Agriculture Op-Ed

How The Naira Devaluation Impacted Agriculture By Feyi Fawehinmi

Byjorjapaxson3737

PublishedSeptember 19, 2017

The Partnership Initiatives for Niger Delta (PIND) recently sent Dr. Ogho Okiti and Mr. Al-Habib Onifade out into the field to find out the impact of the naira’s devaluation on different parts of four key agricultural value chains (palm oil, cassava, aquaculture and poultry) in the Niger Delta. The question of whether to devalue the naira was of course a big debate in Nigeria in 2015 and 2016 with the President himself weighing in.

The binary nature of the debate meant there was very little time devoted to the question of what to do next after the naira was devalued. The inevitable devaluation happened and Nigeria simply walked into it. This report is thus useful for insight into what happened to the aforementioned parts of the agriculture industry after the effects of the devaluation had flowed through.

In the main they looked at two effects – income and substitution. That is, how did the devaluation affect people’s incomes? And – how did it change behaviour in terms of how people switched products? Naturally, the impact of the devaluation was felt in different ways in different parts of the agriculture value chain, but one can summarise by saying it made everything more expensive.

Imported goods got more expensive for obvious reasons – more naira was needed to buy the same amount of stuff. But the reason the local substitutes got more expensive is that when people ran away from expensive foreign products, the local guys were not able to meet up with increased demand and had to increase prices. This was partly because things like fertiliser and pest control, needed to increase productivity, are all imported and had to be paid for upfront. This automatically ruled out a lot of smallholder farmers from taking part in the benefits of the increased demand for their products. This is something that could have been mitigated with policy responses but farmers were pretty much left to their own devices.

Another thing the research paper highlights is, how much poorer the combination of lower oil prices, naira devaluation, inflation, and population growth, made Nigerians. The researchers calculated that GDP per capita fell from $2,200 in 2014 to $1,180 in 2016 – a shocking 47% drop. Again, when something like this happens, one way to reduce the impact is by ensuring that people have access to cheaper goods. But as we’ve seen, it was not only the devaluation that raised prices, it was also deliberate policy of banning the import of some items that caused local prices of things like palm oil to shoot up.

A big part of the debate around devaluation of the naira and economic policy in general has been that Nigeria should produce its own food and not import. Be careful what you wish for. This policy has largely been ‘implemented’, based on the findings of this research paper, and the results are not altogether pretty. Taking rice as an example, the price of foreign rice increased following the devaluation. But the price of local rice went up as well. This meant that the overall demand for rice went down even though demand for local rice went up. In other words, ‘the substitution effect was greater than the income effect.’ A second order effect of this was that, the overall drop in demand for rice was replaced by an increase in the demand for garri and other cassava products. There have even been newspaper reports of increased cyanide poisoning because of people switching to garri away from rice.

One final interesting effect had to do with crop protection products. The researchers found that most of such products used in Nigeria are produced in China under commission from Nigerians who then brand them for sale locally. A lot of these businesses shut down completely in the wake of the devaluation while others who survived increased their market share – the researchers founds one such company that increased market share by 28% and value by 45% (the difference reflecting increased prices). But something else happened beyond devaluation to cause this shift.

The Chinese government cracked down on producers of sub-standard crop protection products in China and many had to shut down. This reduced production capacity from the Chinese side meant that prices of these products increased in China. In other words, Nigeria was at the mercy of a Chinese government policy that had nothing to do with the naira’s devaluation. Between 2014 and June this year, the prices of some of these products increased by as much as 157% as a result.

What are we to make of all these? The obvious lesson is that the actual devaluation of the naira was the easy bit. There was no point wasting so much time on that part of the equation because after devaluing, there was still plenty of work to do. Devaluing the currency was to allow the economy to adjust to its new reality but even that adjustment required an understanding of its impact and how best to cushion the blow.

The other lesson is that the economy is an incredibly complex machine. I’m always reminded of a quote by Larry Summers – former US Treasury Secretary and World Bank Chief Economist – where he said, ‘it is not easy to understand how an economy works.’

They say you should never let a good crisis go to waste. Nigeria is now out of recession officially so maybe there is no incentive for policymakers to consider a report like this. But the effects it highlights can be lessons for good and bad times in terms of how to respond to difficult situations and where exactly to channel resources.