NAIRA DEVALUATION: Not a Silver Bullet for Current Crisis of Capitalism

By Peluola Adewale

Nigeria’s economy is on a tailspin while Buhari/APC government has proved incapable of arresting the situation. Inflation as of May is 15.2%, hitting 6-year high. High unemployment rate is worsened by increasing job losses and collapse of businesses. The economy contracted in the first quarter (January -March) for the first time in 12 years. It shrank by 0.36 percent. Given the current economic indices as of the end of June, the last month of the second quarter, Nigeria must have sunk into recession by now only awaiting official pronouncement. An economy is in recession if it contracts (records negative growth) in two consecutive quarters.

Faced with increasingly high cost of goods and services especially foods and fuels coupled with eroding purchasing power, the poor masses don’t need official figures to feel how terrible the situation is. The increase in fuel price in May has worsened the economic hardship. Now, there is devaluation of naira that is akin to kicking a man that is already down groaning with pain on the floor. At official market naira hovers around N282 a dollar, losing about 40% of its value following the latest devaluation.

Apparently afraid of provoking mass anger given how he emerged, President Buhari was originally against devaluation of naira. However, given how quality of life of average Nigerian in the last one year has been further degraded and worse off, Buhari government policy of non-devaluation has proved to be a monumental failure. For a neo-colonial economy enmeshed in a growing crisis of capitalism globally, no monetary or fiscal measure can really resolve the contradiction of the system.

Nigeria situation is worsened by primitivism of its capitalist ruling elite that ensures, remarkably under the guise of market fundamentalism, that the country has to import fuel despite being a major producer of crude oil. If Nigeria had built adequate refineries, when oil prices were high, the country would not have only freed up at least 30 percent of forex spent on import bills but also possibly earned more forex. This would have mitigated to some extent the crippling effects of the current global crisis of capitalism. But in an economy dominated by imperialism and only looking for quick profits most of the Nigerian ruling class took to the road of looting rather than serious investment, indeed the refineries were left to rot and the state funds meant to “rehabilitate” them were stolen.

Now, devaluation, presented as the silver bullet to the crisis by capitalist economists, has been introduced by Buhari government. Given the failure of the previous policy, the masses appear to have taken this as a bitter pill at best with a much muted resistance. This will however impregnate them with a boiling anger as devaluation can only worsen the situation.

The central bank and bourgeois economists have assured that the devaluation by the floating foreign exchange regime (using forces of demand and supply to determine the value of naira) will help attract capital flows from foreign investors. This, they say, will improve liquidity in the forex market and thereby set the economy in the direction of recovery. This is a lie.

South Africa is a living example. The country has been all the while operating the same floating exchange system yet the foreign direct investment (FDI) to the country dropped by 74 percent in 2015 according to a report by the United Nations Conference on Trade and Development (UNCTAD). This also suggests that it is not non-devaluation that led to the capital outflows from Nigeria. Indeed, Nigeria received lesser blow than South Africa as it saw its own FDI declined by 27 percent. Besides, it also instructive to note that South African economy also contracted by 1.4% in the first quarter, worse than Nigeria.

The fact is that since the collapse of commodity prices in June 2014 as a result of slowdown in the world economy which coincided with the outset of expectation of raise in interest rate in the United States, there has been withdrawal by capitalist investors from the emerging and frontier markets like South Africa and Nigeria. For instance, just within a year, between July 2014 and July 2015, about one trillion dollar was withdrawn from the developing economies (CNN Money, August 25, 2015). The Institute for International Finance put the net capital flows from emerging markets in 2015 at – $735 billion. Yet many of these countries devalued their currencies. For instance, in Nigeria, naira had been previously devalued twice between October 2014 and March 2015 from N155 to N197 a dollar. Indeed, trading at N282 to a dollar as of last week of July, it means that Naira has lost 82% of its value since the outset of collapse of oil price in July 2014.

To foreign investors particularly the portfolio investors, the major fundamental of Nigeria’s economy is oil, which accounts for well over 90% of its foreign earnings, and finances the government and much of the rest of the economy. Therefore, in the face of low oil prices the devaluation in whatever guise cannot likely increase the supply of dollar in the economy at present.

Rather, being a highly import dependent economy with oil as its dominant export, devaluation of naira would not drive export trade nor lower imports of essential items, which are largely inelastic, but feed into already killing inflationary pressure. According to Reuters the currency devaluation is likely to push inflation north of 20 percent in the second half of the year (Reuters, June 22, 2016)

The expected spike in inflation will worsen the economy which from all indication is already in recession. This is because the devaluation will further trigger in increase in prices of goods and services, as well as further erode the purchasing power of working people. The eroded purchasing power will further depress consumer demands with attendant decline in company profits. Companies, already grabbling with increasingly high costs, will react either by increasing prices or sacking workers, if they manage to remain in business. Hence, a vicious cycle continues.

Therefore, devaluation may blunt whatever little sharp edge the so-called expansionary fiscal measures in 2016 budget might have had. In other words, this devaluation may make it more difficult for the measures to stimulate the economy which they ostensibly meant to do. However, given the crisis of world capitalism and neo-colonial character of Nigeria as well as corrupt contract system, this does not suggest that the fiscal measures could ordinarily work if naira has not been devalued.

The fact is, on the basis of capitalism, wherever you turn (devaluation or no devaluation) it is brutal knock in the head. Unfortunately, it is the ordinary people who are the worst hit. There is no end in sight on the basis of capitalism, although in the future an oil price rebound could provide a partial improvement for some.

However, this devaluation could mean relatively more monthly allocation for state governments as it increases their share of naira equivalent of petrol dollar. This means that the state governments should be able to begin to settle salary and pension arrears, albeit with the value of the money already further eroded.

But even the payment is not guaranteed except workers are prepared to struggle for it. For instance, despite the bailouts from the federal government many state governors could still not pay workers and pensioners. This is because the main reason state governors owe salaries and pensions is characteristic preservation of the privileges and profits of the thieving ruling elite at the expense of workers and the masses. This means that despite decrease in monthly allocation the political office holders do not only still maintain their jumbo pays and allowances, but also strive to maintain their quantum of loots.

Labour leadership must be to be prepared to defend jobs and pays in both public and private sectors of the economy. They must ensure that workers and poor masses that benefitted little or nothing in the time of boom are not made to pay for the crisis of capitalism. While the demand of a new minimum wage is welcome, it has to be linked with struggles for payment of arrears of salaries and pensions running now to many months and against any retrenchment.

Already, a growing number of the masses are becoming disillusioned in Buhari despite the anti-corruption propaganda of the government. While they have not developed an anti-capitalist mood, some are coming to conclusion that real change is not possible under Buhari/APC government. Therefore, the struggle for improvements and against attacks must be linked by activists and socialists with the need for a working people alternative on a socialist programme.

If a genuine socialist government takes over power at this period of low oil prices, it cannot promise a quick solution to the current crisis as it cannot manufacture dollar to shore up the reserve. But on the basis of socialist programme and plan on manufacturing, agriculture, infrastructure, finances etc., the effect of the crisis would be mitigated and living standards defended while the economy is set on the path of genuine and solid recovery and diversification. Also importantly, the development of a socialist economic plan will end the cycle of boom and bust, something that is characteristic of profit-first capitalist system.

Definitely what can be done in a single country is limited in the face of global crisis of capitalism. But rather than this meaning that there is no way out; on the contrary this only shows the importance of the international socialist programme which entails that the working class of Nigeria cannot simply hope to end their suffering by ending capitalism and taking political power. Rather, they must also make their own revolution the starting point for the revolutionary uprising of the working class of other countries in Africa and beyond to end the rule of their own capitalist robbers and come together in a confederation of African socialist states to jointly plan economic measures to banish underdevelopment and endemic poverty that decades of capitalism and imperialism have made the lot of the continent.