ASSETS & FINANCIALS

How import substitution can alleviate pains of devaluation

CBN giveHow import substitution can alleviate pains of devaluations 15 microfinance banks new licencesThere are several reasons nations devalue their currencies. Some devalue currencies to combat trade imbalance. Others devalue their currencies to enable their exports become less expensive and competitive globally.

This makes imports more expensive, such that local consumers are less likely to purchase them. Some industrialized nations devalue their currencies based on the dynamics of the global currency markets

Some less developing nations however, devalue their currencies to correct past economic mistakes and decrease the volatility of their currencies. Nigeria belongs to this category of nations in its currency devaluation endeavour.

Nigeria has been import dependent economy for more than four decades relying on crude oil for almost 80 per cent of its foreign exchange (forex).
No wonder it has recorded fewer confirmed cases of Covid-19, when compared to other countries but the global pandemic’s growing impact on its economy is far more significant.

As oil major, while global demand drops drastically in the wake of the outbreak, Nigeria’s economy is being caught in the cross hairs. Essentially, with oil being Nigeria’s biggest export, the government relies heavily on the resource for dollar earnings to fund its national budget.With this year’s $35 billion budget passed with a benchmark oil price of $57 per barrel, Africa’s largest economy cannot currently fund its budget.

The Central Bank of Nigeria (CBN) last Friday, officially devalued the naira to N380 to a dollar. The devaluation came after over three years of push from financial market managers, the World Bank and International Monetary Fund for the local currency to be devalued.

Analysts, operators and investors argued that as long as crude oil remains a major source of revenue for Nigeria, and the economy is mismanaged, there would be volatility in its forex earnings.

To break the jinx, stakeholders at the weekend called for a deepening of the nation’s import substitution as a foil to the negative effects of the recently adopted naira devaluation policy of the Central Bank of Nigeria (CBN).

The stakeholders, who spoke on the new value of the legal tender, insisted that the decision provides opportunity for business managers and entrepreneur to replace costly imports with cheaper, locally made goods.

According to them, the current situation affords Nigerians the opportunity to embrace import substitution and reduce the demand pressure on foreign exchange by importers and ultimately conserve the nation’s hard earned reserves.

Specifically, an economist, Johnson Chukwu, in a telephone interview with The Guardian, argued that it would be sub-optimal to continue to heavily deplete the country’s reserves in defending the naira and as neither the CBN nor the Federal Government is in control of the major factors causing the depreciation of the nation’s currency

According to him, sustained pressure on the reserve, in addition to the continuous exit of foreign investors and crude oil price below $30 billion per barrel have made it become inevitable for the CBN to devalue the Naira.

Chukwu, who is also the Chief Executive Officer of Cowry Asset Management Limited said: “With current reserve at less than $36 billion, it will make it imperative for the CBN to consider devaluing the currency.”

A financial market expert, Adebayo Adeleke, said the currency is weak because there is a huge imbalance in the country’s trade in terms of export and import, which implies that there is an urgent need to ban more items that, can be produced domestically as well as enhance patronage of locally made goods.

According to him, there is no way the CBN would continue to defend the currency amid heavy plunge in foreign reserve and the persistent drop in oil price.

Essentially, he argued that the extent at which depreciation or devaluation affects a country depends on the rate of its exports relative to its imports

He pointed out that government must accelerate diversification of non-oil sector and adopt a framework that would help deepen import substitution in Nigeria.

Adeleke insisted that this is the only viable way to survive the current global economic uncertainty with the volatility of oil price.“There is no way the CBN will continue to defend the Naira at this level. The two conditions to maintain the stability of Naira and particular threshold for foreign reserve and dollar value of our crude oil are weighty as to what determines the value of the currency.

“Since foreign reserve has been declining, those two conditions have left us with no other option than to devalue.”

An independent investor, Amaechi Egbo, said the nation’s earning capacity has been declining when compared to other global economies, especially with the proposed review of the 2020 budget

He pointed out that historical data showed that previous naira devaluations have resulted in an improved level of non-oil export.

Therefore, he stressed the need for government to leverage the current devaluation and raise Nigeria’s non-oil export, as well as reduce the level of import.

He said there is need for government to consider placing ban on more imported goods, noting that the nation’s high level of import has led to forex scarcity, as a result of increase in the demand for dollar by importers.

“High value of import by Nigeria has led to unfavorable trade balances, terms of trade and even trade policies for the country: It is not too good for a country to witness weak purchasing power.

“We need to ban as many products as possible. We lack the will power to do all these. These affect the balance of trade and payment. We cannot continue to have a monopolistic economy. We are at a great risk economically.”

According to him, it is however, discouraging to know that Nigeria has been growing other countries’ economies through our over-dependence on imported goods, especially those which have local substitutes

“Nigeria can easily experience a breakthrough in the quest for local content development and a stable, strong and advanced economy if Nigerians would patronise made-in-Nigeria products.

“In import dependent economies, policy makers and business stakeholders are often concerned about severe consequences of currency volatility, especially depreciation on the cost and return of their foreign transactions.”

The Chief Research Officer of Investdata Consulting Limited, Ambrose Omordion said devaluation is not the best strategy considering the prevailing economic reality, noting that it will further support the rising inflation and increase cost of importation.

“Iam not against technical or real Naira devaluation because CBN policies and actions have helped the economy before now, despite the current challenging situations facing both global and domestic economies.

“Devaluation at this point is not the best of strategy or measure considering the prevailing economic reality, devaluation will further support the rising inflation and increase cost of importation, making it difficult to cut interest rate.

“It is expected to attract foreign inflow if we are an exporting economy, but our major export which is crude oil is in dollar, this move will not attract more buyers at a time the world economy is already depressed by COVID-19. He continued: “CBN had earlier issue FX futures to attract foreign inflow for long term investment and a form of exchange rate stability guarantee. CRR was also, increase by the apex bank recently to curtail inflation.

‘We do not need currency devaluation to discourage import now that coronavirus pandemic has led to the closure of many factories because people are already afraid to import now.

Furthermore, he added that devaluation has reduced the purchasing power of the people and trigger massive exit of foreign investors.

“The devaluation of naira would have made it possible for the monetary policy committee to adjust the monetary policy rate but with inflation hitting the highest of 12.20% in recent times, the possibility of rate cut is slim, as foreign investors have already turned their back to the OMO investment window.”

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