July 1, 2019

Can CBN save the Naira and save Nigerians?

Can CBN save the Naira and save Nigerians?

CBN Governor, Mr Godwin Emefiele

By Henry Boyo

THE Naira exchange rate has suffered severe battering in recent times and fallen from about N160 to the present N197=$; even when our national experience suggests a close correlation between deepening poverty and weakening Naira exchange rates.


Governor, Central Bank of Nigeria (CBN), Mr Godwin Emefiele

Coronation Research Weekly Report: Market interest rates edge upwards(Opens in a new browser tab)

Evidently, the unyielding youth exodus and the mass migration of skilled professionals to more prosperous economies, certainly took root as Naira exchange rate plummeted from 50kobo to N200=$, even when we celebrate bountiful export dollar reserves; furthermore, over 100 million Nigerians, reportedly, now also live below the poverty benchmark of $2/day (N12,000/month), while, regrettably our rapidly expanding industrial landscape has shrunk significantly and become more challenging and uncompetitive, as production costs have skyrocketed with serial Naira devaluations!

Interestingly, the gradual collapse of the manufacturing subsector and the consequent explosion in unemployment, clearly do not support the popular belief that weaker Naira exchange rates would support economic diversification and also promote exports of Made-in-Nigeria goods. Consequently, Nigerians must be wary of any persuasion that prescribes further Naira devaluation as the antidote to our beleaguered economy.

Historically, the CBN, compulsively, devalued Naira rate to bridge the increasingly widening gap between official and parallel exchange rates, even when these gaps were caused by the contrived monopolistic market dynamics of demand and supply. Arguably, it would undoubtedly create much discomfort for CBN Management, if unrestrained dollar demand, further, pushes parallel market rates well above N300=$1; in such event, CBN may again, unwittingly, jerk up the official rate above N300 and remove the embedded ‘subsidy’ from the prevailing arbitrarily fixed official Naira exchange rate to raise dollar price and discourage demand pressure to minimise the opportunities for rent seeking.

Regrettably, nonetheless, a 50% devaluation to N300=$1 would severely deplete all Naira income values and induce panic amongst Naira income holders, who would seek to protect their income from another round of devaluation; sadly such response would simply instigate more dollar demand.  Ultimately, if CBN cannot restore public confidence in Naira as a store of value, another widening gap, between official and parallel market Naira exchange rates will again evolve and make serial Naira devaluations inevitable.

Incidentally, the Ghanaian currency, the CEDI followed a similar trajectory from 1Cedi=$1 to eventually exchange for 10,000 Cedis before the 4 decimal redenomination of the currency in 2007; instructively, however, the Ghanaian authorities still failed, abysmally, to control excess supply of CEDI liquidity and the New Ghana Cedi, inevitably, traded above 4 New Ghana Cedis i.e. 40,000 old Cedis, to a dollar a decade or so thereafter. Consequently in 2015, the IMF provides over $900m emergency loan, so that Ghana’s market dollar deficit would shrink and protect the Cedi exchange rate; regrettably, however, the end of the travails of the Ghanaian currency remains out of sight.

Clearly, Godwin Emefiele, must be concerned that the fortunes of the Naira do not also mirror the story of the CEDI; indeed the forex controls that CBN announced in January 2016 are clearly foraging attempts to protect the Naira value and thereby save more Nigerians from falling below the poverty benchmark. The million Naira question, however, is whether or not CBN’s market control measures can effectively reduce the pressure of dollar demand and stablise or indeed improve the Naira exchange rate?

Nonetheless, in his defence of the ban of almost 3000 Bureau de Change from official forex allocations, Emefiele, expressed grave concern that BDC operators had abandoned the original objective to serve retail end users who need $5000 or less. Conversely, according to Emefiele, “the currency dealers have become wholesale dealers in foreign exchange to the tune of millions of dollars per transaction” while they “criminally, thereafter, allegedly, use fake documentations, such as passports, etc to render weekly returns to CBN.” It is not clear how much tax was generated from these mega transactions!

Inexplicably, however, no known BDC operator has so far been prosecuted for any wrongdoing!

It is bewildering, nonetheless, that inspite of the host of eminent intellects and considerable IMF’s regular oversight, the Apex bank, in Emefiele’s words, ONLY LATELY recognized, that “Nigeria is the only country in the world where a Central Banks sells dollars directly to BDCs!” Furthermore, it is equally baffling that no one wondered, not even the equally star studded Monetary Policy Committee and our well travelled and exposed media practitioners, why the number of registered operators rose steadily from “a mere 74 in 2005 to 2786”, since CBN began direct forex sales to BDCs.

Equally worrisome, also, is the CBN’s incredible belated realisation, despite several articles by this writer in various Public media, since 2004, that BDCs provide a ready conduit for money laundering, round tripping, as well as the funding of unauthorized imports which challenge the competitiveness of local industries. (See; for article titled “Funding smuggling and money laundering from BDCs” published September 2008).

Understandably, however, the burden placed on our limited foreign reserves is certainly ‘more disturbing’ according to Emefiele, who also revealed that before the recent forex controls, CBN “sold $60,000 to each BDC weekly,” making a total of $8.6bn per year. This stupendous forex provision to the parallel market certainly did not include the equally liberal facility for an unlimited number of Nigerian tourists to access upto $150,000 per annum at official rates with Nigerian debit cards from ATMs abroad, even when such facility was widely abused by prolific rent seekers!

Alarmingly, there is nothing to suggest that manufacturers and other job creating real sector operators enjoyed the same liberal access to forex as those inexplicably pampered operators in the grey areas of the economy. Some critics may describe such unpatriotic policy directions as provocative and retrogressive and deliberately supportive of corruption and rent seeking.

Nonetheless, a ban on BDC forex allocations will instigate surging dollar demand and sooner rather than later, the gap between officially sourced and open market dollar rates will rapidly expand, to once more begin a new cycle that leads invariably to further Naira devaluation with its related adverse economic and social consequences!

Instructively, however, the release of CBN’s stranglehold monopoly on the forex market, will invariably reduce the persistent self-induced challenge of excess Naira liquidity which overwhelms CBN’s regular auctions of dollar rations, while the Naira exchange rate will invariably become stronger.

POSTSCRIPT JULY 2019: The above article was first published in January 25, 2016. It is not generally known that the alleged over $20bn annual remittances from Nigerians is the Diaspora, cannot reduce pressure on the Naira rate as often speculated; the reality is that, dollar remittances from such outfits such as Money Gram and Western Union, regrettably make minimal impact on forex supply, as the $20bn estimated remittances always remains domiciled abroad and therefore make no positive impact on dollar liquidity and Naira exchange rate. Incidentally, the Naira was devalued to N305-360=$1 just months after this article was published.

Save the Naira, Save Nigerians!