NIGERIA’S currency, the naira, has been on a continuous downward slide for some time now causing serious panic and fuelling speculations that the country’s economy is bound for the rocks. Plunging prices in the crude oil market, Nigeria’s major foreign currency earner, coupled with massive speculations and policy inadequacies have piled tremendous pressure on the currency, and impacting negatively on its value in the global market.
The situation was worsened with the global economic meltdown occasioned by the COVID-19 pandemic which triggered a lull in the global oil market which consequently affected oil prices. It caused a massive slowdown in offshore investments, a major provider of foreign exchange, thus reducing dollar inflow and further piling pressure on the naira.
In the last one week, the exchange rate hovered between N411 and 419 to the dollar at the official market and above N500 in the parallel market. The effect of this development on the country’s economy and on the purchasing power of the citizens is massive; in fact, tormenting.
In a bid to arrest further degeneration in the economy, the country’s apex bank, the Central Bank of Nigeria (CBN), attempted a number of policy interventions some of which have imposed additional pressure on the local currency.
Although the bank claims some of those measures might yield long-term positive effects for the economy, the immediate effect is driving the currency down the slope as witnessed with its sliding value against major currencies of the world.
The fallout of some of the interventions has obviously led to rising demand for the dollar, the major currency for international transactions, and has put more pressure on the naira, especially as providers of foreign exchange, such as offshore investors, had exited the scene after the COVID-19 pandemic triggered a fall in global oil prices.
In July this year, the CBN cancelled dollar sales to Bureau de Change (BDC) operators claiming abuses in their transactions, including funding terrorism; but the result has been a drastic reduction in the circulation of the dollar in the parallel market and opening up the foreign exchange market to massive currency speculation. The rush that followed has created a negative impact on the naira, shooting the exchange rate to an all time high of above N550 to a dollar in the parallel market.
Although some of the policy interventions by the CBN might seem necessary in the circumstance, the weak economy which is largely sustained by proceeds of the oil and gas industry seem to make them inappropriate as the country’s currency seems to be on a free fall in the last couple of years. It is no longer news that our local production capacity is very low, a development that has seen Nigerians importing almost every of our daily requirements including foodstuff and household consumables.
Industries are closing down because of high cost of production, including high cost of procuring raw materials and low sales due to uncompetitive prices. We keep importing practically everything including petroleum products, without any significant export that yields substantial foreign exchange.
With high import and low export levels, the balance of trade keeps tilting against the country, thus weakening the competitive strength of the local currency. For instance, while there was a marginal increase in export from N1,616,094,70 to N1,802,708.30 in June, 2021; imports increased from N2,221,385.10 to N2,482,178.50 in June 2021, according to the National Bureau of Statistics.
The country’s rising debt profile, depleting foreign reserves, inflationary trend, high interest rates on businesses and pervasive insecurity are not helping matters as these have impacted negatively on production capacity and the cost of goods and services.
Although the state of the naira had remained precarious at the beginning of the year, the stoppage of the sale of the foreign currency to BDC operators is seen as the major trigger for the current slide in the value of the naira. Opinions differ as to the effect of the policy as some claim that it has further worsened the depreciation of the local currency while others believe the current negative effects are just short term reactions.
Last Friday, the CBN also clamped down on AbokiFx, a currency web platform, for alleged illegal foreign exchange transactions. The web platform has been reporting movements in the foreign exchange market since 2015, but the CBN claims it is an illegitimate market that is killing the Nigerian economy through forex manipulations and speculation, a development the CBN says is completely illegal and unacceptable.
The current scenario does not look exciting and the authorities must urgently consider more strategic interventions to save the naira and the country’s economy. This may not be a quick fix situation as it has to do much more with developing the relevant fundamentals rather than just ordinary postulations; but concerted efforts in driving the very necessary indicators might see some relief in the short term and a more buoyant economy in the long run.
We suggest that the presidency should go on a global drive to encourage massive inflows of direct foreign investments (FDI). Although insecurity remains a concern for investors, government can intensively market its current efforts at dealing with insecurity and give guarantees on both personal safety and good returns on investment in the country. Nigeria remains one of the world’s biggest markets, which is a great asset, but insecurity and policy inconsistency has prevented the country from enjoying the full benefits of its major asset. It can seriously and deliberately work around these issues for the benefit of the economy.
Because of the significance of the factor of demand and supply in economics, the CBN should consider reversing the forex suspension policy and bringing back the BDCs into the financial system, but with very strong safeguards against abuse. Strong monitoring, compliance and evaluation frameworks can be put in place to check manipulations, speculation and diversion of allocations to funding of criminal and subversive activities. For every breach, the law must be allowed to take its course.
The CBN, working with the commercial banks, should also find ways of drastically reducing charges on withdrawals from domiciliary accounts and encourage more transactions in the official markets as a way of discouraging high level patronage in the parallel markets.
There is also the urgent need to remove restrictions on domiciliary account operations, particularly allowing inflows of forex for export payments to be withdrawn in cash and utilised at the instance of the account owner/exporter. This was the pre-existing situation before government directed that such inflows can only be used for purchase of equipment or changed at bank rate to the local currency.
Putting a ceiling on the amount of forex that can be withdrawn daily from domiciliary accounts restricts the availability of forex and we think this should be removed to allow for availability and to reduce the rush and speculation, which are the most common triggers of sudden rise in currency rates.
Government must intensify efforts in solving the security crisis in the country to allow for the effective contribution of other vital sectors like agriculture, manufacturing and services. These sectors have very high potentials to reduce the level of imports and increase export levels that would see to the improvement of our balance of trade and improve the competiveness of the local currency.
We cannot continue to watch the local currency on this roller-coaster ride down the slope. Nigerians are losing confidence in the naira because of its weak purchasing power and high cost of living. Lack of strategic intervention and diligent monitoring might torpedo the national economy with far reaching consequences. The effect, when added to the current state of insecurity, will create more uncertainty and make FDIs unattractive. A stitch in time saves nine.
