It is certainly not the best time for the Nigerian government, citizens, and residents as they currently grapple with the negative economic effect of relatively poor-performing and depreciating currency in the foreign exchange (FX) market. It is not grapevine but an established, historical, and empirical fact that the Naira has continued her free fall in the FX market. From periods in the 1980s when the exchange rate went from as low as $1 to N0.70 to a current exchange rate of $1 to N1008 in the parallel market, it is unprecedented that a once dominant currency could dwindle badly; falling by over 1000% within 40 years.
More worrisome is the fact that there is no end in sight for the woes that have befallen the nation as the regulatory and financial policy thrusts of successive Nigerian governments aimed at ‘nipping in the bud’ – or better put – literally ‘raising from the dead’ the depreciated Naira have all failed.
The Central Bank of Nigeria (CBN) has over time expended billions of dollars to support the naira and cushion its impact on the economy by intervening consistently in the FX market. She has also made a host of other efforts including but not limited to regulatory directives to banks, Bureau De Change (BDC) operators, and her collaboration with the anti-graft agencies like the EFCC to stall round tripping and arbitraging among other infractions that are existent in the FX market. Unfortunately, there is a wide viewpoint amongst Nigerians that these actions are only a facade as they smirk of indecision, a lack of political will, and the absence of clarity and direction.
From an applied economic standpoint, it is expected that the goal of every public policy that is targeted at solving the challenges in the FX market sustainably focuses on the underlying root causes of this complex thicket as against low-hanging fruits. It is only when sustainability becomes the goal that the Nigerian Naira can reclaim her lost glory among the ‘comity’ of currencies and the global FX market as every country’s currency performance (the Naira inclusive) is a summary indication of not just the economic health but also the financial health and has a direct impact and links with the stock market, ease of doing business, economic development and the overall welfare of the citizenry. As with any depreciating currency, there will be a chain of effects on key sectors of the economy especially the productive sector like Manufacturing. With the Naira depreciating, the poverty levels in the Nigerian economy have deepened as more Naira is spent on a single dollar with Nigerians in the medium and high-income bracket not spared from the negative impact on wealth. FX is required to pay for semi-imported goods like raw materials, school fees domiciled in other country’s currencies and luxury items shipped from abroad. Also, the attendant effect of a depreciating Naira is that the cost of production increases with the eventual burden transferred to high-consuming members of the Nigerian public. This in effect triggers a concomitant rise in inflation.
The dominant problem of the current FX impasse in Nigeria is the scarcity of the dollar – an insufficient quantity of the dollar to meet the ever-increasing demand by Nigerians. However, this is not what accounts for the dynamics of the fall or rise of a country’s currency. The productive capacity, strength of a country’s economy, and ability to export goods and services to another country and generate foreign exchange in return determines the value of her currency. If a country has goods and services that can be exchanged into foreign currency, then there is every likelihood that its currency will be strong. Thus, countries like Nigeria – a top crude oil-producing nation should have a strong currency. However, the inability to rein in foreign exchange revenue from the sale of crude oil and the depleting foreign exchange reserves owing to a large public (external) debt has impacted negatively on the value of the naira.
The Nigerian government needs to be rightly advised. FX policy inconsistencies and indecision will come at an irredeemable, non-sustainable, and high price because the future generation – Nigerian children yet unborn will pay for the continued, ever-devalued Naira especially as similar policies have not fared better.
The Naira redesign policy of the immediate past government of General Muhammadu Buhari which was prematurely formulated and brought in its wake an unwarranted hardship on Nigerians resulted in the existence of two different designs of the N200, 500 and N1000 denominations with uncertainty when the previous design will be phased out of circulation. There was also the total removal of fuel subsidy which was the highlight of the first few policy releases of the current Tinubu administration. This was another hard nut to crack as fuel subsidies have been confirmed to be back by PENGASSAN with N169.4 billion paid as fuel subsidy in August. The removal of fuel subsidies instigated inflationary pressures with the retail prices of fuel rising by over 300% in some parts of the nation and resulting in a sharp rise in overall consumer goods prices by 25.88% in August, according to the NBS.
Unfortunately, the recent FX policy of collapsing multiple FX windows including the parallel (black market) into the Investors and Exporters (I&E) window is toeing the line of these failed public policies as there remain multiple segments with the gap between the markets now widened more than ever and exchange rate shooting up from N700/$ when the policy was released to over N1000/$ currently. Thus, there is a need for an urgent and innovative FX policy that will stem the current tide for the benefit of all Nigerians.
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Thankfully, the ideal policy is within reach. It utilizes the unique peculiarities and resources of the Nigerian economy as well as riding on digital and technology.
As a matter of urgency, the CBN should fully digitalize the FX market and remove cash-based transactions to deal decisively with the supply side and liquidity challenges inherent in the market. It is also important that restrictions on domiciliary accounts be removed as it defeats the purpose that in a free-floating system, there are restrictions to FX movement among players in the country.
Thankfully, some organizations are already making the right moves. Flutterwave, a Nigerian Unicorn recently liaised with the CBN and a few other financial institutions to introduce a product - SWAP which makes FX available at competitive rates on a digital platform. The entry of more financial institutions and their collaboration to digitalize the FX market will bring ease, fluidity and boost the value of the naira while increasing investor confidence.
When the links between the foreign exchange system and financial system are digitized, it becomes easy for hoarded dollars to be voluntarily released from domiciliary bank accounts and used to supply the high dollar demand with some profit generated by the owners of these accounts. This solution will mirror the recently halted Naira4Dollar remittance scheme of the CBN; only that in this case, owners earn in Dollars and not Naira.
The CBN can actively use a proportion of the trapped FX funds owned by multinationals which cannot be repatriated to foreign countries due to the inhibitive policy in win-win arrangements where their owners play their role to supply foreign currencies that meet demand instead of having these multinationals close-shop or exit the Nigerian business environment because of the difficulty in plowing back profit and a stiffened operational framework.
Like mobile money and agent banking, the Nigerian economy should take advantage of dormant dollars in the hands of Nigerians to meet FX demand. The high arbitrage existing will be effectively removed when Nigerians can bring out their dollar and earn from it. Turnaround time for repaying the dollar should range between 1 to 2 weeks while the CBN works to meet the backlog of dollar demand which is currently estimated at $2.5 billion. Thus, a workable framework for actualizing this should be designed and implemented.
Beyond arresting the challenges inherent in the FX market and boosting the naira, the agricultural and manufacturing sectors will need to be supported so that more cash products and exports can bring in the required FX. While it is understandable that the Nigerian government looks to attract foreign exchange by freely floating the FX market, it is important to say that the Nigerian macroeconomic environment is not ripe for an FX left to the forces of demand and supply. Exchange rate management is in the short and medium term a necessary evil to ensure that speculations and round-tripping do not choke the limited gains from beneficial government FX policies. A favorable regulatory, economic, and political environment will attract the right Foreign Direct Investment and Portfolio (FDI/FDP) into the economy and boost the value of the Naira.
