Arresting Naira’s Depreciation
In this piece, James Emejo argues that the responsibility of preserving the value of the local currency rests not only on the central bank, but also on stakeholders and Nigerians in general
The depreciation of the naira against other major currencies particularly the US dollar has been one of the raging controversies in the economy in recent times.
The naira is currently exchanged for N416.68 to the dollar at the Investors and Exporters (I&E) Window of the Central Bank of Nigeria (CBN), and hovered around N705 on the black market.
However, attention has been focused on the latter segment which the CBN Governor, Mr. Godwin Emefiele, has repeatedly described as tainted, only accounting for five per cent of total foreign exchange market share – and therefore cannot be used to determine the worth of the local currency.
Understandably, the apex bank had since been at the receiving end of critics who erroneously heaped all the blame at the bank’s doorstep over the depreciation.
The CBN Act, 2007 accords the apex bank the overall control and administration of the monetary and financial sector policies of the federal government; ensures monetary and price stability; issues legal tender currency in Nigeria; maintain external reserves to safeguard the international value of the legal tender currency as well as promote a sound financial system in the country among others.
Foreign Exchange Dynamics
To a greater extent, the value of a country’s external reserves determines the strength of its local currency – the more dollars in the reserves, the better chance to effectively defend and preserve the value of the naira.
But in a situation whereby forex accretion to the external reserves has dropped drastically in recent times and the existing volume depleted while preserving the worth of the naira, challenges in the demand and supply chain become inevitable.
The CBN has continuously clarified that it does not print foreign currencies – of which the US dollar is the dominant exchange currency in the country.
In effect, to boost dollar availability, it must be earned through the export of goods and commodities- but amidst a weak export base and following the adverse impact of the global financial crisis occasioned by the COVID-19 pandemic, as well as the commodities supply chain distortion as a result of the war between Russia and Ukraine, leading to energy crisis among others, the impact on forex accretion to Nigeria is better imagined.
According to Professor of Economics and Member, Monetary Policy Committee of the CBN, Prof. Mike Obadan, “The last six years have witnessed economic turbulence in the country, marked by two rounds of recession, the debilitating economic effects of COVID-19, and the negative effects of downturns in the global oil market.
“Under the circumstances, the naira exchange rate has not only assumed greater prominence in macroeconomic adjustment, but it has also become very well-known to stakeholders including market women and men who use it as a reference in the pricing of goods and services.”
Reasons for Exchange Rate/Naira Devaluation
Contrary to the belief of some people that the present exchange rate crisis, as well as the weakening currency, was a result of the inability of the CBN to properly manage the Fx regime, several factors some of which are not under the control of the monetary authority play a role in determining the stability and worth of the naira.
Given that 80 per cent of the federal government’s revenues come from crude oil exports – and also determines the level of external reserves accretion, it is easier to understand that any demand and supply challenges in production and pricing both in the domestic and local markets could affect forex accretion to the country.
NNPC’s Non-Remittance Affects Naira’s Performance
Only recently the CBN indicated that the failure of the Nigerian National Petroleum Company (NNPC) Limited to remit oil sales to the federation account, under the claims of under-recovery has impacted the ability to improve the external reserves position. The corporation had on different occasions announced its inability to make returns to the government largely as a result of subsidy payments.
According to the central bank, NNPC only remitted about $1.78 billion to the CBN in six months, representing an average of less than $300m monthly compared to $3. 4 billion remitted in a month in 2014. On a monthly basis, the CBN requires at least $1.8 billion to fund the import obligations of Nigerians.
However, Emefiele had many times reiterated the commitment of the bank to meet all legitimate demands for forex, especially funding import obligations of Nigerians despite the current difficulties occasioned partly by the non-remittance of the corporation to the apex bank.
But faced with the challenges in the oil sector, the CBN had delved into the fiscal space in ensuring that the non-oil export sector is strengthened to aid FX accretion through various interventions including the RT 200 non-Oil Export proceeds Repatriation Scheme and 100 for 100 Policy on Production and Productivity (100 for 100 PPP), both of which have recorded significant improvement in forex inflows into the country.
Convertibility Challenges for Naira
The issue of convertibility of the naira also remained a major concern in strengthening the currency. International transactions are done using the dollar and other currencies. The fact that Nigeria is still largely imported dependent and low on exports also hurts currency appreciation.
Only recently, the Director-General, West African Institute for Financial and Economic Management (WAIFEM), Dr Baba Musa, said non- convertibility of currencies including the naira poses challenges for Fx management.
He said the fact that all the currencies in WAIFEM member countries are non-convertible raises the need for policymakers to appreciate the skills necessary to manage exchange rates.
But currency convertibility is also a function of a strong export base over an unbridled appetite for importation.
It suffices to say that most of the problems manifesting in the foreign exchange administration as well as currency stability are largely structural following the inability of past and current administrations to effectively diversify the base of the economy, reposition agriculture as well as boost non-oil exports.
Firming up the Naira
Recently, Emefiele explained that the objectives of the country’s exchange rate policy were to preserve the value of the domestic currency and maintain a favourable external reserves position, adding that the FX regime further seeks to ensure external balance without compromising the need for internal balance and the overall goal of macroeconomic stability.
The central bank governor also said the overarching goals of the apex bank are to achieve exchange rate stability that ensures a viable external sector, anchor inflationary expectations, and improve and support economic growth.
The CBN governor added that the thrust of exchange rate management by the bank was to allow the market system to determine the exchange rate parity in an efficient manner devoid of the activities of speculators and rent-seekers, stressing that the bank’s choice of exchange rate regime had at all times been determined by the prevailing economic fundamentals, adding that it is not uncommon that the dynamics of the external and domestic economy lead to a change in regime.
The Chief Executive, Globa Analytics Company Limited, Dr Tope Fashua, said the value of the naira was tied to patriotism and nationalism stressing that a “lot of the value of your currency is made up of perception actually – what do people think about the currency? If those who hold the currency don’t have confidence that currency is in trouble”.
According to him, the local currency remained an embodiment of the people as well as fundamental to the economy, pointing out that the US dollar had remained strong partly because it is protected from losing its value.
Fashua, who said he had never seen a single transaction done in naira in international trade argued that the “more the demand created for a currency the stronger it gets”.
This particularly holds in the Nigerian situation where most top politicians and businessmen among others have chosen the dollar over the local currency thereby tending towards the dollarization of the economy at the expense of the former – and despite an existing law which frowns at such practice.
However, to firm up the naira, Obadan, in a paper on “Overview of Foreign Exchange Management and Economic Diversification in Nigeria”, recommended among other things, the revival and rebuilding of the productive sectors of the economy to achieve higher capacity utilisation and competitive manufactured exports; vigorously implementation of the Development Finance interventions of the CBN targeted at increasing non-oil export earnings; RT200 FX Programme, 100 for 100 Policy on Production and Productivity, Export Development Fund, Non-oil Export Stimulation Facility, among others.
According to Obadan, “Foreign exchange supply and the stock of external reserves provide a good basis for the effective management of a country’s exchange rate. Both, in terms of availability, play a major role in determining the exchange rate of a country while the exchange rate, on its own, can be used as an instrument to manage scarce foreign exchange.
“The recent shocks manifested in oil market slumps, two recessions in five years,
and COVID-19, to name a few, have to a high degree, scared foreign capital away from the country with adverse implications for the stability of the exchange rate.
“Therefore, the necessity to boost the productivity and earning capacity of the economy cannot be overemphasised. This will enable the preservation of the long-term value of the naira as well as the stability of the exchange rate.”