Myths About Naira Devaluation

…according to the data, we do not have an import problem… However, we do have an export problem, highlighted by the fact that crude oil accounts for 90% of our recorded exports and crude oil prices are volatile. Recognising this key difference between an import problem and an export problem is very important because it determines that kinds of policies that should be implemented. Import substitution policies and policies that look to limit imports probably won’t work because they do nothing to tackle the real problem, which is an export one.

The naira issue has been the topic of debate for a while now. Should we devalue or not? Can we cope with the effect of a devaluation? What happens if we don’t? And so on. Over the next few days, I and other colleagues-experts in their fields-will give views on a variety of issues regarding the naira devaluation debate.

To kick things off, it is useful to discard some bad ideas which have been tossed around for a while.

Bigger Number = Stronger Currency?

The first myth to debunk is the false idea that if you exchange a bigger number for a smaller number then the currency with a bigger number is weaker than the currency with a smaller number. You typically hear people say:“Wow, one dollar is exchanging for 16 rand. The rand is weak. The dollar is strong.” That kind of thinking is faulty mostly because it doesn’t take into account the purchasing power behind the currency.

For example, if an individual living in the US earns 300 dollars a month, then that is technically identical to an individual in South Africa earning 4800 rands a month, given that 1 US dollar exchanges for 16 rands. So long as that exchange rate holds then the rand is not weak or strong, it’s just the rand.

In reality, the strength or weakness of a currency has little do with what the actual exchange rate is. So although one Ghanaian cedi exchanges for 30 Japanese yen, you cannot say the cedi is stronger than the yen. Similarly, although one Turkish lira exchanges for six Mexican pesos, you cannot say the lira is strong and the peso is weak. That would be wrong.

In reality, the strength or weakness of a currency has little do with what the actual exchange rate is. So although one Ghanaian cedi exchanges for 30 Japanese yen, you cannot say the cedi is stronger than the yen. Similarly, although one Turkish lira exchanges for six Mexican pesos, you cannot say the lira is strong and the peso is weak. That would be wrong.

What then determines a currency that is “weak” or “strong”?

A weak or strong currency is one that is changing, or that everybody expects to change soon. For example, if the naira changes from 150 to the US dollar to 165 to the US dollar, then during the period the change is taking place the naira is relatively weak and the dollar is relatively strong. The same applies if the currency is expected to change soon. If everyone expects the naira to change from 197 per US dollar to 300 per US dollar, then the naira is weak relative to the dollar. The weakness persists as long as the expectations about the change persist. If the change eventually happens, the naira moves to 300 to a dollar, and everyone believes that is the end of it, then the naira is no longer weak. It is just the naira.

Weak Currency = Bad Economy?

The second myth to dispel is the idea that a country whose currency weakens consistently over time cannot grow. This could not be further from the truth.

The poster child of why weakening currencies do not imply slow growth is South Korea. South Korea grew its GDP per capita from about 1100 US dollars in 1960 to about 24,500 in 2014. What happened to its currency over the period? In 1960 one US dollar exchanged for about 63 won. Today one US dollar exchanges for almost 1200 won. In short, over the period where South Korea has “developed”, its currency has also weakened consistently.

…a currency that loses value over time is not the doom it is made out to be.

Similar patterns can be seen for some of the other fastest growing economies over the period, such as Chile, Vietnam, and Indonesia. The majority have grown relatively quickly even with weakening currencies. In fact, many countries try to weaken their currencies to boost growth. One of goals of Abenomics, a fancy name for policies implemented by the Japanese Prime Minister, was a devaluation of the yen to boost growth. China was accused for years of artificially weakening its currency.

There are many other examples from around the world. The Vietnamese dong trades at 22300 per US dollar today from about one dong per US dollar in 1983 and Vietnam still managed to grow at an average of 6.5% per year over the period. The Indonesian rupah trades at 11,800 per US dollar today from about 600 rupahs per US dollar in 1980 and Indonesia also still managed to grow at an average of 7% per year over the period. Bottom line, a currency that loses value over time is not the doom it is made out to be.

Devaluation = Uncontrollable Inflation?

The third myth is the idea that devaluations lead to runaway inflation, an idea that is not technically true. To be clear, devaluations do lead to inflation but not nearly as much as people think.

For example, the South African rand has devalued by about 40% in the last year yet inflation has ticked up by less than one percentage point to 5.2% from 4.4% a year ago. The Russian rubble has devalued by 126% since the middle of 2014 yet inflation has gone from 8% in mid-July of 2014 to about 13% today, although it peaked at around 16%. A significant increase, but nowhere near catastrophic.

…the reality is, devaluations do cause inflation but not that much… Ironically, according to some studies, the black market premium, i.e. the difference between the official exchange rate and the black market exchange rate is a bigger driver of inflation than devaluations.

Finally, we can look at Nigeria where the naira lost about 20% of its value between October 2014 and March 2015. Despite the devaluation, inflation, which was about 8% then, is still below 10%. If you add the fact that the dollar prices of some of our largest imports, fuel and wheat, have fallen to almost record lows then the inflation worry is minute.

So the reality is, devaluations do cause inflation but not that much. Despite a devaluation, the Central Bank still has lots of tools at its disposal to keep inflation in check. Ironically, according to some studies, the black market premium, i.e. the difference between the official exchange rate and the black market exchange rate is a bigger driver of inflation than devaluations.

Does Nigeria Have An Import Problem?

The final myth to bust is the idea that Nigeria has an import problem. You typically hear statements like “How can we be importing everything from toothpicks to fish. It is unsustainable.” Often left out of such statements is the fact that we have a N90tn economy. And you cannot have a N90tn economy that does not import. Is it odd that a N90tn economy would import N100bn worth of building materials or N26bn worth of shoes? No it’s not.

According to comparable data compiled by the World Bank, Nigeria imported only about 12.5% of GDP in 2014. Of the 160 countries for which the World Bank has data available, Nigeria had the lowest imports to GDP ratio. Côte d’Ivoire imported about 38.9% of GDP in 2014, Ghana imported about 48.9%, Mauritius imported about 63%, Belgium about 83.1% and Ireland about 95.4% of GDP.

Of the 160 countries for which the World Bank has data available, Nigeria had the lowest imports to GDP ratio.

So according to the data, we do not have an import problem. Even if you assume that 50% of our imports go unrecorded, that still leaves us at a healthy 25% of GDP, which is still not a problem.

However, we do have an export problem, highlighted by the fact that crude oil accounts for 90% of our recorded exports and crude oil prices are volatile. Recognising this key difference between an import problem and an export problem is very important because it determines that kinds of policies that should be implemented. Import substitution policies and policies that look to limit imports probably won’t work because they do nothing to tackle the real problem, which is an export one.

Nonso Obikili holds a PhD in economics and works as a researcher and consultant. He has published peer-reviewed articles in various international academic journals and blogs frequently on Nigerian economic issues. Follow him on twitter: @nonso2.

Advertisements

The Writers Wife

Trust me I understand his absences.

Was it not I, his official muse, that set him upon this path?

He is all over the world now; awards, book signings, book readings, CNN, even Bollywood want deals.

He is in Abu Dhabi this weekend… Al Jazeera interview slash a book signing.
And I’m stuck in Abuja presently… Tormented by our two boisterous kids, kids I’m struggling not to kill.

What manner of person travels on Valentine’s day?
Without recourse to the marginal propensity of forfeiture of life? Only my husband!

In fairness to him, he accepted the dates months ago. He told me, and I accepted. But I didn’t know it would be this fourteenth of February!
It sounded like just another day nine months ago.

So I picked up my Sony video camera, the youngest of our two kids and then headed to the man-made Jabi Lake to make and record some memories of my Prince for posterity.

Our daughter looks like her dad.
Our son looks like me.
Our son is me.
He is without doubt the cutest two year old I know. Trust me, its not just because he is my son. He is beautiful.

I had him on the screen of my video camera wearing a life jacket, rain boots and gleefully waving at me. His vocabulary isn’t quite there yet, so his replies to my questions are dazzling smiles and waves.

We are at the water front. The spot is ours. It’s about five thirty pm. There are a few people scattered along the water front to my right. But about half a kilometre away.

My phone rings.

I look away from the video camera propped on a tripod stand to my phone. It’s his dad. Smiling I pick up and look back into my video screen.
Duration of the action, five seconds or less.

My son is still playing about two metres from the water front. Still speaking on the phone I straighten up to ease my eyes and stretch my arched back.
As I lift up my eyes to see my son in real time, I see my son standing face to face with another child. A baby girl. About his age.

I remember looking back into the screen and back at my son, over and over and over again…
All I could see was my son with another child whose image wasn’t coming up on my screen!
On tape, on my screen he was alone. But from where I was ten meters away he was clearly with another female child.

I don’t drink. I don’t smoke. I don’t do drugs.
I believe that evil exists and I believe that Jesus Christ is the way, the truth, and the life. I crossed the distance in seconds screaming my son’s name.

I knelt down in the sand and protectively cradled his startled body. He tried to squirm free, simultaneously pointing to his new companion.
Heart thunderously beating I followed his finger. Sure enough, she was still there.

She was a beautiful girl. Almost too beautiful in fact. Upon closer inspection she seemed to be about four years old. But her eyes…her eyes were older, like the eyes of a twenty year old. She had on a wet, simple cotton dress. Her natural – looking hair was braided all the way back, down to her waist. Very intrinsic braids.
The pattern and style of her hair I had not seen before.

Her gaze and smiles were for my son only. She ignored me completely. Like I was not there. My son was as though hypnotised, he was smiling back arm stretched out toward her.

He kept squirming and trying to pull free of my grip, fully intent on holding the equally outstretched hand of the girl. Puzzled I held on tighter, their eyes were locked on each other. Arms stretched out, straining to clasp. I innately knew that my sons hand could not be allowed to touch the girls hand.

He suddenly threw his head backward, I reflexively turned my face to avoid the reverse head butt hitting my nose. He caught my bottom lip, I felt it split open like a ripe mango hitting the ground. The pain was searing and debilitating, the only two reactions I could manage was to hold him tighter and to cry out “Jesus!”

Instantly he relaxed and whirled round to embrace me. Face in my neck.
The spell was broken.
I could feel blood from my split lip running down and onto the back of his t-shirt.

For the first time, the little girl locked eyes with me. Her arm was still outstretched, but she was no longer smiling.

The malice and hatred she bestowed with her looks upon me could tenderize elephant meat.

I saw malevolence in her eyes. I saw lust. I saw covetousness.
And I saw love. Yes love… For my boy.
She wanted him.

Mothers worldwide can back me up on this; that instinct, that mummy thing just welled up from within me and burst. My eyes blurred in blind rage, I rose to my feet speaking in a tongue previously unknown to me… She recoiled in terror backing up into the water.

I held her gaze, my son and those strange words…she glared at me and then screamed, her tiny mouth wide open. I could see all the way down her throat… But no sound came out.

She pointed ominously at me and then dove into the murky waters… and until I gathered my stuff and beat a hasty retreat to my car I did not see her again.

Book Promotion: “1” By Dan Ochu-Baiye

My first e-book is suddenly making waves.

Funny because it’s been over a year published exclusively on Amazon.

Just in case you missed it, I think you should check it out.

Remember the popular quote about not judging a book by its cover? Yeah… Case in point…

image

Leave a kind review? (for my ego).

Thank you.
Here’s the link :-

http://www.amazon.co.uk/gp/aw/d/B00N4L1QHI/ref=mp_s_a_1_1?qid=1455259602&sr=8-1π=SY200_QL40&keywords=1+lovealways