Reversing the travails of the naira
THE travails of Nigeria’s national currency continue to batter the economy and dismay domestic and international experts and development partners. A new report from the global consultancy, Andersen, raises fresh fears over the forlorn trajectory of the naira and draws attention to the urgency of a salvage mission. Sadly, the two drivers of fiscal and monetary policies in the country, the President, Major General Muhammadu Buhari (retd.), and the Governor of the Central Bank of Nigeria, Godwin Emefiele, respectively, have not only proved incapable of finding effective solutions, but are decidedly part of the problem.
On their watch, every economic indicator is headed south: inflation, unemployment, poverty, and debt are at record levels. And pummelled by rising inflation and scarcity, the naira continues to buckle under escalating demand pressure. Last week, the naira traded at N750 per dollar at the parallel market, a clear N290 above the official CBN rate of N460/dollar.
Experts have projected further worsening of the naira-dollar exchange rate fluctuations with the crisis stirred by the CBN’s monumental bungling of the naira redesign. Ostensibly aimed at strengthening the economy, reducing expenditure on cash management, promoting financial inclusion, and mopping up currency outside the formal system, the scarcity of the new notes has spread misery and nearly crippled the economy.
Andersen projected that the parallel market rate of the naira would reach N900 to $1 in 2023, arising from demand pressure if economic initiatives were not substantially generated. The report titled, ‘Nigeria’s 2023 Economic Outlook,’ presented by its partners in Lagos, noted, “In 2022, the value of the naira was relatively more stable in the official market than in the parallel market, thereby widening the premium between the two exchange rate windows. This was due to the heightened demand pressure spurred by FX illiquidity.”
Nigeria’s economy is massively import-driven and largely hinges on the swing of the naira in exchange for the dollar at the official and parallel market windows. Activities of currency speculators, middlemen, bureaux de change operators, and the foreign trade deficit, further coalesce to make the naira vulnerable.
The situation is exacerbated by the overwhelming role of the CBN as the major source of forex, as the organised private sector generates meagre export earnings. Though non-oil exports rose by 40 percent in 2022, according to the Nigeria Export Promotion Council, the OPEC reported that of Nigeria’s total export value of $46.86 billion in 2021, petroleum exports accounted for $41.37 billion, leaving a balance of $5.49 billion. This leaves the preponderance of available dollars with the CBN.
The CBN’s initiatives to save the naira included ‘Naira 4 Dollar’ scheme for Diaspora remittances, adoption of NAFEX rate as the benchmark rate, ban of forex sale to BDCs, and e-form A for online forex. The CBN also has the Eurodollar borrowing/IMF Special Drawing Rights, e-naira, Pan-African payment and settlement system, and payment of N65 for any $1 repatriated and sold at the IEFX window.
These have not succeeded in halting the naira’s persistent slide. The consistent and debilitating way of “defending the naira” remains frequent draw downs from external reserves. This cost between $8 billion and $10 billion in 2002, said Lagos-based consultancy, Financial Derivatives.
In 2021, the naira fell slightly at the parallel market hours after the CBN announced the stoppage of direct forex sales to BDCs. Emefiele described the BDCs as “renegade, greedy and recalcitrant,” noting that given their rent-seeking behaviour, it was not surprising that since the CBN began selling forex to them, their number rose from 74 in 2005 to over 2,700 in 2016 and almost 5,500 today.
But operational realities at the parallel market indicate that the BDCs still obtain ample forex through the back door. Corrupt officials have unhindered access to forex and the situation continues to throw up billionaires for merely speculating on the naira-dollar exchange.
Money launderers, treasury looters, kidnappers-for-ransom and terrorists have a free rein. The wide gap between the official and parallel market rates has fostered a thriving arbitrage market. The abject inability of the CBN to effectively monitor the banks, deter and punish perpetrators of illegal forex deals is squeezing the productive sectors and businesses.
Sanctions, when imposed at all, are not sufficient to deter offenders. The CBN and the Securities and Exchange Commission in 2021 imposed a combined N1.46 billion on five commercial banks for committing over 20 infractions, including violation of forex market and anti-money laundering regulations. Apparently, the fines were not hefty enough to stop the flourishing forex racketeering.
To save the naira, Buhari and the CBN must stimulate domestic productive activities, and SMEs, and promote exports to significantly boost external reserves hence, the exchange rate. Reserves fell by $317 million in February, according to CBN.
The bank’s data on foreign reserves indicated that the figure, which was $36.99 billion as of January 31, fell to $36.67 by February 27. In January, reserves had reduced by $63.62 million from $37.08 billion at the end of December 30, 2022.
The federal and the state governments need to join forces in stimulating domestic production to diversify the economy away from crude oil dependency. States should promote investment in agriculture, mining, industry, SMEs, ICT, and rural infrastructure. The CBN should fashion enduring and pragmatic monetary policies to grow the economy, foster financial inclusion and reduce cash-based transactions.
Diaspora remittance inflows are crucial to boosting economic activities and external reserves. The CBN should therefore radically improve on this source of non-oil forex through effective policies to strengthen the country’s current account balance and stabilise the exchange rate.
The World Bank said Nigerians abroad remitted $65.34 billion in three years: $24.31 billion in 2018; $23.81 billion in 2019, and $17.21 billion in 2020. It rose to $19.5 billion in 2021 and $20.9 billion in 2022. Though the naira redesign was partly undertaken to mop up the N2.7 trillion outside the banks, its barbarous implementation is hurting the economy. The CBN should urgently re-strategise.