Worrisome Slide in the Value of Naira

Godwin Emefiele


Nigerians are worried over the depreciation in the value of the Naira with some critics urging the fiscal and monetary authorities to cut out the leakages and corruption in the system to save the currency

By Maureen Chigbo  |  Feb. 23, 2015 @ 01:00 GMT  |

THE depreciation in the value of the naira is a source of worry to many Nigerians. This is because Naira which has been relatively stable between January and August 2014, is now witnessing a free fall since the international oil price started declining last year. As at last year, Naira exchanged at about N150 to a dollar officially while the Bureau the Change sold a dollar to about N168. But since January 2015, when oil price was about $50 per barrel, the pressure on the Naira escalated with the foreign reserve also declining to about $32 billion.

It was in order to save the Naira that the Central Bank of Nigeria, CBN, first devalued it in November to N165 to a dollar officially. With the devaluation of the Naira, the difference between the official and the alternative rates deepened, leading to an unbridled speculative currency trading and round tripping. This made the CBN recently close its window of selling foreign exchange, FOREX.

According to the CBN, the managed float exchange rate regime, which it had adopted following the liberalisation of the foreign exchange market, has for the most part been successful in ensuring exchange rate stability in line with its mandate. In recent times, however, with the sharp decline in global oil prices and the resultant fall in the country’s foreign exchange earnings, the Bank has observed a widening margin between the rates in the interbank and the rDAS window, thus engendering undesirable practices including round-tripping, speculative demand, rent-seeking, spurious demand, and inefficient use of scarce foreign exchange resources by economic agents. This has continued to put pressure on the nation’s foreign exchange reserves with no visible economic benefits to the productive sector of the economy and the general public.

In view of this, the CBN thought it imperative that appropriate actions be taken to avert the emergence of a multiple exchange rate regime and preserve the country’s foreign exchange reserves. “Consequently, we wish to inform all authorised dealers and the general public that,… the rDAS/wDAS foreign exchange window at the CBN is hereby closed. Henceforth, all demand for foreign exchange should be channeled to the interbank foreign exchange market,” the apex bank said.

The statement which was signed by Ibrahim Mu’azu, director, corporate communications, CBN, also said that “For the avoidance of doubt, all authorised dealers and the general public should note that the CBN would continue to intervene in the interbank foreign exchange market to meet genuine/legitimate demands.”

It’s been more than three weeks since the CBN took the measure to stabilise the Naira. But the value of the Naira to the dollar has continued to slide and is now hovering at about N215 to a dollar, prompting many critics to state that the CBN was just devaluing the Naira without making a pronouncement to avoid a backlash from the people. Some critics of the new policy said that CBN was not going to achieve much with the new policy unless the federal government stopped all the leakages which drain the foreign reserves.

Some of these leakages have to do with the fiscal planning in the country which allow for funding of importations good and services that help to drain the country’s foreign reserves without adding much value to the economy. The importation of petroleum products in the country and payment of subsidy to importers is a major source of leakage which drains the foreign exchange. Nigeria has four refineries which have not been working at optimal level despite all the money pumped into it to do the Turn Around Maintenance. If the refineries are working, the level of importation of will reduce and lessen the pressure of the foreign reserve and the Naira. Closely allied to this, is the leakage which comes from about 400,000 barrels of oil that the country loses annually through pipeline vandalism and crude oil theft.

Another source of leakages in the recent past is the printing of the permanent voters’ card in China, which one of the critics said not only had security implication but could have been done in Nigeria to save help the economy.

Another obvious form of leakages is the way government fritters away its resources on non-regenerative ventures and funding ostentatious lifestyle of its top public officers and corruption. The billions of Naira the government spends to fund a retinue of special assistants for top government functionaries and their large convoy of vehicles could be eliminated and such expenditure plough back in productive ventures. The same also goes for the over-bloated expenditure profile of the National Assembly, top government functionaries and local government officials.

A school of thought also worries that government is still printing the Naira abroad when it has a minting and printing company in the country which it strengthen to perform the job instead of impoverishing it and building the economies of other countries.

Apart from leakages, Naira is depreciating because the country does not have a productive economy. It is a mono-product economy with its major revenue coming from the sale of crude oil. This revenue, which accounts for the foreign reserve has fallen as a result of the decline in crude oil prices; Nigerian economy is import dependent. Other sectors of the economy contribute very little to the foreign reserves.

Gene Leon

There is also the added problem of capital flight which has seen more than $25 billion dollars leaving the country which invariably weigh on the foreign reserve and the value of the Naira. The capital flight is caused by uncertainty about the forthcoming general elections which has made some portfolio/hot money investors and venture capital fund to shut their investment in the country and move them out to other countries with more stable economic outlook and huge profits on investment. This capital flight has equally affected the value of some blue chips companies listed in the Nigerian Stock Exchange including the Dangote Group which lost more than half of its value recently. The hope is that things will get better after the election and if government will put up an effective policy that will make future foreign investment in the country to be in productive sector which will make it difficult for hot money investors to pull out their funds in the event of any crisis in the country. This means that the government will have to review its fiscal regime and make its budget more realistic and sustainable.

Also, a situation where government was growing the domestic debt of the country when more money was coming into the country should be avoided. This is necessary to avoid the Naira being hit badly in the event of a crash in oil price crashes.

According to an official of one of the multinational finance institutions in Nigeria, who wishes anonymity, the Central Bank of Nigeria devalued the naira through the back door so that the people will not understand what is going on. “The key thing is corruption. If they can remove corruption, 60 percent of the problem in the will be solved. The last time Naira was devalued, CBN sold the Naira at N168 but it is now selling at N198. The Naira fell from 215 last week at the Bureau de Change to N220”, he said. Some analyst are even projecting that Naira will hit N250 to a dollar by June.

Another finance consultant says that the closure of the retail window will not solve the problem unless government devises means to make the refineries to start working and have a clear cut policy on repatriation of proceeds; cut out a situation where the telecommunications companies should be importing 90 percent of their materials and reduce corruption,” the pressure on Naira will continue.

However, Mu’azu is of the view that the policy initiated by CBN cannot achieve result in one day but will take some time for the Naira to get stable. “It is for us to see the trend. We have reduced the margin. Some people take advantage of the three markets to speculate. It is not devaluation through the backdoor. We are avoiding multiple markets. We had three markets only two remaining. The Bureau de Change, BDCs, were complaining that they were being pushed out of the market when we asked them to recapitalise. But nearly all of them qualified and are better of today.”

He thinks that the BDC’s are now complaining about the new policy because their profit margin has reduced. Mu’azu said: “Analysts are part of the problem. Their forecast are not realistic. Our own issue is economic. There have outrageous demand that cannot be justified. Speculations is a major problem caused by analyst. We are pushing them out. The serious BDCs are getting it better.  The target was to stop unjustifiable speculation and round tripping. It is a question of supply and demand and once speculative demand is pushed out. Naira will stabilize. We are creating our problem. But with what the CBN has done the rate can come down N160,” he said.

He recalled that the last time Naira was devalued was in November, four months ago. “Give another four months and see what it will be. If oil price continue to rise and increase revenue the supply of forex will increase. It will now reduce the pressure on demand of forex. And if non-oil exports are remitted on time, it will reduce the pressure. Without any change in policy the price of Naira will be better in the weeks to come,” he said.

Mu’azu’s optimism is shared by Gene Leon, the IMF mission chief for Nigeria. In a recent state issued on February 11, Leon said welcome the CBN policy. “In a combination of actions, most recently the communiqué after the Central Bank of Nigeria’s Monetary Policy Committee meeting of November 24-25, the authorities have announced a set of policies aimed at mitigating the impact of the recent significant fall in global oil prices on the economy. These include: adjusting the exchange rate, resubmitting the Medium Term Expenditure Framework to the National Assembly with proposed tax and expenditure measures to achieve the deficit target consistent with a lower budget oil price, and tightening monetary policy. We are supportive of and welcome these actions, which we view as complementary and moving in the right direction. Of course, the global situation remains fluid and the key issue is being ready to manage downside risks and for the authorities to be prepared, based on assessments of credible scenarios, to consider additional measures, as necessary,” he said.

Similarly, Standard and Poor’s has just released its latest assessment of Nigeria which retains the country’s sovereign rating at BB- with a negative watch. Previously, it was BB- with a negative outlook. This means that the ratings agency has adjusted its rating slightly by placing the country on negative watch because of the pressure of falling oil prices on the economy as well as political risk. Thus, Nigeria has not been downgraded but the country clearly needs to work harder to actualise its recently announced policy response to the current economic challenges.

Other oil producing countries, like Saudi Arabia, have also been put on negative watch, while a number of others, including Kazakhstan, Bahrain and Oman were downgraded outright. It is important to note that in spite of the serious challenges arising from the sharp fall in oil prices, Nigeria is doing quite well compared to some other oil producing countries. For example, while the economies of Russia and Venezuela are projected to contract and experience negative growth this year, Nigeria’s GDP has been projected by the IMF to grow by 4.8 percent which is quite robust by global standards.

Overall, there are two broad implications. First, the economy, despite many challenges, retains key strengths. Second, we have to keep working harder to continue to turn these strengths into real value for the country and its citizens, the ministry of Finance said.

— Mar. 16, 2015 @ 01:00 GMT