“The first option is to increase productivity substantially. I strongly recommend the first option (increased productivity} because Nigeria has a vast area of land and the technical nohow to achieve an appreciable increase in productivity within a reasonable period.
“The second option to avoid devaluation of the naira is dollarization. Dollarization refers to the adoption of another country’s currency as a legal tender. Dollarization is chosen by countries that have high inflation rate and wants to stabilize their price levels and economies.”
He said that despite the second solution not being his preferred option, the good news is that nations that dollarize their currency can de-dollarize any time at no cost whatsoever.
The Economist said that he has examined the attempts of Tinubu’s Administration to deal with the fallout of the devaluation of the naira, stressing that CBN floating of the national currency against the dollar and other global currencies means that market forces {supply and demand) will determine the exchange rate of the naira.
Eleazu said that what beats his imagination is if the policymakers ab initio intended to float the naira why will they first devalue the naira before floating it at the free market?
