By Luke Onyekakeyah
The recent statement by the former Minister of Finance, Olusegun Aganga that the naira would continue to be weak if the country remains an import-dependent country clearly restated the obvious. A currency is like a house which must be supported by solid foundation with pillars. No house hangs in the air without support. In the same way, no currency stands or has strength without solid support derived from deliberate economic productive activities. Without production, the currency is like feather. No amount of policy engineering will make the currency strong without a strong productive base. This is the predicament of the naira which the policy makers have failed to understand and appreciate.
A little while ago, some items that should enhance industrial manufacturing were excluded from the foreign exchange market with the hope that it would help to strengthen the naira but rather than improving, the situation has worsened to the extent that it has forced the Central Bank of Nigeria (CBN) to lift the restriction once again. But that is just one aspect of the tinkering. Other equally critical issues must be addressed before the naira could breathe again.
Something like epileptic power supply must be addressed. A situation where most industrial productive centres could no longer buy diesel costing over N900/litre to power their industrial plants following the punitive subsidy removal means that the problem remains even if manufacturing firms could source raw materials. The challenges confronting our battered economy are numerous to deal with in one stroke.
Aganga was speaking at a recent Adeola Odutola lecture, during the 51st Annual General Meeting of the Manufacturers Association of Nigeria (MAN). He said Nigeria must produce for local consumption and more importantly for export, for the naira to be strong. Reports say the naira fell from about 450/dollar to an average of 760/dollar following the exchange reforms of President Bola Tinubu and then plunged to 1045/dollar last Thursday at the parallel market. Speaking on the free fall of the naira he said, “What is the wisdom in spending billions defending the naira when it continues to fall instead of investing in genuine manufacturers and exporters of high-value products that would earn Nigeria foreign income and more?”
He charged the government to declare the industrial sector a national priority sector and back it with plans, policies, and money. “Unlike the trillions spent on subsidies, bailouts, the Agric Anchor Borrowers Programme, the refineries, I can assure you that every naira, no matter how large, that is well spent on the strategic industrial sectors can be easily recovered and will deliver tremendous benefits to the economy and the nation.”
Late in 2021, the CBN announced the introduction of newly redesigned N200, N500 and N1, 000 banknotes as if the new naira notes would halt the downward spiral of the naira. Like a thunderbolt, the move jolted Nigerians, particularly, politicians who promote money politics. Those who had amassed naira and dollar waiting for the elections were biting their fingers. For months, Nigerians suffered untold hardship to access naira notes with worsened economic outlook.
In a way, the move was a masterstroke against corrupt politicians, who had hoarded huge sums of money for vote buying during the 2023 general elections. By redesigning the naira and releasing it barely a month to the elections, the CBN was thought to have played the trump card to frustrate all the permutations by politicians who banked on vote buying.
But the economic fallout was more devastating. The dramatic intervention in the fortunes of the buffeted and battered naira appeared to serve as the last straw that breaks the camel’s back. Before then, the CBN had applied several interventionist measures on the naira in an attempt to boost the currency’s strength but all were in vain.
The measures include implementing floating exchange rates, moving away from pegged rates, monetary policy that allowed for trading with the market, government policies to attract foreign investment, and the country purchasing its own currency. But the naira still remained on a free-fall. To keep the pegged foreign exchange rate stable, the government must hold large reserves of the currency to which its currency is pegged to control changes in supply and demand. Unfortunately, the foreign reserves, which usually gives the CBN the power to defend the naira reportedly declined by 5.47 percent to $38.28 billion on September 29, 2022 from $40.50 billion at the end of 2021.
The latest policy intervention by the CBN would likely make no difference. Before it is launched, the naira has collapsed to above N1000/$ in the black market. There is fear that if nothing is done to halt the speedy downward spinning, the naira could in a matter of months cross the N2000 bar to the dollar and the crisis would escalate from there. That would spell doom for the economy.
The reasons for the collapse of the naira include improper valuations or pegging of the naira, chronic low growth and inflation. Currency collapses are caused by a lack of faith in the stability or usefulness of money – either as a way to store value or as a medium of exchange. A situation where people purchase and hoard dollar in preference to the naira is injurious to the naira. People have more faith in the dollar than in the naira.
The question as to whether or not it is good to have a strong currency is pertinent. There are both pros and cons to having a strong currency. Pundits say it depends on the country’s trade balance. Net importers like Nigeria will prefer to keep their currency strong, since it will make their imports cheaper, while net exporters like Japan tend to benefit from a weaker local currency, as it makes their exports more profitable.
Again, it depends on the productive capacity of the economy. I have said in this column before that no amount of financial engineering or tinkering in form of policy would strengthen the naira outside a buoyant economy that is powered by industrial and agricultural productivity. Without a strong productive base like in the 60, 70s and 80s, there would be no back-bone for the naira, and as such it would continue to fall with nothing to wedge it.
It is unfortunate that rather than put heads together to come up with a proactive strategy to revamp the economy as a basis for revamping the naira, the economic planners appear to concentrate on dishing out policies that provide ad-hoc remedy to the naira predicament. I must appreciate the fact that the country is in a quasi-state of war that has made life unbearable to the populace due to the ravaging state of insecurity. Consequently, there can be no stable and sustainable economic plan that would work in the circumstance. We need stability for economic plans to work. It won’t be out of place to declare a state of emergency on the industrial productive sector and agriculture. There is need to boost export of finished products as well as raw materials where necessary.
For instance, the CBN’s Anchor Borrowers Programme (ABP), was designed to provide loans (in kind and cash) to smallholder farmers to boost agricultural production, create jobs, reduce food import bill and thereby create economic linkages between smallholder farmers and processors with a view to increasing agricultural output and ensuring food price stability. That is a laudable intervention that has the capacity to leverage the economy through sponsored agricultural productivity.
But the programme has since run into troubled waters, for no sooner was the programme launched and farmers took the loans and planted crops than bandits, herdsmen and terrorists operating in the North-west and North-east launched vicious attacks on the helpless farmers and destroyed crops, leaving the farmers frustrated with huge loses. The result is that many of the farmers could no longer repay their loans and that has left the programme in quandary. The expected economic benefits that would have been derived from the progrmme have gone down the drain.
One way to make the naira strong is through increasing terms of trade in which there is greater demand for Nigeria’s exports. This, in turn would result in increased revenues from exports, which would boost the demand for the naira and an increase in the currency’s value. Unfortunately, nothing is being exported except what is left of the crude oil that is being stolen. No agricultural or industrial products are exported and as such the naira can’t be strong no matter what. The persistent free-fall of the naira is an indication that none of the interventions so far applied has worked. Otherwise, there would have been some respite for the beleaguered naira, even minimally.
Nigeria is an import dependent economy, which requires foreign exchange availability to function. While there is nothing wrong in trying to retune the economy to be inward-looking, the feat cannot be accomplished overnight by executive fiat. A strategic return to agricultural and industrial productivity is the only solution to the naira mess. The naira should be supported with foreign exchange earned through export of industrial and agricultural goods. The current import dependent economy is suicidal.