…as investors count loses in trillions
The foreign exchange market for so long has been in dire need of an economic solution. The Central Bank of Nigeria has over time, come up with policy measures to reduce or completely abolish the volatile nature of the forex market, and unifying tendency. NGOZI AMUCHE examines the impact of devaluation of Naira on the ailing economy.
Against the backdrop of solving the challenges facing the foreign exchange market, the Central Bank of Nigeria has intensified efforts to address the current state of the Forex market, especially where it has inadvertently created a huge arbitrage and consequentially, aided the dollarization of the economy.
However, the parallel market has been on daily depreciation of the Naira in the past two weeks, worsening with market operators indicating that the crash has no remedy. The CBN recently devalued the Naira by seven per cent against the dollar, in a bid to migrate towards a single exchange rate system for the local currency.
The apex bank replaced the fixed rate of 379 Naira to a dollar used for official transactions with the investors and exporters exchange rate, also known as the Nigerian Autonomous Foreign Exchange rate of 410.25 Naira per dollar.
CBN Governor, Godwin Emefiele, said that the move was informed by the apex bank’s quest for sanity in the forex market.
“We found out that we were no longer dealing in this so-called CBN official rate for transactions, we are still running a managed-float. We are monitoring the market and seeing what is happening for us to ensure that the right things are happening for the good of the Nigerian economy,” he said.
Notably, in 2015 the Federal Government took steps to ease pressure on the Naira by restricting items that could be imported into the country, and for which foreign exchange could be officially accessed. The CBN also banned importers of 41 products from accessing the foreign exchange market.
Under the policy, the CBN would not grant foreign exchange to import the 41 items, mostly consumer or intermediate products.
The policy resulted in plummeting exchange rate of the Naira, but the CBN governor insisted that the objective of the policy was to tackle the problem of import dependency and to diversify the economy.
According to him, the intervention would help to resuscitate local manufacturing and change the structure of the economy. In spite of this and other similar policies, the Naira has continued to depreciate.
But market pundits and economy observers, who spoke with our correspondent, said there are several factors militating against the stability and strengthening of the Naira at the foreign exchange market.
According to them, “Whenever the authorities introduced a dual exchange rate regime, some people would take advantage of the usually wide gap between the two rates to round-trip by buying from the official market at a lower rate and then sell higher at the autonomous market rate.”
They opined that having the right exchange rate was the only way of keeping the nation out of debt burden.
They also stressed the need for Nigerians to import what cannot be produced in the country.
A former Deputy Governor of the CBN, Mr. Ernest Ebi, explained that exchange rate management in the country was determined within the framework of the overall macro-economic policy objectives.
Ebi said, “The exchange rate of the domestic currency was deliberately over-valued to make imports cheaper. This policy regime was sustained by the huge foreign exchange inflow arising from the oil boom in the mid-1970s up to the 1980s.”
Former Minister of Finance, Chief Olu Falae, who also spoke on the issue, blamed the depreciation of the Naira against other international currencies on the weak economic base of the country.
According to him, “For the Naira to appreciate, there’s the need to expand the productive capacity in order to produce more goods and even generating more jobs. There is also the need for reduction in imports so that the country would spend fewer dollars on importation”.
Falae said it had become imperative for the nation to re-kindle interest in agriculture and industrial production.
“We are not producing at home, that is the point, we have to import a lot of things and this will put pressure on the Naira,” he said.
As the nation’s currency continues to depreciate, Nigerians continue to express worry that the Naira, which some years ago, was at par with the dollar, had become so weak and vulnerable.
They see the value of the Naira against the dollar and other foreign currencies as indicative of the shape of the Nigerian economy.
According to Nigerian veteran musician and social commentator, Femi Kuti, the unending depreciation of the Nigerian currency is an indication of how the country’s economic problems have multiplied over the years.
“Some years ago, one dollar was exchanged for one Naira. But now it is about N400-N480 to one dollar; this means that Nigeria’s problems have multiplied by over 400 times,” he said.
Unarguably, for the Naira to gain some value and become stable, the government must put policies in place to accelerate economic diversification, be stricter in cutting consumption of imported goods and services and invest heavily in the real sector of the economy.
Tension persist at the forex market
As tension persists at the foreign exchange market, findings revealed that Bureau De Change operators got the dollars from the CBN at N393 but sold it for N494, while experts blame preference for unnecessary importation of goods and services by Nigerians, and the deficit in local production and manufacturing of essential goods and services as reason for the weak currency.
An official of the apex bank said the bank would formally give a “forward guidance” on the new policy that is expected to frustrate the booming black market trading of foreign currencies nationwide.
The CBN will also deal with a well-organized intent/effort at scuttling the new requirements for Bureau De Change operations in Nigeria, as proposed but it must hold firm on the premise that delivered the change proposed.
Analysts advised that the government should encourage the consumption of locally manufactured goods and services in order to reduce pressure on the Naira.
“The reason we all care about the value of the Naira to the dollar is because we need to import. If we can access good medical facilities at home, good education, and we do not import petrol, we will not care about the value of the dollar. If we produce what we consume and consume what we produce, the value of the Naira will stabilise,” said Chief Executive Officer of the Nigeria Economic Summit Group, Mr. Laoye Jaiyeola.
Investors count loses
Worried by the dwindling nature of the financial industry, investors in various sectors of the economy are weighing the negative impact of the scarcity of foreign exchange on their businesses, with the Lagos Chamber of Commerce and Industry saying some of its members lost more than N1.46 trillion in six months.
LCCI Director-General, Muda Yusuf, attributed the loss to stalled business activities due to inadequate supply of foreign exchange as a result of Federal Government’s policy on foreign exchange restriction.
Yusuf was reviewing the state of the nation’s economy and the business environment in 2019 as well as perspectives for 2020 that the outgoing year was the most challenging for private sector operators.
He said LCCI’s third quarter 2020 business environment survey showed that the Central Bank of Nigeria’s FOREX restriction policy proved the costliest of all government policies in recent years, while the Nigeria Customs revenue contracted during the year, compared to the previous year.
The LCCI boss said, study also showed that private operators in the steel, furniture, pharmaceuticals and manufacturing sectors lost substantial amount of money in stalled business activities in the last six months as a result of the policy, “if steps were not taken to check the negative impact of the policy, particularly with crude oil prices dropping to unprecedented levels, the economy would face a huge danger in the near future.
Conclusion
Instructively, if the primary cause of Naira’s depreciation is not identified and minimized, the forex market would steadily become unrivalled and the parallel market rate may alarmingly exceed N600=$1 with disastrous economic consequences in the years ahead.
Historically, CBN’s attempt to manage Naira exchange rate has always been targeted at curbing dollar demand. It is instructive however, that high dollar demand is actually a function of public perception of the dollar as a stronger and safer store of value than Naira.