Devaluation alone will not unify Nigeria’s forex system

The massive devaluation of the naira in June 2023 is a positive move, but it won’t be enough to fulfil the new administration’s goal of unifying Nigeria’s foreign exchange system.

The devaluation was substantial, yet it may not produce a fundamental reform of the system. The current Investors & Exporters window was initially proposed to operate based on market-determined exchange rates. This is what the CBN asserted when it introduced the system in April 2017.

What changed this week was that the CBN allowed market forces to prevail, instead of its prior practice of controlling exchange rates, even though the system was meant to be based on willing buyer, willing seller principle.

The I&E window was not the first time the CBN attempted to liberalise the system. In June 2016 the bank supposedly floated the Naira when it launched what was said to be a market-determined interbank foreign exchange market. The naira was devalued to match the parallel market. For a while, the currency was even weaker in the official market than in the black market.

Both times the CBN devalued the naira and promised free market rates, it soon reverted to pegging the currency.

To achieve a unified and stable exchange rates regime the government and CBN must abandon the long-held myth of a strong naira and the belief that the state should channel subsidised forex to certain economic sectors. They should also scrap capital controls, including bans on certain imports, that restrict entry into the official market and drive individuals and organisations to the black market.

It is also crucial that policymakers understand why under market forces the Naira constantly depreciates. The most important factor has been the excessive growth in the money supply in the economy, largely driven by money printing to finance government deficit spending.

The myth of human capital shortage in Africa

 People with knowledge and skills are being wasted

By Tunde Obadina

It is a common belief that the prevalence of extreme poverty in Africa stems from shortages in skilled manpower needed to spearhead rapid economic growth. This notion has led international development institutions to advise African governments to invest more in human capital development. But are African nations impeded by lack of qualified manpower? The answer is no.

Take Nigeria as an example. University educated Nigerians are more likely to be unemployed than the average citizen in the country. According to the Nigerian government employment data, 28% of workers with university first-degree qualifications were unemployed in the second quarter of 2020, compared 15% with only secondary school education and 5% who never attended school. Nearly a fifth of master’s degree holders was jobless, while a quarter of those with a doctorate was underemployed. Overall, more than half of workers with higher education qualifications were jobless or underemployed.

This employment situation suggests Nigeria’s economic underdevelopment does not stem from a deficiency in knowledge and skills in the workforce. What we see is an over-supply of college-educated people, including doctors, engineers, and teachers.

Who’s afraid of China’s loans to Africa?

 By Tunde Obadina

China’s growing economic relationship with African countries has received much negative media coverage in recent years. Critics of the fast-rising Asian economic superpower present the Chinese state as the new imperialist threat to Africa. As did yesterday’s European colonisers, China is today seeking to capture Africa’s vast natural resources and exploit its labour-force for the aggrandisement of the world’s most populous nation, so say the critics.

A strategy purportedly being deviously used by Beijing to capture African resources is debt. Critics see China as offering cheap loans to African governments, hoping they will default on repayment, enabling the Asian giant to gobble up assets used as collateral. China’s Belt and Road Initiative, a global infrastructure development strategy, is described by the critics as a debt-trap diplomacy, part of a campaign for global hegemony.

Concerns over the safety of Nigeria’s struggling economy in the face of the envisaged encroaching dragon led the country’s House of Representatives in May to launch an investigation into all China-Nigeria loan agreements since 2000. The lawmakers want the contracts reviewed and where necessary, cancelled. The legislator who spearheaded the action said there is widespread global concern about the alleged fraudulent, irregular, and underhand characteristics of Chinese loan contracts with African nations, which have resulted in a new form of economic colonialism foisted by China.

Whose money is it anyway?

By Tunde Obadina

In its endeavour to shore up the naira currency the Central Bank of Nigeria (CBN) has in recent months taken steps to curb domestic use of foreign currencies in Nigeria. It barred authorised money dealers from importing foreign currency banknotes without prior approval and stipulated that beneficiaries of international money transfers must be paid in naira only. The regulator has also tightened restrictions on the operation of bureaux de change to limit demand for hard currencies.

According to monetary officials Nigeria has become one of the world’s largest importers of US dollar notes. Restricting domestic use of foreign currencies, they believe, is necessary to combat money-laundering, especially by corrupt politicians and Islamist insurgents. The CBN also wants to counter what it says is the dollarisation of Africa’s largest economy. Its aim of checking money laundering is undoubtedly commendable; but corruption is not the only driver in the growth in local usage of foreign currencies.

There are many legitimate reasons why people may choose to hold dollars or other currencies in preference to the local currency. Lack of confidence in the national monetary system is an obvious reason. Individuals and businesses may believe their interests are better served storing their wealth in assets that are more stable and less prone to losing value in the foreseeable future.

Money is in some ways similar to debt. Unlike barter, where people exchange commodities that both parties can immediately ascertain their respective value, a monetary transaction involves the seller receiving an item that has no inherent worth. The real value of money is determined at the time of its application as a means of exchange. For example, when customer A gives one dollar to shopkeeper B for a bar of chocolate, A receives a product which has instantly realisable utility. For B the actual worth of the dollar note will only be known to him when he deploys it in a future transaction. At that later time its purchasing power may provide more or less chocolate as at the time he accepted the note, depending on whether the currency has meanwhile appreciated or depreciated. When the seller exchanged his chocolate for money he acquired a note that contained a promise of future entitlement. He took a risk in doing so. He entered the transaction because he believed that the asset he receives will retain a value that is at least close to its present worth. His faith could prove to be misplaced, if when he comes to spend the money it buys much less in value than the chocolate customer A had long digested.

Given the volatility of money, the choice of people living in economies with high inflation and weakening local currencies to hold some of their wealth in sturdier foreign currencies is rational. It is a way to protect against risks of devaluation. Needless to say, governments and central banks throughout the world intensely dislike their citizens using foreign currencies. This is because the practice undermines their control over the financial system and the economy. The effectiveness of monetary policy is limited if members of the public can choose to ditch government-issued money in favour of other mediums of exchange and wealth storage.

Control over money supply is arguably the most wide-reaching and effective means the state has to affect the lives of individuals within its domain. People can ignore or circumvent most government regulations, such import bans and licensing laws, but holders of the national currency cannot easily escape the effects of state monetary actions. For example, when governments print large amounts of money, thereby fuel inflation, their action invariably devalues the money in the pockets and bank accounts of all who possess the currency. Citizens can evade paying direct taxes, but they cannot easily avoid the taxation effect of money printing. The state does not need to know of your existence or location to take your money.

Currency shifting by individuals and businesses to protect their wealth against the effects of poor state financial management is not peculiar to developing countries.It is world-wide. It is one of the reasons that the export of dollar notes is a big U.S. export. The relative stability and strength of America’s financial system is also a reason why individuals, businesses and governments across the world deposit most of their external reserves in the U.S.

In a free society individuals may hold their wealth in any form that does not violate the property rights of others. Individuals alone assume the risks involved in their investment decisions, including any limitations on the number of people willing to accept the currencies they possess. Some readers may think that this libertarian perspective only benefits rich people with money. This is not so. Poverty does not mean being penniless, it is having very little amounts of money. This is why the opportunity to choose currencies that are least susceptible to depreciation is important for the poor. A subsistence farmer who saves 5,000 naira in an economy with 10% annual inflation rate will find that after a year his nest egg is worth only 4,500 naira in real terms. Had he changed his money into a more stable currency, the value of his meagre savings would have been better preserved.

Currency shifting is not necessarily an act of national betrayal. It is the case that rich people in developing nations keep much of their wealth in foreign assets, including overseas bank deposits.