The clamor for continued devaluation of African currencies reeks more and more of selfish interests

Dear Africa Interested Individuals:

                                                        The clamor continues for commodities export dependent (especially oil) economies to further devalue their currencies.  I keep asking myself "when is enough finally enough?"  The clamor is largely driven by global economists across the spectrum loyal to economic theory and the countries they are domiciled in, portfolio managers and large commercial banks in the countries of focus with net positive (more dollar inflows expected than dollar outflows) dollar exposures.  

What does devaluation do to the people in the countries that have devalued their currencies multiple times (or one devaluation of 20% or more) over a short period?

1. Inflation rises quickly and is driven by those directly and indirectly impacted which is everybody.  

2. Chances are high that the Central Bank (Fed in the USA) will have to raise interest rates to stem inflationary pressures in the economy. This also causes an increase in borrowing rates which stifles productive manufacturing activity.

3. Unemployment increases as manufacturers react to the difficult operating environment and reduce payroll expenses to increase chances of remaining a going concern while responding to reduced business activity and the vicious cycle heads for the home straight.   

The biggest gain from currency devaluation is typically, an increase in exports due to other countries requiring less money to buy the same amount of goods (holding prices constant) from the country that devalued its currency.  Nigeria's major export (crude oil) is priced in dollars and strictly paid for in dollars unlike Tea from Kenya and Tobacco from Malawi therefore negating this benefit.  I am also of the opinion, that exporters will increase their prices after devaluation to counter inflationary pressures in the local economy, thereby nullifying any potential gain in exports.  Nigeria is (and will likely remain for the foreseeable future) an import-dependent economy and its non-oil exports actually declined by 8.2% from $2.97B in 2013 to $2.71B in 2014.  This backs my assertion.  Diversification of the economy through non-oil exports will be strengthened by keeping inflation in check.  Dealing with Nigeria's number one enemy of inflation stagnation or reduction (currency devaluation) is a great start.     

Recently, the MD of GT Bank Nigeria advocated for a further 10% devaluation of the Naira relative to the dollar saying, "this will allow the Naira to settle,"  Morgan Stanley recently said that "lower oil prices and a failure to adjust their currencies rapidly enough have taken a toll on growth in Kazakhstan and Nigeria."    A financial analyst interviewed by CNBC Africa recently said that "the measures by CBN are not just temporary but are also dangerous, our challenges are not isolated as what happens in China affects us as well."  He went on further to say that the CBN was "better advised to engage policies that will attract foreign portfolio investment (emphasis is mine) so that we can monitor investment coming into Nigeria."   

I am of the strong opinion that all the above parties and others are looking out for their own interests and those they may represent.  This advice while portrayed in a selfless manner for the good of Nigeria and other African countries, is actually driven by selfish interests in my opinion.  Unfortunately, those in the local environment that will greatly suffer from any further devaluation of the Nigerian or other African currencies, do not have the platform to speak out vociferously and make their case as the above.  

Let us take GT Bank and the comment made by the CEO for starters.  If the Naira is devalued by a further 10% against the dollar which will take it to N220, GT Bank will receive an estimated (pure gain) boost to its profit of N12.55B (about $63m) just because the Central Bank of Nigeria decided to devalue the Naira by a further 10%.  This figure is more than the pre-tax income Sterling Bank is expected to make for 2015 at its current run rate!  Simply put, the CEO of GT Bank is seeking an additional significant boost to the bank's bottom-line from one decision by a former bank CEO like him.  GT Bank's shareholders will be happy, their foreign portfolio investors (it is estimated that more than 25% of GT Bank's shares are held by foreign investors) and of course the CEO and other board members will be happy.  This is driven by the fact that GT Bank has foreign currency loan exposure in excess of 2.5X approximately in relation to its foreign currency debt exposure.   

Now to the foreign portfolio investors who need to make returns periodically to their capital providers and explain their investment decisions beyond the publicly available fact sheets.  A further 10% devaluation will enable them to buy 10% more stock value with the same amount of dollar transfer.  You will argue that they are already negatively exposed due to existing positions.  I tell you this, there is more money ready to be invested in the Nigerian equity market than is already in open positions.  Therefore, in a net sum game, a further devaluation will give foreign portfolio investors more profit (holding prices constant) if they enter and exit after a further devaluation just because of a further currency devaluation.  

I can say more, but I have other things to do... 

The further devaluation of the Naira, Cedi, and Kenyan Shilling etc will benefit non-natives and punish natives.  This is a classical case of shooting oneself in the foot.  Africans do not do it; short term gains (where applicable) will be offset by longer-term pains.  Enough is enough.  95% or more of the people clamoring across the media for Nigeria, Ghana and Kenya to further devalue, do not live in these countries AND where they do, are wealthy enough, to not be bothered by the inconveniences experienced by many of their fellow citizens.  

Nigeria has already devalued its currency by 25% between October 2014 and February 2015.  This is the same percentage devaluation carried out by Dr. Soludo in December 2008 for the same low oil price reason (N120 to N150) and remained in that territory for approximately six more years.  Any further devaluation, by Mr. Emefiele officially, will be his legacy and not a good one in my opinion.  It is time to stand up for pockets of people and not pockets of interests.  I like his defiant stance to not budge any further and hope he keeps to it.  Hang in there buddy.     

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