The free fall of the naira as the economy continues to tumble presents an emergency that does not recommend a mere policy tweak to our monetary and fiscal authorities as solution, but well orchestrated policies and actions. The challenges are indeed as complex and local as they are global. In June, the Governor of the Central Bank, Godwin Emefiele, with a raft of measures, tried to charge at this seeming economic bear when he announced that importers of 41 items would no longer be allowed access to foreign exchange at the official rate.
Such a measure, the CBN said, flowed from the need to stop the fast depletion of Nigeria’s foreign reserves, stabilise the forex market, promote efficient utilisation of forex and ensure optimal benefits from goods and services imported into Nigeria. “The implementation of the policy will help conserve foreign reserves as well as facilitate the resuscitation of domestic industries and improve employment generation,” the CBN had noted.
But the immediate upshot was of no salutary effect on the economy as the currency precipitously slumped to N240 to a dollar in the black market, a rate nowhere nearer the official N197 to a dollar. Since then, eddies in the foreign exchange market show that achieving stability will not be anytime soon.
A strong currency is a reflection of the strength of a country’s economy; the naira, therefore, is a victim of sustained abuse of governance and policy inconsistencies. Paul Krugman, the 2008 Nobel Prize winner in Economics, stressed this fact when he said, “It is only when fundamentals – such as foreign exchange reserves, the government fiscal position, the political commitment of the government to the exchange regime – are sufficiently weak that the country is potentially vulnerable to speculative attack.”
Nigeria’s foreign reserves have plummeted in the last one year, reaching a new low of $29 billion in June, following monthly raids by the Goodluck Jonathan administration to defray the cost of fuel importation, maintain huge cost of governance and release allocations to the three tiers of government as oil revenue dwindled. Strategic economic initiatives were lacking to really stimulate the economy, culminating in the CBN’s latest knee-jerk reactions to save our currency.
A successful rescue can only drip from deliberate, sustained planning and policies, rigorously implemented. The steps taken are a far cry from this paradigm. Take this as an example: while Emefiele listed textiles as one of the 41 items whose importation will be denied official exchange rate support, President Muhammadu Buhari, in the same breath, lifted the ban on the importation of textiles and furniture, among others, a contradictory impulse that crowds the demand for foreign exchange. Nothing is seriously being done to stem high liquidity, which poses significant inflationary risks and inflicts the hardest blow on the currency.
The naira is under pressure today because of decades of over-dependence on commodity trade – crude oil; declining industrial or manufacturing base, triggering an out-of-control consumerist behaviour; failure to develop non-oil sectors of the economy – agriculture, solid minerals and shortage of foreign direct investments.
Crude oil, which accounts for about 90 per cent of the country’s export revenue, according to the Organisation of Petroleum Exporting Countries, has had its prices going South since mid 2014; just as revenues from it since 1999 has been mismanaged and looted by public officials. As of Monday, OPEC daily basket price was put at $45.19 per barrel, which is below the 2015 budget benchmark of $53pb. Even with a better average price level in the first quarter, a Budget Office budget performance report showed a loss of N580.62 billion in anticipated revenue. Oil industry experts expect crude to even fall to a range of $32 to $35 per barrel before recovering at a higher but unspecified level.
But this change in fortune did not come without warning. The United States discovery of shale oil, which forced it to stop the patronage of our oil; emergence of new entrants into the market such as Ghana, Angola and Chad; drop in China’s demand for our product, preferring, instead, Iraq’s and Iran’s cheap crude, and the quest for alternative sources of energy in the West, were sufficient alarm bells that Nigeria’s economic managers criminally ignored.
However, a realistic rally for the naira will require the right mix of fiscal and monetary policy measures and a high level of foreign investor’s confidence in the economy. Statistics from the National Bureau of Statistics on capital importation by investment reveal that the economy is, indeed, in dire straits. For instance, the total capital importation in 2014 first quarter was $3.904 billion and $5.803 billion in the second, while the figures in the corresponding period for 2015, stood at $2.671 billion and $2.666 billion, showing a sharp drop. Yet, these funds comprising FDI equity, portfolio investment – equity, portfolio investment – bonds, money market instruments, loans etc., are the necessary stimuli to the economy.
Experts have argued that a currency supported by reserves cannot be a victim of mechanical devaluation. Therefore, getting the naira out of the hell-hole demands well-planned measures, all geared towards diversifying the economy away from crude oil and by expanding our sources of foreign exchange earnings. But an important leg of our currency crisis is excess liquidity. The International Monetary Fund says excess liquidity weakens the monetary policy transmission mechanism and thus the ability of monetary authorities to influence demand conditions in the economy.
This, according to Henry Boyo, an economist, is created by the “Central Bank’s practice of capturing export dollar revenue and substituting naira at its unilaterally determined rate of exchange, before payment of consolidated naira allocations to the three tiers of government.” As part of its “4-point agenda designed to make the naira the ‘Reference Currency in Africa’,” the CBN proposed in 2007 the “sharing part of the Federation Account funds in US dollars to deepen the Forex Market and for Liquidity Management.” It was meant to “ensure more effective liquidity management and monetary policy,” according to the bank. The policy was jettisoned.
The Federal Government should immediately address the underlying causes of this involuntary excess liquidity by adopting non-negotiable dollar certificate or coupons (strictly not cash) in place of bloated naira warrants for the payment of allocations of dollar denominated revenues. The present toxic practice has done enough damage, not only to the national currency, but also to our overall economic growth. This idea is worth trying.
