DEVALUATION, ITS IMPLICATION AND THE IMPORTANCE OF A SOCIALIST SYSTEM OF GOVERNMENT.

This essay attempts to analyze the issue of the present devaluation of Naira. The writer is of the view that it is only a capitalist state that inflation can get to a very high degree. To him, the inflation Nigeria is about to witness is as a result of capitalism. He goes further to conclude thatthe only solution to the problem of inflationis revolution, not just revolution but the adoption of a socialist system of government.

Over 90% of foreign exchange earnings (that is dollar earning) is gotten from oil sales. CBN receives this money, keeps the dollar and give the government the Naira equivalent. What does CBN use the dollar it is keeping for? There is foreign exchange Market where dollar and other foreign currencies are exchanged for Naira. CBN supplies dollar to meet up with the demand for dollar. If for example: CBN earns 10Billion dollar in a month and the demand for dollar in that month is 5billion dollar, it means CBN will meet the 5billion demands and still be able to save the remaining 5billion dollar in Foreign Reserve or Excess crude account as the case may be. If CBN earns 10billion dollar and the demand for Dollar is also equal to 10billion dollars, it means CBN will not be able to save anything into foreign reserve for that month, everything will be used to meet up the demand for dollar. But if CBN earns 10Billion dollars and the demand for dollar for that month is 15billion dollars, how will CBN reacts to this? CBN can eitherallow the force of demand and supply to determine the price, whereby value of dollar will rise and value of naira will fall, because the demand for dollar cannot be met within the economy. Alternatively, CBN can go into its foreign reserve and take out 5billion dollars to augment the shortfall. When CBN does this; this is what is meant by defending the Naira. So, how does this play out currently?

For sometime now, income in dollar has been going down for reason already a common knowledge(collapsing oil price), but simultaneously, what has been happening to the demand for dollars in foreign exchange market (where currencies are bought and sold)? Listening to what the CBN Governor said when he was announcing the devaluation:
"However, available data indicates that banking system liquidity has been lavishly deployed in pursuit of speculative foreign exchange trading at the short-end of the market. While the Committee remains fullycommitted to the goal of promoting inclusive growth through lower interest rates in the medium- to long-term, banks as agents of financial intermediation have a critical role to play in the nation’s development process. A banking system with an overly high profit motive negates the core tenets of banking and purpose of a banking license"

CBN Governor Because of enormous power of Banks, they have so much cash under their control, my money and your money plus money of riches are concentrated under their control. This is thesituation under capitalism. With so much resource in their hand, they have calculated that:
Since the dollar income is dwindling, inevitably, CBN will come under pressure and will yield to the pressure, so Banks started buying dollars in very large quantity, so that when dollar has increasedin value, they can sell it back and make gains. They deployed all their resources towards this end. This makes the demand for dollar in foreign exchange market to jump astronomically in the recent time.In addition to this, foreign investors who mainly invest in Stock exchange and bonds (Portfolio investors) are also very sensitive to the price of oil, because they know that Nigeria is wholly dependent on oil; so these investors too started withdrawing their investment from Nigeria Stock market in drove. This explains why there has been downward trend in Stock market in the recent time.

Foreign investors constitute about 60% of total asset in Stock market, it is even used to be 75% before. They have to convert their money to dollar to pull it out of Nigerian economy, so they too have been adding more to this increasing demand for dollar. With increasing attack(demand) and weakening capacity of CBN to continuouslydefend Naira against this attack, it is clear that CBN surrendering to this attack is just a matter of time. It is like a football match, if the attack gets to a level, even a strong defence will definitely give way to a beautiful goal. This current devaluation is official recognition of the increasing incapacity of CBN to continue to defend Naira at the expense of foreign reserve. But, why corresponding increase in MPR and CRR? Firstly, what is MPR and what is CRR? Monetary Policy Rate MPR, is the interest rate at which the central bank lends to other banks. A lower MPR will encourage Banks to borrow more money from CBN, while a high MPR is meant to discourage Banks from approaching CBN for loan. The primary function MPR is to regulate the amount of money available to banks. Cash Reserve Ratio (CRR), in simple term is percentage of Banks deposit that CBN says they must not lend out. For example, if a bank has 100million deposit and CRR is 20%, it means the bank cannot give loan more than 80million; the bank must keep 20million in its reserve because of CRR of 20%. So, why would CBN increase MPR from 12% to 13% and increased CRR from 15% to 20%? The only logical reason is fear of inflation and minimizing the capacity of banks to engagein speculative attack on naira as it is ongoing. CBN's fear of inflation is well founded, because Nigeria is import dependent country.

The manufacturers depend on imported machines to produce and therefore will pay in dollar to buy the machines, with devalued naira, it means the cost of the machine and many imported raw materials will go up too.Those who engage in imported goods/services buying and selling too, will buy expensive goods/service because of high-valued dollar and will have to increase the price here in Naira in Nigeria market. So, it is very natural to experience inflation as a result of devalued naira. To minimize it, CBN is trying to control the amount of naira that is available in circulation. It feels that with too much Naira in circulation, galloping inflation will inevitably be the result. But, will this CBN measure still prevent the skyrocketing inflation? Things that are bought in dollar will be more expensive because dollar has more value now than before, so the question is, what are those things not bought in dollars in Nigeria? Import dependent country like Nigeria imports so much and cannot therefore escape increase in price of goods and services. We should not forget that even petrol is imported into this country and the so called “subsidy” is also paid in dollar.

Therefore, the inevitable outcome of this CBN policy is that there will be so much need for naira as a result of increase in price of goods and services and yet Naira will be very scarce to come by. Many more factories will have to close down. The poor will become much poorer and the working class will be hit much harder. The students will naturally feel the pain partly from the parents getting poorer and the likely squeezing of more money through school fees and other attacks. CBN recognizes the power of Banks and how they use the resources under their control for speculative attack and wrecking the economy, but under capitalism there is practically nothing CBN can do about it. You cannot control what you do not own. CBN has to go through this much more painful and round-the-bush "control" because banks are untouchable under Capitalism.

To solve this problem without putting much more burden on the overwhelming majority of masses is to simply expropriate the banks. Taking over of banks will make this enormous resource in the hand of the bankers that they are using to subvert the economy available for the betterment of working class, youths and the poor in general, neither APC nor PDP can carry out this, only Socialist state established through revolutionary overthrow of this rotten blood-thirsty system can carry out this.

Having said this, one will want to agree with me that socialism happens to be the only solution to this kind of problem. If we are to adopt Awolowo's democratic socialism with the exception of his approval of individual wealth, then the money from the excess crude account crude account would be used to settle this issue before it got to this extent as things are owned collectively in a socialist state.

Written by: Bhadmus Adedamola
E-mail: dammydultimate@gmail.com
BBM Pin: 2A7768D3

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