Naira’s free fall due to CBN’s bad economic policies

The performance of the naira and the entire economic sector in the last seven years under President Muhammadu Buhari. World Bank and experts’ assessment of the government’s efforts in stabilising the Naira over the period shows that it could have been better managed

President Muhammadu Bu­hari, while campaigning in Owerri in March 2015, said his administration will en­sure that the Naira was equal to the dollar in value if voted into office. Almost seven years into his regime, Naira, which was between N145 and N170 to a dollar in 2015, is exchanged for N580 in the parallel market while it is N416 in the official market.

That is a 300 percent increase from what was obtainable about seven years ago.

Immediately he got into office as elected President, Buhari also vowed that he will resist pressure from the International Monetary Fund (IMF) and World Bank to devalue the cur­rency and remove fuel subsidy but af­ter a few months in office, he changed the tune.

Significantly, the Nigerian econo­my has been pummeled by falling oil earnings that have led to a near-col­lapse of the economy. The IMF had long indicated its readiness to support Nigeria’s economy with credit liquid­ity but insisted on Nigeria devaluing its currency. President Buhari had in­sisted on numerous occasions, before and after his election, that he would never devalue the naira.

A day after the Buhari admin­istration increased the price of the pump price of fuel by 67 percent, from N86.5 to N145 a liter, the administra­tion agreed to demands by the Inter­national Monetary Fund (IMF) that he significantly devalue the Nigerian currency as the Naira was devalued to N290 to one dollar.

Officially at the E & I window, a dollar is N416.36 while it is N580 in the parallel market.

The Central Bank of Nigeria (CBN) had in 2017 opened a new special forex window dedicated to investors, exporters and end-users. In a circular titled ‘Establishment of Investors and Exporters Window,’ the CBN claimed this new window was introduced to boost liquidity in the FX market and ensure timely execution and settlement of eligible transactions.

The window will specifically serve eligible transactions that are classi­fied as invincible in nature as well as transactions for Bills of Collection. According to the CBN, rates will be determined exclusively by willing buyers and sellers. The CBN did not provide any rates and did not also mention any preferred band. To provide price discovery for the market (obtain prevailing FX rates), the FMDQ OTC will be mandated to poll buying and selling rates and oth­er relevant information from major participants in the market.

This basically means that the FM­DQOTC will be asking banks and oth­er authorised FX dealers how much they bought or sold dollars daily and then use that to determine the aver­age rates and depth of the market. Think of it as a survey for rates.

Several efforts were made by the Central Bank of Nigeria (CBN) to boost Nigeria’s foreign exchange re­serves. In 2018, the CBN came up with the idea of reducing the pressure on the foreign exchange market with demands for dollars of services and things that Nigeria has the potential to produce. The CBN imposed a ban on access to dollars from the forex market on the items.

The 41 items are: rice, cement, margarine, palm kernel/palm oil products/vegetable oils, meat and processed meat products, vegetables and processed vegetable products, poultry – chicken, eggs, turkey, pri­vate airplanes/jets, Indian incense, tinned fish in sauce (geisha)/sar­dines, cold-rolled steel sheets, gal­vanised steel sheets, roofing sheets, wheelbarrows, head pans, metal boxes and containers

Others are enamelware, steel drums, steel pipes, wire rods (de­formed and not deformed), iron rods and reinforcing bars, Wire mesh, Steel nails, Security and razor wire, Wood particle boards and panels, Wood fibre boards and panels, Ply­wood boards and panels, Wooden doors, Furniture, Toothpicks, Glass and Glassware, Kitchen utensils, Ta­bleware, Tiles – vitrified and ceramic, Textiles, Woven fabrics, Clothes, Plas­tic and rubber products, polypropyl­ene granules, cellophane wrappers, Soap and cosmetics, Tomatoes/toma­to pastes, Eurobond/foreign curren­cy bond/ share purchases, Fertilizer, Dairy/milk, Maize and Sugar

The Governor, Central Bank of Nigeria (CBN), Godwin Emefiele, while justifying the ban on forex on the 41 items said the apex bank’s de­cision to restrict access to the foreign exchange (forex) official window for the importation of 41 items, is in the best interest of the Nigerian economy.

He said that the selective protec­tion policy on forex restriction to some imports was carefully posi­tioned, with a view to reversing the numerous challenges of dwindling foreign reserves, contracting Gross Domestic Product (GDP), recession, and the embarrassing rise of unem­ployment that confronted the nation.

He maintained that the implemen­tation of the policy on the 41 items contributed greatly to getting the Nigerian economy out of recession, citing growth in the real GDP, and im­proved reserve accretion as success indicators. He further rationalised that the 41 items were an unnecessary drain on the country’s forex reserve, saying the policy is aimed at stimulat­ing the domestic economy to enhance domestic production and protect local industries from undue foreign com­petition and take-over.

Dwelling on the success recorded in the area of import reduction, spe­cifically on rice importation, in ad­dition to other policy actions of the bank, Emefiele urged Nigerians to support the policy on the 41 items to further reduce pressure on the Naira.

Though as laudable as these efforts seem, many analysts believed that the CBN was actually defending the dol­lar and not protecting the Naira.

Steven Iloba, a Lagos-based econ­omist, is of the opinion that the Fed­eral Government, instead of looking at how to look for avenues where a non-oil sector of the economy is boosted to be able to bring the need­ed foreign exchange, all attention of government was in the direction of looking for loans to fund the budget.

He said, “A serious government will look for ways of developing the SME sector to be able to attract for­eign exchange to boost the economy, but instead the government was busy looking for avenues to borrow money. I am not surprised that the Naira is losing its value. It will con­tinue to do so until the right steps are taken to attract more foreign exchange.”

Tola Abimbola, an investment analyst, said the CBN in 2016 should have allowed the Naira to float like it was done in Egypt and that by now, Nigeria should be reaping the fruit of that sacrifice. “I said in 2016 that the CBN should just allow the Naira to float instead of the veiled floating it did by creating several windows. Look at Egypt, they allowed the cur­rency to float and they are reaping the fruits now. I will still say that we still don’t know the value of a dollar. What we have is what the CBN tells us”.

Mustafa Chike-Obi, former man­aging director of the Assets Manage­ment Corporation of Nigeria (AM­CON) and, currently, the executive vice-chairman of Alpha African Advisory Limited, a financial advi­sory and fundraising firm said, “Our currency has been appreciating in real terms over the last few years. The naira has been stronger than the dollar by about 40 percent. So, that has to be addressed.

“It is technical and you need to understand it. If you go to America today and borrow $100, let’s say I pay two percent for one year. At the end of the year, I owe the bank $102. If, however, I change that $100 to naira, I will get N36, 000. I use that N36,000 to buy treasury bills in Nigeria at 10 percent. At the end of the year, I will have N39, 600. If I convert it back to dollars, I will have $110.

“So, it will pay back the $102 and I will keep $8. I have just made an $8 profit for doing nothing right? That is an appreciation. But for me to get the same $102 value, what should the naira be? It has to go to a level where at the end of the year, it is still $102 so that I don’t make any profit from doing nothing. And that rate is N396 to a dollar. At the end of the year, the naira should go to N396 per $1 so as to remove that differential and stop that arbitrage. But instead of that, Nigeria continues to defend it to re­main at N360 to the dollar.”

Kingsley Moghalu, former Dep­uty Governor of the CBN, is of the opinion that forex liquidity con­straints persist because foreign in­vestors remain on the sidelines, and the gap between the parallel and in­terbank markets remains wide.

“Typical of our national pat­terns, we are seeking quick fixes to the currency’s malaise without fully assessing the interlocking challenges that confront it. The naira’s problems are symptoms of deeper economic, governance and institutional mal­functions. Without confronting these problems, our quest for solu­tions may be skirting the real issues. There are eight specific challenges we must address,” Moghalu said.

He added that the fundamental problem is the absence of a produc­tive economy. “Two most important aspects of this challenge are electric power to support the growth of a productive, manufacturing indus­trial economy, on the one hand, and removing the obstacles international trade policy places on our industrial­isation prospects by stymieing the vi­ability of our local industries, on the other. Cheaper foreign manufactur­ers have easy access to our markets.

“Conversely, our own manufac­turers are unable to access foreign markets because value-added goods from our country are blocked by high tariffs imposed by our trading part­ners (but our raw materials for their own industries are welcome and at­tract low tariffs!). Quality standard­isation concerns also dog Nigerian exports,” Moghalu explained.

The World Bank, in its assess­ment, said the travails besetting the naira are caused by the Central Bank of Nigeria (CBN). It blamed the way the CBN handles foreign exchange (FX) for the current FX crisis in which the naira exchange rate fluc­tuates widely daily. Officially, it sold for N411 to the dollar on Thursday, but N580 in the black market.

It said the CBN’s FX policy reduc­es supply in the market thus affect­ing investor confidence and leading to a ditch of the official market for the black market. “The way the ex­change rate was managed limited access to FX and thus adversely af­fected investor confidence and invest­ment appetite,” the bank said.

Going forward, Moghalu said we need to shift from the never-ending quicksand of gas-based power to a focus on renewable (solar, wind, geothermal and biomass) energy for household consumption and hydro and coal-based power for industrial production.

“We need to impose smart pro­tectionism through high tariffs that can be justified under the rules of the World Trade Organisation, on imports from foreign markets that are snuffing out our local industries in several sectors such as textiles. If we combine these policies with a flexible exchange rate policy that makes export-oriented value-added products more profitable than im­portation, the naira will ultimately realise a beneficial effect from its inevitable devaluation,” Moghalu emphasised.

Credit: Independent