To Devalue or Not?

To devalue the naira; or not? This dilemma has powered most conversations and arguments in the country over the last week.

In the “red corner” we have had those who would rather lose their lives than snuff the life out of the beleaguered naira. This cohort has also held out against devaluation in the interest of that most famous section of our community — the poor and the vulnerable, in defence of whose interest successive Nigerian governments have squandered huge portions of our commonwealth to no real effect.

The “blue corner” of this debate has largely argued from an “economic efficiency” perspective. Basically, the central plinth of the argument here is that when the supply of any service or product drops (for whatever reason) without a corresponding shift in demand, the most effective means of allocating such a resource would be to have the price go up to reflect the supply/demand imbalance.

Increasingly, however, both these positions have become of theoretical value only. The hard facts on the ground daily move in uncomfortable directions. And if we must move public policy at the centre forward along a useful path, the need arises to separate what we desire from quotidian reality. Ordinarily, “devaluation” presupposes that the Central Bank of Nigeria (CBN) has the means to continue intervening in the foreign exchange markets. In other words, that the balance on our foreign reserve accounts are relatively healthy.

On this presumption, the point would then be that rather than continue glad-handing an increasingly scarce and very important national resource, the apex bank should raise its counter-parties’ cost of access to its dollar balance in the foreign exchange markets from the US$/N197 – 199 that it is currently at to some other point. So a central bank with US$60bn in its reserves would then intervene in the markets next week at a higher exchange rate for the naira. That would ease the demand pressure on the naira (disciplining consumption in the process), while returning more naira to the federal coffers for each dollar the CBN hands out.

There are several arguments behind this position. First, is that irrespective of the preferred methodology for computing the naira’s value — the external balance assessment, external sustainability approach, or the price-based approach — at US$/N197, the currency comes out overvalued. Then, there is the huge arbitrage window between the official and parallel markets — a huge incentive for persons with access to the official window to game the system.

Other facts, however, tell a different story. First, the US$28bn balance on the foreign reserve account is almost nearly fictional. This is not just because of the way the apex bank calculates the balance (a 30-day moving average with effect from November 2011). The problem with this is that it clearly would either under- or overstate the actual cash balance the CBN is sitting on. Beyond this though, is that there are contingent obligations (crystallising in the future) that the apex bank must meet at some time, including past-due letters of credit, futures and swaps. Even, therefore, were we to concede the liquidity to the CBN that its accounting for the foreign reserves indicate, not much of it is available to intervene in the markets with. Understandably, the apex bank has since shut all its intervention windows.

Meanwhile, the parallel market sells dollars to those who would buy at N305. How come then that we still have persons hell-bent on keeping the naira alive when all its vital statistics have flat-lined? If we then concede that the authorities have nothing to devalue, or nothing of value to hold on to for that matter, what to make of the argument that inflation would be exacerbated by a nominal devaluation?

Hogwash, essentially. For the economy long since moved to pricing its transactions at the black market rate, rather than the CBN’s convenient fiction. Okay, so the core argument of this piece boils down to requiring the apex bank to run the economy better by simply admitting the obvious. In this context, there is a clear possibility that the naira’s exchange rate might deteriorate further were the apex bank to make this mental transition. But that would be the market pricing into the different models for doing business in the country, the likelihood that the authorities do not have a decent understanding of domestic fundamentals in their policy formulation.