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‘This Naira exchange roller coaster must stop’

By Makanjuola Ojewumi
28 August 2016   |   3:53 am
Undoubtedly, the Central Bank seems as confused and perturbed as the average Nigerian citizen. This is evident in the constant policy changes and summersaults they have had to put in place every few months between 2015 and 2016.


This recent past, the Nigerian Naira finally touched the N400 mark in exchange for one United States dollar in the parallel market! This is N10 above Bloomberg’s N390 prediction for 2016 year end rate! Needless to say that virtually every Nigerian is at loss as to how we got to this point. How on earth can so much Naira be staked on the ever insufficient forex? Just when you feel like holding back from dealing, thinking for sure, “it will come down”, the rate edges up again and the local money changer Mallam tells you “people are still demanding forex everyday!!. In fact, its not even available unless you wait a while.” This has been the story through 2015 (last year during and after the infamous elections) up until now. It has dramatically inched up from N165 to N200, then N300 and now N400!!

Undoubtedly, the Central Bank seems as confused and perturbed as the average Nigerian citizen. This is evident in the constant policy changes and summersaults they have had to put in place every few months between 2015 and 2016. It has not been an easy path for the CBN and the blame need not be put solely at their doorstep. Nigeria has presented as a complex basket case and we need to analyze the situation pragmatically in order to proffer logical solutions for a way out.

The first error, which the CBN committed was failing to allow a realistic but gradual sag in the exchange rate from 2014 when oil prices first crashed from its peak. The forex rate is a demand and supply thing. At any point in time (based on known forex supply sources and statistics of our oil earnings, export proceeds and Diaspora inflows) we, as a country can estimate what amount of foreign exchange is available. We can equally guesstimate for the grey market (parallel market). Similarly the CBN can estimate the amount of Naira in circulation at any point in time. Sometimes there are extra budgetary spendings (when the executive/presidency orders spending outside of budget provisions).

The CBN can use all these information and analysis to ease the exchange rate to that Projected Equilibrium that people will be willing to pay for forex based on actual total Naira supply and forex availability or scarcity with the context of our national economy. Instead of doing this, former President, Goodluck Ebele Jonathan sustained a wrong policy of defending the Naira at all cost. Perhaps the thinking was to avoid rocking the boat or sparking off public outcry or attendant inflation. Unfortunately the real effect was just postponing the day of reckoning.

It also works out like self deceit. On the one hand, the previous Administration kept assuring and speaking out through the CBN (the Government’s Banker) that the Naira will not be devalued. The official rate was pegged at about N165 before being adjusted to a yet low, unrealistic, and unsustainable N197! We just did not have the foreign exchange to do this and should have floated the currency at the right moment before 2014 and 2015. The same government that held on to a fixed exchange rate regime was spending stupendous amounts of money among party bigwigs!! So much naira collected by odd individuals in the name of elections, re-elections and all what not! In so many cases, Billions of Naira were distributed to several individuals.

These were unearned sums; unproductive collections, surreptitiously distributed among so many people. With the benefit of hindsight, so many cases between Obanikoro, Fayose, Dasuki, Nenadi Usman, Fani Kayode, ex-military chiefs, as revealed by EFCC and hundreds of others not yet exposed took chunks of money they didn’t work for. These Naira billions are now also chasing scarce foreign exchange! Who then are we deceiving? The previous residency at that moment was setting us up inadvertently for this day to come! At the same time, they barked a commend at the CBN governor – “Tell the public – No devaluation!”.

With so much bulky Naira sums (in such few hands), it was only a matter of time – these few corrupt politicians could buy up the entire paltry reserves of Nigeria which hovered at $26 – $29 Billion USD – Not a lot really, compared to over $66 billion left by Obasanjo in the twilight of his administration and the over $120 Billion earned in the Jonathan years. We really ought to have at least $100 Billion in reserves and a controlled and responsible fiscal side if our currency must be defended and stable. Ngozi Okonjo Iweala cannot claim innocence in all these as she sat and straddled the government side of spending as a so-called “super-minister” – a strange appellation not known to this country before or after her. In reality therefore, this seemed like CBN’s first error but they were helpless as the executive meddled and messed it all up.

Then Muhammadu Buhari steps in on May 29 2015. He triggered the second error inadvertently. The situation was already very critical. Oil prices were dipping further, the treasury was heavily depleted from the most terrible election squandering this country had ever known (if you estimate that Dasuki’s embezzlement of $2.1 Billion alone can turn Ghana to a rich economy and that’s only one of a potential several). Buhari should have known all these from briefings and observations. Instead he took six months to form a cabinet! In six (6) months it was only the CBN running the economy-No Finance minister – no budget execution. The economy was standing on only one limb – the other limb (fiscal side) seemed amputated.

To worsen it, Buhari gave an order that no one should pay in any cash into foreign exchange domiciliary accounts! He wanted to checkmate the thieves who stole Nigeria’s money but he totally forgot the real economy! The Nigerian businesses who constitute Africa’s largest economy! And the custodians of FDI – (Foreign Direct Investments). The Exchange rate gap began to widen in unbelievable margins. It was a wrong move – very very wrong. What baffles the average business leader in Nigeria is why these Presidents who are largely ignorant of Economics and have no sound business knowledge (neither Goodluck Jonathan nor Muhammadu Buhari have any know business pedigree) give out orders and commands to CBN and Economic teams that lead us into trouble instead of seeking to listen, listen and listen again and consulting far and wide outside their political party organs to intuitively pick the correct advise that will work for the greater interest of Nigeria and Nigerians. It is so tragic.

While Buhari was at this error, he upheld the previous mistake of his predecessor in office by insisting that the exchange rate must not change from N197 to the US dollar. Too many people advised him that it was not sustainable. In fact, the voice of the Emir of Kano, Sanusi Lamido Samusi was so loud in calling for the Naira devaluation that it reportedly led to a strain in their relationship. By this time, it was getting rather late for the Naira to be rescued. Heavy speculation had started. All the speculators needed was Buhari’s constant and stoic statement that the official value of the Dollar would not change. Speculators know better. Nigeria could not provide a sustained supply of dollars so if they kept mopping up dollars at any price, they would eventually make their money back. The Naira was under attack both from normal demand pressure and speculative pressure!!

Finally at the end of the second quarter of 2016, the CBN succumbed and floated the Naira and allowed market forces to determine the exchange rate. It is unfortunate that this is coming so late in the day. As they say “its medicine after death”. The Economy has shrunk (Nigeria has lost in first place to South Africa as Africa’s Largest Economy), Nigeria has been taken off the international Bond Index – so many businesses have left Nigeria and FDI has virtually stopped. All of these were avoidable, if what we were forced to do two (2) months ago, had been done just one year ago. President Buhari was wrong and he should stop being an obstinate President. As President, he should not think he knows a lot of things. He should open himself up to advice. His task is to be wise enough to pick the correct advice. He need not know a lot – just listen and learn on the job!

Today’s reality is that the official window’s exchange rate is about N314 average to the dollar while the parallel market rate is N400. Two months ago, the CBN opened this window at about N285 to the dollar, promising with optimism that the exchange rate will soon drop after some moments of trading and is likely to settle at N250 to the US Dollar. The CBN also sounded so sure that the gaps between official and parallel will close. Just a few weeks later, the gap is widening in the face of growing dollar scarcity, and the reluctance of foreign Direct Investors to return to playing in the Nigerian economy. We need to get it right very soon. The rough ride must be halted so we can have a smooth predicable and good outcome and it is still easy at this point.

These Are The Realistic Solutions – Moving Forward
In first place, the CBN has just made a deft move that can improve the naira exchange and force it downwards by up to ten (10) to twenty (20) percent. The CBN has allowed the BDC access to the forex market once again after months of banning them from operating or being allocated funds. Ordinarily, this is a good move as the BDC’s back in operation will help liquidity in the market. There are supposed to be closer to the people, the informal sector and SMEs.

Unfortunately they were banned previously because of sharp practices. So, just being curious now – what has changed? The CBN ought to tell the public and Nigeria’s business community how they plan to rein in the excesses of Bureau De Change in the country so they don’t engage in round tripping and also comply with the principles of fair trade (A rare practice in the Nigerian Landscape). The beauty of their second coming is that they will now only access inflows into Nigeria coming in through the deposit money banks. This is the so – called Diaspora funds – money being sent home by the millions of Nigerian’s out there through International Money Transfer Operators (IMTO). This is as much as $21 Billion yearly. The rules were loose before now.

Most of those at the collection points abroad changing this money (IMTO) did not have to send hard currency to Nigeria before this August 2016 directive. They took forex abroad and merely raised Naira here. From August 2016, by law the forex being changed must flow as hard currency into Nigeria. This will now be sold to BDC’s and hopefully it will ease the pressure on the Naira.

It is however not yet uhuru as the CBN needs to quickly learn that all these individual actions have not worked so far. Not because they are not workable – it is more because of their non-holistic, kid glove approach. The CBN needs to take on its proper role. That is; tight regulation! Set the rules in place to govern the commercial Banks, the BDC’s and FMDQ on how to honestly operate and make decent margins. Any infraction should be discovered through inspections organs CBN sets up and heavily punished. In all, this is CBN’s only real fault to date. Most of the rate escalation has been traceable to our Presidents hesitation and past executive recklessness which is no real fault of CBN – But the current fluctuations can be traced to CBN’s weak grip and weak oversight – the Banks are smarter, the BDC;s are smarter and can manipulate records to profit advantage and this must stop in the greater interest of our country.

The CBN should regularly inspect the system and ensure The Nigerian system is not being defrauded in forex transaction by the banks. The CBN needs to ensure that there are no diversions of funds using false documentation like fake invoices or over – invoicing. Strict compliance will tighten the window for round tripping. Even customers who present false documents to the Banks must be similarly penalized. It may seem like a lot more work but the result will be instant as it is not rocket science to catch erring parties and soon stability of rates can be achieved.

•The rest of such write-ups will be uploaded on for further reading