Stabilising exchange rate amid pressure on naira

The continuous and seemingly unending depreciation and instability of the naira vis-a-vis the United States dollar and other foreign currencies have been a source of continual worry for most Nigerians and other stakeholders.

Within the country and beyond, virtually everybody, including the garri seller in the market, now talks about the effect of the exchange rate on their economic transactions. Many see the exchange rate as a key determinant of the rate of inflation in the country.

These are indeed trying times for every Nigerian who is continually adjusting to the erosion of their hard-earned income through continual price increases for basic consumer items. The most common scapegoat is generally the price of the dollar. The pressure on the naira is indeed real.

The current risks to the local currency are numerous. These range from a depleting state of the foreign exchange reserves, declining foreign capital inflow, heightened political risks, narrowing fiscal space and the generally poor management of the Nigerian economy. These have proved intractable for quite some time now and the situation appears to be getting worse.

Given the high import dependence of the Nigerian economy, imported inflation has become rife such that rapid price changes to imported goods as well as local goods with a large component of imported inputs have become commonplace.

The main losers in this unending economic somersault are fixed income earners as well as the large army of the unemployed who rely on the already impoverished income earners for their sustenance. Nigeria appears to be at the crossroad in this seemingly unending crisis of the falling value of the naira vis-a-vis that of other foreign currencies, particularly the United States dollar.

Conceptually, it is known that the exchange rate, like any other price, is the outcome of the forces of supply and demand. Virtually every government, through the Central Bank, has been preoccupied with the management of these supply and demand forces in relation to the determination of the exchange rate. Their success or failure in this regard has depended on the effectiveness of the supply and demand management policies as well as local and international developments.

Since the advent of the Muhammadu Buhari administration in 2015, the situation with the exchange rate has been at its worst. From an exchange rate of N197 to a U.S. dollar in 2015, the naira exchange rate has rapidly deteriorated to about N420 to a dollar in the official market and a whopping N585 to a dollar in the parallel market. That is a huge N165 difference between the two markets thus creating room for huge arbitrage or round-tripping in the foreign exchange market. This is a great incentive for rent-seekers in the market who would do whatever it takes to maintain this status quo.

Aside from external exogenous factors affecting the value of the local currency, the value of the naira has been largely mismanaged by the Buhari administration and the facts are quite obvious in the public domain.

Allegations of huge political interference in the demand management process at the Central Bank of Nigeria (CBN) are quite rife. According to Sanusi Lamido Sanusi, the former governor of the CBN, while the Goodluck Jonathan administration was identified with the fuel subsidy scam, the albatross of the Buhari administration is the dollar scam. This appears obvious because the naira was relatively more stable under Jonathan than under Buhari.

Going by this, the CBN, the deposit money banks and unscrupulous politicians or those with connections with the current government are liable in this regard. This is regarded as one of the major forces fuelling the widening gap between the official and parallel markets as well as the overall depreciation of the value of the domestic currency.

The other contemporary demand management challenge is the alleged stashing away of foreign currency for use during campaigns preparatory to the forthcoming 2023 general elections. This provision for voter inducement, even with foreign currency has been identified as one of the causes of the scarcity of the dollar in the market currently. This needs to be investigated and addressed. But given that Godwin Emefiele, the current CBN governor is now a politically exposed person, who has indicated an interest in contesting for the Office of President under the ruling All Progressives Congress (APC), who then will do the investigation appropriately?.

Another issue is that government efforts under the Buhari administration in the promotion of the use of “Made-in-Nigeria” goods have been very weak. Hence the demand for foreign exchange for domestic production as well as consumption has remained high in the past seven years.

Supply management has also been weak given the poor operating environment for export promotion, aside from crude oil. Excessive government borrowings by ways and means of advances from the CBN, by the fiscal authorities, are part of the problem coupled with the growing incidence of oil theft in the economy.

Internationally, the rising trend of interest rates globally has become a huge disincentive for capital importation into Nigeria. Interest rates have recently been jerked up by their monetary authorities in major economies such as the U.S., UK, South Korea, New Zealand, Brazil, Russia and even South Africa. Hence capital flows have been redirected to these countries with Nigeria being a loser in this regard.

The way out is for government to fine-tune its demand and supply management policies to rescue the naira from further decline in relation to other currencies.

The incidence of political interference needs to be addressed very soon, particularly with the President not on the ballot in the 2023 election and someone probably in search of a legacy to his name as he leaves office in 2023.

Nigerians should be encouraged to buy local – goods, education and health, among others. Local industries should be protected. Government should link the current economic situation to the promises the ruling party made in 2015. The issue of corruption in the area of smuggling and connivance by the Department of Customs and Excise should be looked into and addressed.

On the supply side, the operating environment should be improved upon, the incidences of the CBN ways and means advances minimised and the current governor of CBN absolving himself completely from political activities in order to address the exchange rate and monetary policy challenges in the economy.

In the alternative, Emefiele should resign so as to pave way for another expert to take up the challenge of addressing the falling value of the naira. The burden lies with the fiscal and monetary authorities to lead the way out of the current darkness. Nigeria can do better than she is doing presently.