the the conversation around the naira and CBN monetary policy is an issue that may not go away for the foreseeable future. As long as our appetite for foreign-made goods remains insatiable, coupled with corruption and a near collapse of virtually every sector of the economy, the naira will continue to struggle. The Central Bank will not do any magic to improve the value of the naira unless the government shows bravery and political will to stabilize our education system which should be our greatest asset. Nigeria urgently needs an education system that reinforces the social values of individuals and invariably stimulates the economy. We must end health tourism, create infrastructure that will create a productive economy, make our refineries functional, and set an example by deliberately using Nigerian-made products as vehicles for official government use.
It’s a shame that despite being one of the largest oil and gas producers in the world, we still import refined oil. For the past two months, we have been experiencing a nationwide fuel shortage for inexplicable reasons. Many hours of work that could have been spent on productivity are instead wasted at service stations. The cost of diesel has reached the N1000 mark in some parts of the country making the very little available = SMEs must close completely because no industry can survive in such difficult conditions.
The aviation industry has threatened to further raise the air price to a minimum of N120,000 or shut down service altogether. According to them, the national network has collapsed, plunging the whole country into darkness. The GENCOS are threatening to shut off the gas supply as they claim they hold billions of naira.
The truth is that the same corruption that has permeated oil subsidies has also permeated GENCOS. The country subsidizes corruption in the electricity gas supply sector because the so-called debt to GENCOS is a ruse. Why am I saying this? Licenses for the supply of gas are issued to briefcase companies that have nothing to do with the production and supply of gas.
So far, the GDA agreement signed with the suppliers is designed to the detriment of Nigeria. The GDA is a “take it or leave it” deal which involved that we had to pay for whatever the GENCOS claimed to have generated and in the meantime we have neither the consumption capacity nor the storage capacity for what is generated . Moreover, it is the GENCOS who determine what they claim to have generated because, in the first place, we do not have the infrastructural framework to accept and store the quantity of gas that they claim to have generated. For years, the country has been paying for gas it does not consume. And if what is produced exceeds our capacity to consume, why issue new licenses to new gas producing companies, knowing full well that we are indebted to the original suppliers who produce beyond our needs? Some Nigerians in public office with their associates in the private sector are common criminals who only deserve China’s treatment for public corruption if that country is to move forward. I must commend the Central Bank for its efforts amidst our conflicts of interest and our convoluted policy for doing everything it can to control the naira currency despite demands for deeper reforms from the International Monetary Fund and the World Bank and corporate complaints.
Multilateral institutions claim that a freely floating naira would help the economy withstand future shocks. But Nigerian authorities fear that inflation resulting from a sharp devaluation could push millions into poverty. Already, inflation rates are huge and things are looking bleak. Costs of goods are skyrocketing with no end in sight. Nigeria is like a ticking time bomb waiting to explode and as such the Central Bank must be careful in assessing all available options. I’m happy that the central bank Governor Godwin Emefiele has consistently denied the country is adopting a new foreign exchange management policy, despite Vice President Yemi Osinbajo saying the government would itself use a more flexible rate. The CBN must jealously guard its independence as regulator of monetary policy while avoiding the authoritarian and misguided influence of politicians whose lavish spending is the very reason we are in this mess. What is happening to the naira, and why is the naira under pressure? Here are the facts about Nigeria’s currency and recent monetary policies:
The COVID-19 pandemic and falling oil prices have hit Africa’s largest economy, 90% of whose foreign exchange earnings come from oil and gas exports, plunging it into its second recession in four years. It narrowly emerged from 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 depleted its foreign exchange reserves. The government of President Muhammadu Buhari, which took office in 2015, has kept the currency artificially high out of national pride and to stem inflation. During the last oil crash, in 2016, the Nigerian Central Bank created a system of multiple exchange rates in order to avoid a major official devaluation. These included a market-determined rate for investors and exporters called the Nigeria Autonomous Foreign Exchange Rate Fixing (NAFEX). Faced with a budget deficit of 5.6 trillion naira ($15 billion) 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 per dollar in line with other rates, including NAFEX.
Left with little choice, the Central Bank of Nigeria devalued the official Naira rate twice last year and weakened the exchange rate for retail users. He also banned issuing the dollar at exchange offices while relying on banks. But it remains to be seen how far banks have managed to meet public demand as black markets continue to thrive. The CBN has nevertheless continued to gradually adjust the currency since the devaluations, limiting access to the dollar for imports and implementing restrictive exchange policies to support the naira.
After oil prices plummeted in 2014-2016, Nigeria raised interest rates to attract investors. But when crude prices plunged last year and foreign money fled, the Central Bank cut treasury bond yields to boost naira liquidity. But with the Russian-Ukrainian war and the global energy crisis, the price of crude has risen again beyond what it was 12 years ago. What will be the impact of the oil price hike on the naira? How can Nigeria benefit from Russia’s oil and gas sanctions by US and European allies? The value of the naira and dollar liquidity issues are major deterrents to business and investment in Nigeria. Twelve-month non-deliverable futures quote the dollar at 465 naira, implying that the local currency is currently overvalued by around 18%. Patrick Curran, senior economist at emerging markets consultancy Tellimer, said this essentially guarantees an investment loss when the currency is forced to adjust, unless yields rise above overvaluation. I don’t agree with these arguments, especially when we don’t have it as simple as putting our population into productive use.
Nigeria’s debt is one of the least productive in Africa, on which the government is relying to cover this year’s large financing needs through cheap local borrowing. We don’t need to live off the rental economy when we can plug financial leaks and repel endemic corruption. Besides the significant rebound in oil prices after the war with Russia, the potential of our offshore debt will further improve Nigeria’s dollar reserves.
To keep watering the naira, the Central Bank offered cheap credit to try to stimulate manufacturing and agriculture to reduce imports. Investment in agriculture is paying off, although much more needs to be done to make the cost of food more affordable for the masses. The CBN Core Borrowers Fund remains a commendable effort that can be replicated in the education and healthcare sector. The CBN has also eased rules on diaspora remittances to boost dollar liquidity, after the naira fell sharply on the black market. With consistent monetary policy, the CBN could eventually achieve the stated goal of low and stable inflation, as well as diminishing currency shortages and depreciating the parallel market.