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Local production must be encouraged to stabilise naira – Prof Ukpong, UNIUYO financial economist



A Professor of Financial Economics at the University of Uyo, Prof Leo Ukpong, in an interview with AMARACHI ORJIUDE, examines the dangers of The Central Bank of Nigeria defending the naira against major currencies and the effects on the country’s economy

The World Bank has criticised the CBN’s continued use of the External Reserves to defend the naira, saying it could bring further challenges to the economy. Do you support this view and why?

I agree with the World Bank because external reserves are like savings in a personal account, which are meant for uncertainty; savings for future consumption. So when we have an external reserve, it serves to ensure that in future if we need something, especially from outside the country, we have the money to finance it. It also has a psychological importance, in terms of how the world looks at you. It is like someone who spends all his salary and every month and  he waits to be paid salary before he can buy anything, but someone who has a savings account is viewed as a stable person, banks can give him loans. So World Bank is right, we need external reserves for tomorrow’s expected consumption. We also need to it to caution borrowing, if we consume all our external reserve the cost of borrowing will rise, the exchange rate that we are trying to defend will depreciate more because of lack of confidence and the ability to pay back our foreign debt – we need foreign currency to pay back foreign debt.


What are the other key dangers to the economy if the CBN continues to defend the naira from the reserves?

Let me allude to a historical event; the country that has the highest deposit of dollars in this world is the United States. In the 1970s when the US decided to adopt a flexible exchange rate where they will let the market determine it, they tried to defend the dollar. They couldn’t do it for one week. They didn’t have enough money to defend the dollar against the demand for dollar from outside. Now for us to defend naira, we don’t have enough dollars to even last us for five days, if our creditors were to ask us to pay them what we owe in dollars, we won’t have enough. So clearly, this is a bad policy, trying to shore up the value of naira by subsidising the exchange rate is bad for the economy.

So I think what the CBN has to do is somehow gradually, let the market determine the exchange rate, they shouldn’t pull out entirely, they can intervene occasionally, to stabilise naira, but not to dictate the rate.

On the dangers, let’s look at it this way, if you don’t have money to buy what you need at home, or the money you have is not enough to buy what you need, you cannot grow your home, your kids will not eat properly, you will not be able to cover your expenses. Now look at the country from that perspective in terms of the economy, we need inputs of production because most of the things we consume we don’t produce them here. If we don’t have the money to import these things, the economy will go down, economic activities will stifle. Also, even if our external partners, other countries, are willing to sell things to us on credit, they will raise the interest rate, because we are not buying cash. Anybody buying on credit will pay a higher interest rate, this means high inflation when the interest rates are translated into the prices of goods and services. Either way, it is destructive to our economy.

We must reverse that and be able to produce or manufacture what we need in the country.

 Do you think the naira is rightly priced against the dollar currently at the official market?

Absolutely not. I as every other person buy things from the market and most of what we buy have foreign inputs. The only reason they sell those commodities at such  prices is because, they cost them more. What the CBN is doing is saying ‘we want things to be cheaper for Nigerians so let’s place the exchange rate at N410.’ That would be okay if everybody who needs dollars to buy things from outside can get it at that rate, but the CBN doesn’t have enough to sell to importers, so what happens to the price of dollars? It will skyrocket, it can’t be N400, it will be somewhere around N500 or N600. Right now the dollar is trading around N550 to N560 at the parallel market, and this the price used to import goods into the country.

So the CBN can’t continue to defend the naira at the rate that it is doing. We will run out of dollar. The job of the apex bank is to manage the exchange rate, not to control it, the market is too difficult to control. Their duty is to manage the market such that the price will be somewhere in-between.

The CBN is suppressing the value of the naira, and the entire thing is psychological, they stopped sales to BDC, closed down AbokiFX which by the way is not a good thing, because business men and women need information to make decisions. So the N410/$1 is underestimated, the exchange rate should be allowed to be determined by market realities.

World Bank has expressed concern about the wide gap between the parallel market rate of the exchange rate compared to the official rate.  How can this gap be reduced?

For those who study the foreign exchange market, there is something called equilibrium – when the demand and the supply meet, then we have an equilibrium price. To give you a clearer picture, let’s assume that people are buying $40bn a day , that is what they need to trade, and the CBN could only supply $20bn, so we have a gap of $20bn.  What will happen to the price of dollar? Because the apex bank can’t meet the demand, the price will go up, that increase is an adjustment that happens in the market and it is called the invisible hand. I have said that the CBN has to pull out from controlling the market. What they can do is to manage and let people who have dollars outside the country bring it in without so many restrictions. This will encourage Nigerians who have dollars outside the country to bring their money in,  so in essence, the CBN should make the regulations easier to move dollars in and out of the country. With that, dollar will flow into Nigeria. Once they eliminate these control measures, there will be increased inflow and the rate will fall and the gap between the markets will reduce. The gap won’t be completely closed, but the gap won’t be as high as N150 as it is now, because to me anything above N50 is too high.

The CBN stopped sale of FX to BDCs but the naira is still facing pressures. Why?

If you look at the BDCs, their function is to buy and sell in the market. They serve as a substitute when those in need of dollar can’t obtain it from the banks due to shortage. So the job of the BDC is to make the market more liquid, they bring supply.  By banning the sale of dollars to these operators, the CBN is restricting supply to the market, keeping in mind that the banks do not have enough to meet demand. Now remember what I said, when the supply is lower than the demand, the price of the commodity will go up, the same thing is playing out with the forex market. In fact, the value of the naira against the dollar should even be higher than N450 but CBN is manipulating it, to keep it low.

How can CBN get it right on the issue of exchange rate?

Let me not be too hard on the CBN because stabilising the naira is not just a CBN problem, the fiscal authorities also have a role to play. If you think about it, what do we need forex for? We need it to buy foreign goods – that is the number one reason. Other reasons include travelling, paying the school fees of your kids who study abroad. So you need foreign currency for anything you are consuming from outside the country. Now, the question we should ask ourselves is, why do we need all these things? The answer is: we don’t have the capability to produce them; our hospitals are dead, so everyone is going to India, every time our schools are on strike, so those that can afford it, send their kids outside so they can have a stable, reliable and timely education.

Our manufacturing sector is facing a lot of challenges; we don’t have the capacity to produce what we need internally, so we import almost everything. You can now see that the policies that can affect these sectors are not necessarily under the purview of the CBN but the fiscal authorities.

So the fiscal authorities must wake up and introduce policies that can tackle the challenges in these critical sectors of the economy. They should also be able to address these issue of insecurity ravaging the nation. That way, investors and all those who want to do business in Nigeria can come in and invest. The CBN can now intervene and make sure that the interest rates are not too high. When we have all that we need as a country to thrive, the demand for forex will reduce thereby stabilising the exchange rate in the country.

So, it is not all about the CBN, the executive arm is a big part of the equation, they probably account for 70 per cent.

However, there is also the issue of inflation, which the CBN is tasked to reduce. Inflation is high even at 15.99 per cent and this is impacting negatively on the value of our domestic currency. So because of inflation people are hoarding dollars and we know that the higher the shortage the lower our currency will be.


Can import dependent country like Nigeria afford to allow the naira to face much pressure as it is currently?

If nothing is done, the pressure will continue. It is just like this issue of fuel subsidy, Nigeria can’t continue to subsidise fuel forever. We will run out of money and our deficit will rise. Similarly, we can’t continue with the present policies as they will cause our currency to depreciate infinitely. At a point what we will see is that a loaf of bread will cost a truckload of naira.

For things to change, the government must fulfil their promises to the people. They should provide stable electricity to enable businesses to thrive, tackle insecurity to promote investments and so on.

On the part of the CBN, interest rates should be kept low so that businesses can borrow and invest and those who want to build houses can borrow, build and be able to pay back. This will also help to control inflationary pressures.    ,,

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