Friday, 24 June 2016 04:08

Buharinomics & Devaluation of Naira

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In retrospect, as a country, Naija nation never experienced a huge recession in any measures historically, and given that context, the great depression typified by unprecedented decline in economic activity majorly only when stock market is completely in comatose, banks were closed down and macroeconomic factors destabilized.

The major recession in history was generally to have occurred between 1929 and 1939. Although parts of the economy had begun to recover by 1936,then the high unemployment rate persisted until the Second World War but the reversed circumstances pixilated  Nigeria context...despite our high unemployment rate domestically our macroeconomic stability remain solid, we still #1 economy in African continent  till date hence our 2009 banks reform are still adamantly functional except for our manufacturing industry that remain weak as primal breeder for export growths to enhance foreign earning which stands to be  the biggest fear I have for this devaluation, but considering all fronts amidst economic imbalances Nigeria towered the biggest economy in Africa mantle. How this new devaluation affects us econometrically?

Devaluation is ok as long as it doesn't cause us a loose monetary policy, and our central bank remains apolitical which can eventuate future inflation e.g. hyperinflation in Japan after 1936 is a good lesson to share

If we can recall vividly, lately  the tumbling of oil  prices has emanated serious doubt in the  sustainability and survival of any oil economies worldwide, Nigeria is not an exception to the rule, and President Buhari was just a victim of circumstances,  the previous administration should have seen it coming and saved hugely during the rainy days instead of  wasteful spiral spending  spree on security votes that was never executed, the naira that had just  nosed dived had  lost 40% of its value in one single "black Wednesday" is no surprise in an  analyst corridors, its long awaited  there is no doubt that in a such  awkward economic situation present administration  could have done anything differently than to succumb to a natural market driven  method to revive the economy and our exchange given with  little price of devaluation on a short term, the move was expected to be painful but 40% devaluation is an hard pill to swallow...but on long term naira floating freely will definitely translate to a fairer  and positive economy growth down the road.

This measure will definitely give us a new template to operate on, however it will have an adverse effect on our sound macroeconomic values and that might in a short run create an economic stress to the whole continent being the largest economy in Africa however, this is the first step toward great moderation to steady economic growth and I see it as a right step forward.

As we all know in a simple terms a devaluation occurs when the exchange rate falls in value and this causes our exports to be cheaper and imports to be more expensive. In theory, it can help increase economic growth, though it may cause hyperinflation if unchecked

The impact of naira devaluation as in Nigeria context, depends on economic circumstances. If a country as our nation is suffering from being uncompetitive with high increasing unemployment rate and low inflation ( averages 8% - 9% before devaluation) a devaluation as right recipe may help considerably given historical perspectives, between 2008 and 2013, the British pound experienced same economic shocks at 25-30% devaluation in sterling, but the United Kingdom had a weak recovery despite their strong manufacturing sector, some cost push inflation and a surprisingly large current account deficit occurred. And it was obvious that the depreciation then in pound did little help to the UK economy

In theory, a devaluation of Naira will cause the following to happen to Nigeria economy:

Presumably, a) the price of imported goods into Nigeria will increase. This will reduce our spending on imports and instead we will be more likely to buy domestic goods given our growing population as a consumer economy – it is a good stress to have.... and the quick fix should be for our govt to give huge incentives to promote "Made in Nigeria" goods aggressively and improved on their standard for export gains.

b} The price of Nigeria exports will be lower in foreign currencies, this will increase the competiveness of Nigeria exports and it will cause an increase in demand for "Made in Nigeria" produce for export, solutions: Government should pump money and incentives (tax free etc.)  to manufacturing industries for huge volume of production

c}Considering our balancing of trade temperament, focusing on: Made in Nigeria" mass productivity for exports the increased competiveness should cause an improvement in our current account and that will eventually solidify our foreign reserves.

Again, on simple terms, devaluation is the decision to reduce the value of a currency in a fixed exchange rate. A devaluation simply means that the value of the currency falls which eventually affords domestic residents to find imports and foreign travel more expensive because the rate of naira exchanges to foreign currencies become greater which will later typify hyperinflation, however on the long run domestic exports will benefit from their exports becoming cheaper and the manufacturing industry grows.

In the current conundrum, our export become cheaper and locally made goods becomes more competitive to foreign buyers. Therefore, this provides buffer and a boost for domestic demand and could lead to job creation in the export sector. And on the hindsight, the higher level of exports should lead to an improvement account deficit especially Nigeria as a country has a large account deficit due to lack of competitiveness. And in my opinion, I strongly believe that higher exports and aggregate demand can lead to higher rates of economic growth and that buttress Buharinomics moving in the right direction on the long term.

It is no doubt, that in a recession a devaluation can help boost growth without causing inflation however, in a boom a devaluation is more likely to cause inflation and besides, a devaluation may take a while to improve current account because demand is inelastic in the short term.

If we can recall, past years with fixed 195 naira to dollar, Nigeria had lost its competitiveness in a fixed exchange rate and as of now only a devaluation could be beneficial in solving that decline in competitiveness

However, with all great merits of devaluation, it is also good to note some warning signal aspects of it.... Devaluation may as well likely to cause inflation because any imported goods or raw materials will increase in price and that can make imports more expensive, devaluation might cause an increase in our aggregate demand which will eventually cause demand pull inflation.

Obviously, devaluation tends to reduce the purchasing power of citizens abroad e.g. more expensive to go on holiday, Solutions will be to build more domestic resorts for vacation

It will also not hurt to note that a large devaluation may scare off foreign investors (it reduces FDI – Foreign Direct Investment). It might reduce the competitiveness investors less willing to pump funds to the economy for fear of reducing value of their holdings and repatriation of their capital gains home might be a huge challenge

Overall, and to Buharinomic's credit, this current devaluation is a relatively painless way to boost domestic demand and unlike fiscal policy you don't have to borrow to supplement the economic revival however, one drawback of devaluation is that usually it can be inflationary, but in a recession inflation is unlikely to be a problem. And finally as an economist, I strongly believe our first objective as a country is to pursue the monetary policy which is most suitable for our economic situation. If a country like Japan is experiencing deflation. It is correct to pursue expansionary monetary policies. They should be seeking to reduce the value of their currency and pursuing looser monetary policy.

Nigeria is in a competitive devaluation mode and that implies that country pursue the correct monetary policy by allowing the market to seek the exchange rate to find its correct level unlike China with huge current account surplus in early 2000s with their currency manipulation, but still intervened to keep the value of their Yuan undervalued and the whole world reacted. Current administration in Nigeria had played save. Kudos to the govt on this new Buharinomics.

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Akin Awofolaju Ph.D, CLE,CSP, CFE

Visionary Leadership •Business Strategy; Governance, Risk Management & Compliance (GRC) ;Digital Forensics Analysis, Quantitative Financing & Asset Management; High level Auditing/Internal Controls; Analytics Economics • International Business Expert• Global Strategic Alliances. Budget & Business Forecasting; Hedge Fund & Private Equity Expert; High-Stake Contract Negotiations. Key Partnership Development.Organizational Restructuring. Risk Management. Public and Media Relations • Forensic Accounting & Financial Analytics • Business Development • Mergers & Acquisitions • Executive Advisory Investment Analysis • Analytical Business Skills • Project Management •Learning on the Fly Skills • Interpersonal Savvy Skills • Building Effective Teams Skills • Problem Solving & Priority Setting Skills• Managerial Courage Skills• Strategic Agility & Action-Oriented Skills •

As a corporate executive with extensive fortune 100 corporate backgrounds both in personal and corporate business. Dr Awofolaju is a governance, risk management, and compliance guru, managed many organizations in the leadership capacity. His company is one of the leading Leadership Business Development, Strategic Programs in Tri-States Area. He is an American Board Certified Financial Forensic Examiner, Educator, American Board Certified Strategy Planner and also a Strategic Thinking Expert. An Applied Economist (Regional Development Economics)  Expert in forward-thinking unimaginable vision, identifying opportunities involving both start-up and existing businesses for sustainable growth.

He has been a top-ranked financial engineering expert; Business Resources & Leadership Development for educational industries in NY/NJ Regions for a decade and also leadership development expert for the fortune 100 companies where he worked as an award-winning leadership professional with over 17 years of management experience, demonstrated analytical skills. Dr. Awofolaju is a member of over twenty professional bodies amongst which are the American Association of Financial Forensic Fraud Examiners, the Nigerian Institute of Management, American Economic Association, and International Research for Income & Wealth, etc Author, a prolific writer, and columnist on contemporary issues.

Dr Awofolaju is a motivator and mentor with a collaborative, entrepreneurial management style with expertise in translating the big picture into specific business leadership strategies. Dr Awofolaju was a leading Corporate Executive (New York/New Jersey regions) for Verizon Wireless Telecommunication Company in America, where he worked for over 10 years before he started his own company. Dr Awofolaju managed the team of senior-level managers, and for his entire career he was the top performer in the region, as well as nationally. As a management expert, he has broken many business acquisition/merger records with several awards and recognitions and also attended Advanced Program at Harvard University Business School & Cornell University graduated from S.C Johnson Postgraduate Business School in Executive Leadership Development & Strategic Thinking/Planning. 

As an Co-Executive Chairman(Advisory Board) African Trade Business Center(ATBC) and Owner/Founder AmeriStrategy Inc-UsA, aided US/Africa Business enterprises with healthier job creation and maintenance in both the U.S.A & Africa, He promotes economic infrastructure and global competitiveness of U.S small businesses owned and operated by members of the minority and diaspora communities with trade

He served as a Senior consultant for Min. of finance & Debt management office (DMO) - FMoF - Diaspora Bonds of US$300million for sustainable infrastructural development and 

 Dr Awofolaju also managed over 500 high-performance driven team that generated over 450 millions of dollars in mergers & acquisitions when he worked as Regional Account Executive for British Petroleum Company for Tri- States ( PA/NJ/NY) - 1999 -2001. His strengths are his motivational and mentoring skills. A keen listener and creative thinker, Dr Awofolaju has been a consultant for individuals and businesses since 1991. He managed European financial powerhouse as President/CEO - Bayland Investments Company in Eastern Europe (1991- 1999), he discovered the executive keen interest in his experience and insight into maximizing peak performance. 

Dr Awofolaju developed the leadership development & training program that unleashes the potential of individuals or organization value adding by opening up creativity and recharging passion requisites for consistently perform at their best. Dr Awofolaju's focus resonates with others because it sheds light on why people do not perform to their potential even when they're talented and committed. Dr Awofolaju works with various CEO's, corporate executives be it in Wall Street, business professionals to athletes – professional basketball players. Dr Awofolaju’s wide range of clients illustrates how anyone can benefit from performance coaching. Dr Akin Awofolaju has been a Business consultant for individuals and businesses since 1991, when he discovered executives' keen interest in his experience and insight into achieving peak performance.

Chairman: State & Local Government  Nigerians in Diaspora: Nigeria Constitution Review Committee  
Honoree: Top 50 Nigerians in US/Canada commemorating 50yrs of Nigeria Independence @ United Nations -New York, NY -USA
Founding Chairman : NigeriaCEO Council - New York 2010
Steering Committee Member: Nigeria In Diaspora Constitution Review Committee ( 1999 Constitution Amendment Committee)
Alumni : Cornell University - Postgraduate  School: S.C Johnson School of Business, Itacha, New York - USA  
Member: Nigeria Global Forum - USA
Member of American Economic Association (AEA) -USA
Member: Association of Certified Fraud Examiners (ACFE)- USA 
Member of International Association for Research in Income and Wealth (IARIW)
President: Acumen Investment Club of  State of New Jersey
Board Member: Aberdeen Township Planning Board-New Jersey
Board Member: Mount Hope Housing Company over $300m investments/Borough of Bronx,NY