How to curb persistent pressure on the naira

The persistent pressure on the naira that culminated in the domestic currency sinking below N170 to the dollar last week has dominated discussions across boardrooms in Nigeria and beyond since the results of the GDP rebasing exercise were made public in April this year.

After sampling the views of some leading economists in the country, we are convinced that many contributors to the debate tend to miss the point and therefore come up with largely misleading policy recommendations.

The key to understanding the unyielding pressure on the naira is to recognise that the rebased GDP has highlighted the immediate major challenge to the economy. And that is the absence of structural transformation from primary to domesticated value-added production. Even though the report suggests that some other countries, like Thailand and Malaysia, have experienced similar growth in the services sector, that in itself does not justify the composition of the GDP that the rebasing just revealed.

The GDP composition shows that primary production and services account for 72.6 percent (agric 22.4 percent + services 50.2 percent) for 2012. The share of these two sectors in the rebased GDP means that the manufacturing sector has been skipped.

However, all over the world, economies are measured by the strength of their industrial capability that gives verve to the services sector. The services sector includes wholesale and retail trade which both in the old and rebased GDP is still dominant in the services sector.

If the manufacturing sector has revealed an uninspiring contribution of 7 percent to GDP, it means that wholesale/retail trade is driven by imports. The implication of this is that the services sector puts a lot of pressure on the exchange rate of the naira to the dollar. Given that the earnings from the oil sector are beginning to level off, the demand for forex to sustain the volume of import-driven trade can only come from running down our external reserves.

It seems reasonable to presume that the Federal Government is aware of this danger when it says it will pay more attention to manufacturing, but the issue is a lot more urgent than the routine “paying more attention”. Government will need to take urgent and immediate action to forestall the collapse of the naira. In this regard, government`s Agricultural Transformation Action Plan (ATA) has to plug loopholes that are currently limiting its success including lapses in input distribution.

It is significant that ATA has not succeeded in the transformation to higher value-addition. This is why the manufacturing sector, in spite of increase in volume of agricultural output, has remained stagnant. The immediate step will require urgent collaboration between the Federal Ministry of Agriculture and Rural Development (FMARD) and the Federal Ministry of Industry, Trade and Investment (FMITI) to chart ways of improving private sector investment in rehabilitating existing agro-businesses.

This path is critically important because a look at the activities of the FMARD indicates a spill-over into the functions of the federal ministry responsible for Industry and Investment. Specifically, it is FMARD that is apparently engaged with the Bank of Industry (BOI) for the importation of processing machinery for agric produce. And it is the FMARD that is directly championing the use of cassava flour in bread in a well-coordinated programme. Any policy towards processing would have been the responsibility of the Ministry of Industry, Trade and Investment.

Government can strengthen the value of the domestic currency in two major ways. First is to expand the volume of non-oil exports; and secondly, to enhance domestic competitiveness that would reduce the demand for imported items because a dollar saved is as good as a dollar earned.

The second option is to conduct research into the problems of the manufacturing sector because, as long as the manufacturing sector remains stagnated, for that long will unemployment remain an unsolved threat to our economy.