Bola Ahmed Tinubu, Nigeria’s recently elected president, pledged to strengthen the country’s economy through an industrial policy that will make use of all available fiscal tools to encourage indigenous manufacturing and reduce reliance on imports.
Three days later, news that the CBN had devalued the naira’s exchange rate to 630 to one dollar caught the Central Bank of Nigeria’s (CBN) attention. Dr. Isa AbdulMumin, the acting director of corporate communication, immediately stated that the rumors were untrue and that the CBN had not depreciated the naira.
For the avoidance of doubt, the exchange rate in the Investors’ & Exporters’ (I&E) window traded this morning (June 1, 2023) at N465/US$1, and it has been consistent at this rate for a time.
Despite the CBN’s denial of the naira devaluation, it is important to highlight that this may not be the best strategy for Nigeria’s efforts to reduce imports.
The CBN might theoretically reduce the value of the local currency to limit imports at the expense of slower economic expansion. However, later procedures carried out in the past did not resolve this problem. It forced the economy to pay more for commodities.
Imported items are more expensive as a result of the naira’s depreciation. This may ideally discourage imports into the nation. Nigeria’s current account deficit will only grow if the naira weakens because of its high reliance on imports and its unpopular export sales policy.
Why Naira Devaluation is Not Ideal
Naira devaluation will cause inflation in the country by raising import costs while maintaining the same level of domestic demand. The CBN would have operated irrationally if it devalued the naira while claiming to be fighting inflation when it raised interest rates.
Looking inward in order to boost the growth of the manufacturing industry means that devaluing the currency will encourage local manufacturers to increase their production capacity since locally-made goods will become cheaper than imported products. However, the CBN promotes imports and inhibits domestic production by raising the interest rate.
A consumer nation like Nigeria shouldn’t devalue its money because doing so would result in inflation and cause its people to become poorer. The CBN is getting this one right by not devaluing the Naira.
Manufacturing Rather than Devaluation
Technical or actual Naira depreciation is not something I oppose. However, given the current economic situation, devaluation is not the best course of action at this time. Devaluation will make it more difficult to lower interest rates by driving up import costs and supporting growing inflation.
If our economy is one that exports, then it will attract investment. If Nigerians can easily locate made-in-Nigeria goods, the country may quickly make progress toward the creation of local content and a strong, advanced economy.
Nigerian businesses operate in a challenging economic climate. This is highlighted by the fact that machines and raw materials are not manufactured in the nation; the scarcity of finances and high cost of them; the high rate of inflation; the numerous taxes and regulations; the inadequate power supply and bad roads; the effect of limited and inadequate port facilities and high charges; and unfavorable monetary and tariff policies, among many others.
As a result, manufacturing made-in-Nigeria goods becomes challenging, which opens the door for imports. The government needs to prioritize manufacturing over the devaluation of the currency.
For this, it can set up development funding windows with flexible conditions for small and medium-sized businesses, establish a platform for monitoring and evaluating progress with input from the private sector to oversee the distribution of various development funds for the industries, offer a credit guarantee for commercial bank loans to businesses, and encourage sizable investment in the entire electricity value chain, including generation, transmission, and distribution.
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