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The conversation around the naira and CBN’s monetary policy is an issue that may not go away in the foreseeable future. So long as our appetite for foreign made products remains insatiable, coupled with corruption and a near collapse of virtually all sectors of the economy, the naira will continue to struggle. The Central Bank will not perform any magic to improve the value of the Naira except the government demonstrates the bravery and political will to stabilize our education system which ought to be our greatest asset. Nigeria has an urgent need for an education system that builds the social values of individuals and invariably boosts the economy. We need to end health tourism, create infrastructure that will create productive economy, make our refineries functional and live by example by deliberately using products made in Nigeria like vehicles for official government use.
It’s big shame that despite being one of the world’s largest oil and gas producers, we are still importing refined petroleum. For two months going we have been experiencing fuel shortage across the country for inexplicable reasons. Several man-hours which could have been spent on productivity are rather wasted at fuel stations. The cost of diesel has hit up to N1000 mark in some parts of the country, making the very few available =SMEs to shut down completely as no industry can survive under such harsh conditions.
The aviation industry has threatened to further hike air price to N120,000 at the minimum or shut down there service completely. The national grid they said has collapsed throwing the entire country into darkness. The GENCOS are threatening to shut down the supply of gas because according to them they are being owned trillions of Naira.
The truth is that the same corruption that permeated petroleum subsidy has also penetrated the GENCOS. The country is subsidizing corruption in the electricity gas supply sector because the so-called debt owed to GENCOS is a ruse. Why do I say so? Licences for supply of gas are being issued to briefcase companies who have no business with gas generation and supplies.
Before now the GDA agreement signed with suppliers is designed to the disadvantage of Nigeria. The GDA is ‘a take or leave it’ agreement which implied that we must pay for whatever the GENCOS claimed they have generated and meanwhile we have neither the consumption capacity nor storage capacity for what is being generated. Moreover it is the GENCOS that determine what they claimed to have generated because in the first instance we do not have the infrastructural backbone to accept and store the amount of gas they claimed to have generated. For years, the country is paying for gases it is not consuming. And if what is being generated is beyond our consumption capacity, why issue fresh licences to new gas generating companies, knowing fully well that we are in debt with the original suppliers who are producing in excess of our needs? Some Nigerians in public office with their collaborators in the private sectors are common criminals that deserve nothing but the China treatment for public corruption if this country must move forward. I must applaud the Central Bank for their efforts amidst our conflicts of interest and convoluted politics for doing all they can to control the naira currency despite demands for deeper reforms from the International Monetary Fund and the World Bank and complaints from businesses.
The multilateral institutions say a free-floating naira would help the economy withstand future shocks. But Nigerian authorities fear inflation stemming from a sharp devaluation could throw millions into poverty. Already the inflation rates are massive and things are looking grim. The costs of goods are soaring higher with no end in sight. Nigeria is like a time bomb waiting to explode and as such the Central Bank must be careful in weighing all available options. I am happy that the Central Bank Governor Godwin Emefiele had consistently denied the country was adopting a new foreign exchange management policy, despite the vice president, Yemi Osinbajo saying the government would itself use a more flexible rate. The CBN must jealously guard its independence as monetary policy regulator while shunning the overbearing and misguided influence of politicians whose lavish spending is the very reason we are into this mess. What is happening to the naira, and why is the naira pressured? Here are the facts about Nigeria’s currency and recent monetary policies:
The COVID-19 pandemic and oil price crash hammered Africa’s largest economy, 90 per cent of whose foreign exchange earnings come from oil and gas exports, pushing it into its second recession in four years. It narrowly exited the recession in the fourth quarter, but the sharp drop in oil revenues led to a balance of payments deficit of $14 billion last year and has depleted its foreign reserves. The government of President Muhammadu Buhari, who took office in 2015, has kept the currency artificially high as a matter of national pride and in other to stem inflation. During the last oil price crash, in 2016, the Nigerian Central Bank created a system of multiple exchange rates in order to avoid a large official devaluation. These included a market-determined rate for investors and exporters called the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX). Faced with a 5.6 trillion-naira ($15 billion) budget deficit this year, the government is seeking a $1.5 billion loan from the World Bank. But in return, the World Bank wants Nigeria to do more to bring the official exchange rate at per the dollar and other rates, including NAFEX, into line.
Left with little choice, the Nigeria’s Central Bank devalued the naira’s official rate twice last year and has weakened the exchange rate for retail users. It also banned issuing the dollar to Bureau de Change outlets while relying on the banks. But how far the banks have done in meeting up with public demand remain to be seen as black markets continue to thrive. The CBN nevertheless has continued to gradually adjust the currency since the devaluations, limiting dollar access for imports and implementing restrictive forex policies to support the naira.
After oil prices crashed in 2014-16, Nigeria raised interest rates to attract investors. But when crude prices plunged last year and foreign money fled, the Central Bank reduced yields on treasury bills in order to boost naira liquidity. But with the Russia / Ukraine war and the world energy crisis, the cost of crude has again risen beyond what it ever was some 12 years ago. How will the rise in oil price impact on the naira? How can the Nigeria benefit from the sanctions on Russia oil and gas by the US and European allies? The naira’s value and issues with dollar liquidity are major deterrents to business and investment in Nigeria. Twelve-month non-deliverable forward contracts quote the dollar at 465 naira, which implies the local currency is currently overvalued by around 18 per cent. Patrick Curran, senior economist at emerging markets consultancy Tellimer, said that essentially guarantees a loss on investment when the currency is forced to adjust, unless returns exceed the overvaluation. I don’t align with these arguments especially when we have not as simple as put our population into productive use.
Nigeria’s debt is among Africa’s lowest-yielding, which the government is counting on as it seeks to cover this year’s large financing needs via cheap local borrowing. We do not need to live on rental economy when we can plug the financial leakages and push back on corruption, which has become endemic. Besides the significant oil price rebound following the Russian war has the potential of meeting our offshore debt obligations will further improve Nigeria’s dollar reserves.
To continue to shower up the naira, the Central Bank has offered cheap credit to try to boost manufacturing and agriculture in order to cut imports. The investment in agriculture is paying off, though more needs to be done to make cost of food more affordable to the masses. The CBNs anchor borrowers fund remain a commendable effort that can be replicated in the education and health care sector. The CBN has also eased rules on diaspora remittances to increase dollar liquidity, after the Naira fell sharply on the black market. With consistency in the monetary policy the CBN may eventually accomplish the stated goal of low and stable inflation, and decrease of forex shortages and parallel market depreciation.
