Naira devaluation and austerity measures

THE decision by the Federal Government to introduce austerity measures and to devalue the nation’s currency in response to falling oil price is wrong-headed; and constitutes a mere manifestation of official economic mismanagement. The solution to the problem arising is to address the economy in a more efficient and professional manner.

After crude oil prices steadily fell by some 30 per cent and touched the oil price benchmark of US$78/barrel initially proposed in the 2015-17 Medium Term Expenditure Framework and Fiscal Strategy Paper, Finance Minister Ngozi Okonjo-Iweala summoned the media on Sunday, November 16, 2014 and announced that the Federal Government would adopt a multi-pronged austerity strategy to protect the economy from any adverse effect of oil price slump. The minister assured Nigerians that, unlike in the 1980s and ’90s when outsiders proffered measures for tackling oil price slides, a competent Economic Management Team (EMT), which had been soundly managing the economy, would craft a set of policies to address the oil price shock and protect the common man. She also assured that the economic team together with the monetary policy authorities would transparently manage the economy.

But barely one week after the minister’s address, the naira was devalued by 7.7 per cent in response to what the apex bank termed frivolous demand for forex. Nigerians know and have borne the negative effects of currency devaluation (and depreciation) ever since the naira, which stood at N0.5464/$1 in 1980, began to consistently lose ground to the dollar. It is necessary to look beyond the devaluation because even now, given the Dutch auction system, the CBN mid-rDAS rate of N168/$1 already overvalues the naira. And some economic analysts have predicted ominously that the naira risks being exchanged at N500/$1 in the near to medium term. That outcome will be calamitous. However, the good news is the awareness in some quarters that the exchange rate on the limit under the DAS approximates infinity. How then did the economy arrive at its bad shape and what steps should be taken in order to bring the economy to good health.

But barely one week after the minister’s address, the naira was devalued by 7.7 per cent in response to what the apex bank termed frivolous demand for forex. Nigerians know and have borne the negative effects of currency devaluation (and depreciation) ever since the naira, which stood at N0.5464/$1 in 1980, began to consistently lose ground to the dollar. It is necessary to look beyond the devaluation because even now, given the Dutch auction system, the CBN mid-rDAS rate of N168/$1 already overvalues the naira. And some economic analysts have predicted ominously that the naira risks being exchanged at N500/$1 in the near to medium term. That outcome will be calamitous. However, the good news is the awareness in some quarters that the exchange rate on the limit under the DAS approximates infinity. How then did the economy arrive at its bad shape and what steps should be taken in order to bring the economy to good health.

During the media address, Okonjo- Iweala played down the correct diagnosis of the economic ills and wished away, or acted in denial of, the serious problem. It is imperative for the EMT to first accept the correct economic problem before successfully pursuing the objective of securing the economic wellbeing of the common man under the unfolding 2014-15 austerity measures. Answering a question, the minister rightly rejected printing money to finance the budget in the face of falling oil prices because of the well-known serious consequences as demonstrated in Germany in the last century and more recently in Argentina and Zimbabwe. The EMT should stop pretending in the public and accept that Nigeria too has, since the 1970s, been facing the consequences of printing money on a limited scale tailored to volumes of withheld Federation Account (FA) oil receipts. Consequently, the economy labours under more or less controlled annual excessive fiscal deficits of about 10 per cent of GDP. The outward less devastating throes of printing money to finance the oil budgets than in the other named countries result from the artificially fixed exchange rates and the wasteful use of the withheld dollars to drain away trillion of naira from the system in the name of defending the value of the naira.