Skip to main content

IMF Chief Christine Largarde proposal for Naira Devaluation flawed by Ken Uwotu

January 10, 2016

Nigeria's foreign reserves are feeling the pain of both its reliance on oil for forex inflows and its attempts to arrest the slide in the Naira as the price of oil continues to spiral downwards.

Nigeria's foreign reserves are feeling the pain of both its reliance on oil for forex inflows and its attempts to arrest the slide in the naira as the price of oil continues to spiral downwards. The Central Bank of Nigeria has warned a recession is imminent if proactive steps were not taken to revive growth in key economic sectors as the country facing its worst financial crisis in years. Nigeria’s economic growth in the past decade has not always been about oil but the government’s inability to tax the services and agriculture industries has left it reliant on revenues from oil. 

The International Monetary Fund (IMF) Managing Director, Christine Largarde on her recent visit to Nigeria states “The economy is well diversified, it is no longer dominated by agriculture and oil with services accounting for almost half of Gross Domestic Product (GDP), including a significant home-grown film industry and innovative start-ups from fashion to software development”. The IMF Chief’s view on how well Nigeria's economy has diversified can at best be described as 'cosmetic' because the Nigerian government has failed to generate taxes from agriculture and services industries. According to the World Bank, Nigeria’s tax revenue is one of the lowest in the world today; true diversification is measured by a country’s exports and the overall contributions of export revenue to a nation’s foreign reserves. Nigeria derives 90% of its foreign exchange from crude oil while all other sectors contribute just 10%.

googletag.cmd.push(function() { googletag.display('content1'); });

It is indeed true the IMF has helped out a number of African nations in difficult times, it approved a $918 million bailout package for Ghana in April 2015 to restore debt sustainability and macroeconomic stability but it hasn’t always been a beacon of support in Africa; the IMF backed a structural adjustment program in Nigeria introduced in 1986, which failed to address a number of economic problems. Instead, external debt swelled, the fiscal gap widened and economic growth became far-fetched. It is crucial for the Minister of Finance, Mrs Kemi Adeosun and the government to take on board advice offered by international financial organisations but the Minister must review both the macroeconomic and microeconomic factors that affect Nigeria's economy before deciding on a fiscal policy and strategy to tackle the challenges facing the economy.

The fall in oil prices has created some challenges for the government with the country's budget deficit expected to double to 2.2 trillion naira ($11bn, £7.4bn) this year and although President Muhammadu Buhari has states his government would seek funding overseas of 900bn naira as well as 984bn naira domestically, it might be increasingly difficult to source loans on the international market if oil prices continue to fall further as predicted by the IMF, due to the huge oversupply in the global oil market.

googletag.cmd.push(function() { googletag.display('content2'); });

The IMF proposes the devaluation of the Naira; it is true, devaluation of a nation's currency is likely to make exports become cheaper and more competitive to foreign buyers thereby providing a boost for domestic demand and it is also true a higher level of exports should lead to an improvement in the current account deficit however, the devaluation of the Naira may fail to deliver these benefits because revenue generated from exports is currently in decline with non-oil exports dropping significantly from $664 million in the second quarter of 2014 to $391 million during the corresponding period of 2015.

Source – Trading Economics 

The Nigerian government favours forex restriction over devaluing the Naira but it may be forced to partially devalue the Naira if the price of oil continues to fall. The present restrictions on the autonomous foreign exchange market should only be considered as a temporary measure as this policy may significantly affect Nigeria’s already dwindling export earnings.

The million Naira question is ‘How does Nigeria avoid a recession and lift itself out of one of its worst financial crisis in years?’, it will be a tough ride for the nation with the government likely to pursue an austerity fiscal policy and a continuation of its clampdown on corruption, expanding its anti-corruption campaign reach to all sectors of the economy.

Recommendation for economic growth.

  • The Nigerian government must aggressively plug revenue leakages in the country (air, land and sea).

  • Raise revenue from taxes (non-oil sectors).

  • Significantly reduce recurrent expenditure which currently accounts for over 90% of Nigerian budgets.

  • Secure ‘soft loans’ from countries like China to target ongoing infrastructural development.

  • Fully empower the Economic and Financial Crime Commission (EFCC) to continue the anti-corruption drive.


Written by Ken Uwotu, Political Analyst on Nigerian Affairs, London (LinkedIn) ; Group Leader, AllAboutNigeria - ONE Nigeria

googletag.cmd.push(function() { googletag.display('comments'); });