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Is Naira under Pressure?
Facts: Nigeria’s GDP in 1980 was $25.9 billion and that of South Korea was $19.8 billion. Today, South Korea’s GDP is approaching $200 billion. In 1981, Nigeria’s GDP dipped to a little over $14.6 billion, because of the reduced demand of Nigeria’s oil by the U.S. The government at the time, headed by Shagari, then found itself in an economic mess due to the reduction in oil receipt. It was an eye opener as it exposed the flaw in the funding of Nigeria’s public sector. Conventional taxation as a source of revenue for the government was found to be inadequate. Shagari, however, went to borrow. That had been renegotiated and paid off. Whilst the country was trying to reform the tax mechanism as it were, to effectively fund the public sector, IMF suggested an interim solution of fiat devaluation. It was to immediately capitalize the public sector, meanwhile. That was where the country was, when Babangida took over in 1985. Tax reform is a manifest salient factor that ought to come back to the table from the shelf where it had gathered dust since 1986.
The naira, no doubt, is under pressure as evident by its value today. Over the years, we have been told that the pressure on the naira is as a result of Nigerians’ predilection to foreign goods and capital flight. Those could be partly true, but they do not explain why the government would want to continue to sell the petrodollar to the highest bidder. Except, of course, we have reinvented public funding. The naira is the symbol of Nigeria’s wealth and the instrument of our governance. Government’s social obligations are executed to a large extent in the local currency. So, there is already enormous pressure on the naira from that sector. Our public sector spending, though tainted with corruption, might not be the fundamental problem. It could be the method chosen to fund the public treasury that is the root. All over the world, funding of public treasury is usually through conventional taxation. We have, however, chosen our own peculiar way. Public treasury, since 1986, has been funded through auctioning of the petrodollar to the highest bidder. The method seems to maximise government earnings of naira, but it has its consequences. As we have witnessed ever since, the system has priced out the productive sectors of the economy.
Facts: Our population is increasing unabated; yet we are not creating wealth vis-à-vis the increase in human numbers. Another reality is the quota imposed by OPEC, as a member, that limits our wealth generation through the extraction of oil. Trading, in whatever form (banking, general trading and stock exchange) is dynamic with quick returns but it creates little wealth. Since 1986, our economic policies have favoured the mercantile option, which is the high-end service quick return. In fairness, there is no better way, presently, to fund our government activities effectively, as the convectional tax system is still not reformed. However, we have continued to live in a state of denial by reforming the wealth distribution mechanism (the banks, stock exchange, etc.), and have ignored the real issue (reformation of government funding). Banks, general trading and the stock exchange do not add much value to wealth only commissions. Though, they are efficient in wealth distribution. The commissions generated in a mercantile option, however, are insufficient for the number of mouths to be fed in a huge population.
In the beginning, government had hoped that by allowing every segment of the society to compete openly for the scarce forex, a realistic value of the naira would be arrived at. That did not happen, because it was lopsided as those in the business of wealth distribution (e.g. banks; traders and stock exchange), through their mercantile dynamism, were able to outbid those in the business of wealth creation. The wealth creators are educational institutions; agricultural farms; and factories, whose harvests are not immediate and thereby have been tottering since 1986. Factories have shut down, farms deserted, and educational sector is at a sorry state. The most valuable wealth we ever created is from our educational institutions and it is now scattered all over the world (the Diaspora). Pardon me; I am trying to link this to the remote cause of lack of conventional tax system that has priced out our professionals also. Ignoring the wealth creators and concentrating on the merchants has left our GDP virtually unchanged, except for the boom in oil prices and the remittances home.
Wealth creation is mainly through engineering. Knowledge, the biggest wealth of all, is created in educational institution by reengineering the minds of students to produce desirable know-how. Elements or materials are engineered through the process of man’s know how to produce desirable items in the factories. A single seed is multiplied by using nature’s engineering mechanism in agriculture to create wealth. In poultry, animal husbandry, and fish farming, nature’s engineering in genetics is put to use to multiply and thus wealth is created. All forms of engineering transform a raw material to a desirable need or item to create wealth. Even bankers and brokers are products of reengineering of learning. Conversion of raw energy (chemical or potential) to another desirable energy (electrical or mechanical) creates wealth. Even minerals (e.g. oil & gold) that are locked under the ground were for thousands of years engineered by nature and tapping them through extraction also creates wealth.
It is, therefore, easier to calculate, than all the yardsticks of the economic jargons flying around, the non-performance of our economic policies since 1986. The best performer, aside from the oil sector, has been the banking sector. This is a commission taking sector that may never create enough wealth for a country as big as ours. The bank basically is a government guaranteed bureau de change that buys, for example, a dollar for N126.00 and sells it for N127.00. In that process, the bank has not added any value to the dollar or the naira, but has scooped away a commission. Banking, nevertheless, is important because it eases wealth distribution and could facilitate wealth creation. When a farmer plants a single seed he could harvest hundreds more. That is wealth creation. Similarly, a manufacturer, who takes a sheet of metal and moulds it into whatever item mankind longs for, has also created wealth by adding value. Ironically, it is the wealth creating option that creates more jobs.
For a way forward may I suggest we embrace the factory-floor option? It requires a political will on the part of the political class to redirect the wealth derived through extraction (oil) onto the factory floors in order for it to multiply. What that means is that the oil wealth will first be pumped to the agriculture and manufacturing sectors. Thereafter, the traders could distribute the wealth generated. Should this option be decided, then the monetisation as it were will have to be altered. Here comes, again, the issue of the naira. We can peg the naira to the dollar today at today’s price. Industries could be invited immediately to tender their needs for forex based on anticipated wealth to be generated and the number of jobs to be created. Access to the scarce foreign exchange ought to carry some responsibilities. We could use the foreign reserves as soft loans at zero rates for them. Since the government has promised 10,000 megawatt of electricity generation by December 2007, raw materials and machinery would be arriving by that time if we start today.
If we do not do this now, and end up producing 10,000 megawatts of electricity by December, who is going to use the electricity produced. Do not forget that electricity once produced and not used is wasted forever, because it cannot be economically stored. This could make electricity very expensive for the average Nigerian. In the meantime, tax reform could be accelerated. It appears that without first addressing the tax issue, the productive sectors of our economy will continue to be consigned to the backseats on our economic train. Tax laws have been downgraded to a de facto rule just because tax is not the main source of public treasury; otherwise an evasion would carry stiffer penalties. Go and ask those that have to deal with that “man” called Uncle Sam. How does one explain a known tax evader being recently confirmed as a minister in Abuja? On the value of the naira, the West would rather we do not fix our local currency to any of their currencies. It favours them, if we do not. They reckon that if we do, then our productive sectors will compete with theirs. The West has been threatening China, since, to unburden its currency, the yuan, to the dollar, but China has refused. Besides, it reduces the number of variables in an economy like ours if we do. We could then concentrate on tax and interest rates to mop up excess liquidity in our economy.
Samuel Akinyele Caulcrick, the author of The Devil Must Be Laughing.
ISBN: 1-4241-2196-5
Email: saceekay@aol.com.
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Posted by Robot| 06.09.2007 08:12