Nigerians’preference to transact business with the United States’ Dollar locally rather than the Naira is the greatest threat facing the currency from firming up in its exchange rate value with other hard currencies in the FX market, writes Group Business Editor, SIMEON EBULU
It will not be for lack of efforts nor policy deficit that the naira, Nigeria’s currency, has remained vulnerable to various headwinds on its path.
In the face of obvious CBN’s efforts to stabilise and strengthen the Naira exchange rate vis-a-vis other hard currencies, most especially the famous United States Dollar (U$D), the Naira still remains abysmally weakened in its exchange rate, unstable and unable to stand its ground.
The Central Bank of Nigeria (CBN) that is saddled with defending the currency, like their peers in other climes, has urned out policies, crafted to arrest the Naira’s exchange rate slide when juxtaposed against other hard currencies.
The currency’s descent in value when compared with others, didn’t just start yesterday, it has taken a while, but the real danger and worry now is that several measures put in place by the CBN to address the menace have not yielded the desired and intended results, largely because of untoward practices of operators in the forex market space whose stock in trade is, basically to undermine the regulatory measures put in place, largely for filthy lucre’s sake at the expense of societal benefit, or interest. The naira had not always been a weak currency. There was a time the local currency was so strong that it squared up with the Pound Sterling, the USD was at a time actually valued lower than the Naira. It was not until 1986 or thereabout that the macabre downward exchange rate dance of the naira began.
It started with a wholesome, one fell swoop devaluation of the naira under a Structural Adjustment Programme of the military regime then in power. Whatever purpose that policy was meant to serve, part of its negative fallouts and its attendant ripple effects, are the causes of the imbalances plaguing the Naira. That singular measure alone dropped the naira/dollar exchange rate value by a whopping 50 per cent in just one day, with a stroke of a few lines’ announcement made over the radio late afternoon of that day.
Since that infamous policy pronouncement, the exchange rate of the naira against other hard currencies, has been witnessing a downward sliding trajectory. However, the pace of the fall had been gradual, moving apace one step at a time. Regrettably, its not so any more.
Worrisome and as disturbing this development appears, the monetary authority for all time, has always risen to the challenge through its multiple response mechanisms by rolling out one policy after another to stem the tide and manage the slide in the exchange rate usually skewed against the naira. And there are a number of these remedial measures by the CBN that readily come to mind.
The CBN’s stoppage, or abrogation of forex sale through Bureaux De Change operators, the I&E ( Importers & Exporters) window to obtain and repatriate FX, the N65/dollar incentive for Diaspora remittances, and the $200billion expected receipts from non-oil exports over a five-year period, coupled with the stiff penalties imposed on Deposit Money Banks and other financial institutions for FX infractions, are a few of several measures introduced by the CBN to ensure that operators play by the rules thereby availing the naira a breather to enable it compete and attain parity with its peers in the forex market management space, among others, suffice.
Regrettably however, a bad situation is now being made worse by the clear and flagrant disregard for laid down rules intended to moderate the FX market, this time among others, by the very segment and people on the queue angling to assume the reign of governance, and by implication become the managers of the system for which they’ve shown much scorn through their openl display of total disregard for laws in the run-up to the political parties’ primaries a few weeks ago.
As two notable, wide circulating national dailies captured the development, “politicians are wiping out forex and by implication, making life hard for citizens they hope to represent.
“The story of Nigerian politics is not only that of failure to raise the level of the governance and the moral architecture of the people. But they also do it with brazen indifference. And we saw that in the just-concluded primaries …and how the partisans of the party cried over what has been added into the language of our society: monetisation.
Not that it is new, but that the political society has managed to raise the bar of infamy.
“Its effect has spread to the larger society. Manufacturers have complained that the new cycle of politicking is damaging the value of the Naira because the politicians are mopping up foreign currencies.’’
The currency has never had a good time in the past five decades. We have witnessed its descent, sometimes slowly, sometimes precipitously. But since its decline began, which was first announced in the 1980’s as a fall from parity with the dollar-to-four Naira (U$D-N4) to the American currency, it has never known a real pirouette.
What politicians are doing in this season is to preside over an unprecedented collapse. In the parallel market, otherwise known as the black market, it converts for at least N610 to a dollar.
“They have gone to the banks and collected all that they could muster. They had always left there when there is none left, and collected from the bureaux de change or BDCs. When neither works, they go to the black market. In any direction, the currency is taking a beating. But it is the Nigerian fortune that is taking a beating.”
SIX months after revising upward its growth forecast for the economy in the year to 3.1 per cent from its earlier projection of 2.7 per cent released in January, the International Monetary Fund (IMF) has revealed in its new report that rising inflation, pervasive insecurity and election expenses will negatively affect the nation’s economy. Other factors that will pose threats to the performance of the economy, according to the global financial institution, include monetary tightening by the CBN, rising energy cost and high food prices. This was disclosed recently by the Fund’s Resident Representative for Nigeria, Ari Aisen.
As it would appear, the Naira/Dollar exchange rate fluctuating between N600 and N610/$, is a manifestation of our penchant for, and preference for dollar usage instead of the naira in our day-to-day transactions. The migration from naira to engaging the greenback became clearly evident in the run-up to the party primaries that held a few weeks ago, which reverberations from the point of view of dollar-rain is still in the air. There’s now a gradual, but steady drift, from a naira operating environment to one that is largely dollar denominated. Our economy, being one denoted as cash-and- carry, rather than via direct debit, bank transfers and such other e-commerce platforms,
it is not particularly surprising that the outcome of what transpired during the parties’ primaries and its effects are already manifesting, not only in the FX market with respect to exchange rates fluctuations, but also in its attendant inflationary impacts on production costs and consequently on prices of consumer items. At a cost push inflation of over 17 per cent, we don’t need any soothsayer to announce to us that there’s fire on the mountain.
Already, market intelligence is pointing in the direction of political spending for the current travails of the naira amid speculated mopping up of available foreign currencies, especially the dollar, in the run-up to the campaign period. Analysts said whichever angles we decide to examine the nation’s foreign exchange market, the naira has never had it so bad in recent times as it continues its free-fall against the dollar last week. The situation is also compounded by the decline in Nigeria’s foreign reserves, which, despite the rising price of crude oil on the international market, still fell to $39.650 billion as of the end of April 2022, compared to the $39.550billion recorded in March this year. This is according to data extracted from the daily external reserves tracker from the CBN.
The Naira made massive gain at the parallel market against the dollar after political parties concluded party primaries to nominate candidates for the Presidential and National Assembly polls. The proof that political activities substantially edged the Naira/dollar exchange rate higher, became evident when the local currency appreciated by N9 against the dollar the week immediately after the primaries. The Naira traded at N600/$1 from N609/$1 before the primaries. The naira’s recovery intensified as politicians, mainly delegates, began conversion of ‘political dollar’ earnings to the naira. This was aptly validated by Abdul Hassan, a Lagos-based Bureaux De Change (BDC) operator, who said the parallel market has received a rapid increase in the number of walk-in-customers exchanging dollars for naira.
“The volume of dollars purchased from walk-in- customers peaked last week after the party primaries. We expect the naira to continue its recovery in the next few weeks as dollar liquidity in the parallel market rises,” he said, adding that politicians had during the campaigns pumped huge dollar reserves to the economy as they sustained political spendings ahead of the 2023 elections.
Also, Forex Analyst at AXA Finance, Ikenga Kalu, said he expects the naira to sustain recovery at both official and parallel markets as huge dollar spendings find their way to the parallel market, thus reducing pressure in the official markets. “We expect to see further gains for the naira in the weeks ahead as political dollars circulating in the country get converted into local currency,” he said. Demand for dollar at both official and black markets rose significantly in the last one month as political parties prepared for party primaries to nominate candidates for the Presidential and National Assembly polls. The uptick is dollar demand led to depreciation of the naira, which closed at N612/$1 at the parallel market while the naira exchanges at N416.36/$1 at the official market.
All said, the Naira may never appreciate to its desired value and attain parity with the Dollar, and indeed other hard currencies for as long as Nigerians in their transactions prefer to spend the greenback at the expense of their own local currency, more so given the lack of interest by the nation’s security apparatus and even the legal arms of government to enforce existing legislations in place to tame several of these known FX infractions.
