Nigeria: "Naira is Overvalued," Says IMF

opinion

"The International Monetary Fund (IMF) said on Thursday that the naira was overvalued and that more exchange rate flexibility would be needed to prevent the Central Bank of Nigeria (CBN) from running down the foreign currency reserves to fix the rate.The Fund said in Washington, DC, USA that the CBN might need to increase benchmark interest rates further and weaken its currency to curb inflation, following the increase in public spending".

The above is an excerpt from a news report titled, "Naira is Overvalued, IMF Tells CBN," on Page 19 of the Punch Newspaper of Friday, 18/2/2011. My reaction to the above report was a spontaneous exclamation that "we are done for!", as it was clear that rising and increasing consumer prices and higher interest rates consequent upon adoption of IMF's recommendation will further deepen poverty in Nigeria!
There is no doubt about the considerable influence of IMF support and supervision agencies on the operations of our economy, particularly our monetary framework and policies! Indeed, the Fund showed the extent of its commitment to pressing adoption of its prescriptions, when the emoluments of one of its officials, on secondment as our Finance Minister were underwritten in dollars in the recent past. The result of that enterprise, of course, was our gleeful separation from about $20bn of our reserves, in what was affectionately termed as "debt forgiveness"! Meanwhile, rising unemployment, unbridled inflation and reduced industrial capacity with lending rates above 20% prevailed against the realistic expectation of Nigerians, from the goodwill of having our economy managed by IMF technocrats! We were obviously oblivious to the age-old reference to the loyalty of the piper to his benefactor when we accepted the "imposition"!
Nigerians will recall that the main cause of our economic downturn and increasing abject poverty of the masses can be traced to IMF-sponsored Structural Adjustment Program (SAP), to which then President Babangida acceded. The major thrust of SAP was the devaluation of the naira. IMF held that naira was grossly overvalued, in spite of the bourgeoning industrial landscape, increasing job opportunities, and wages and salaries commanding significant purchasing power.
The resultant grossly devalued naira quickly induced brain drain, as experienced lecturers, professors, doctors, nurses, engineers and scientists fled to greener pastures, where, in spite of the regret of social dislocation, they were assured of incomes that could maintain their dignity and self-worth. Soon after the exodus, the quality of education at all levels dropped remarkably; today, we are still nowhere near recovery. Rapid naira devaluation sounded the death knell for otherwise prospering commercial and industrial conurbations in the country, as production costs skyrocketed, and cash flow challenges could not be favourably resolved with lending rates above 20%!

The unanticipated spiralling cost of critical imports of parts and equipment also dealt injurious blows on the state of social infrastructure as hospitals, power stations, steel complexes and diverse consumer industries were destabilised. The net product became a ghostly industrial landscape, and hundreds of thousands of Nigerians lost their jobs. The continuous, officially sanctioned naira devaluation to its present rate of N152=$1 has finally reduced incomes of over 50% of Nigerians to below United Nations poverty benchmark of $2 per day! A grim reality, which has led thousands of young, desperate Nigerians to traverse inhospitable deserts and stormy seas in search of a better life. Some critics have likened the migration to the slave trade era, but the difference this time is that, the slaves willingly find their ways to the 'camps' either by hook or crook!
The above gives a fair picture of the socially destructive impact of SAP with naira devaluation as its arrowhead. My concern, therefore, at the present IMF call for further naira devaluation, is the sad recognition of the prospect of aggravated poverty, which will inevitably be its product in the light of our historical antecedent. However, some observers may consider such perspective as alarmist and note that the IMF recommendation is without binding force! Even if there is no overt imposition, the reality is that, IMF has generally had its way in 'third world' countries, and our national experiences confirm same. Other analysts may conclude that the IMF report is actually notice of a 'done deal' and sooner than later, naira will be devalued by more than 10%; in other words, naira may exchange for dollar at over N175=$1! Curiously, one of the reasons for IMF's recommendation for naira devaluation was to halt capital flight or forestall 'one-way bets in foreign exchange market' according to IMF parlance! But regrettably, this overt recommendation for a devalued naira will only spur the already buoyant market for dollar and consequently precipitate the Fund's prediction of capital flight, which may then make naira devaluation subsequently inevitable!Continued