Moghalu gives reasons for naira free fall
Former deputy governor of the Central Bank of Nigeria, Kingsley Moghalu said the free fall of Nigeria currency is due to reliance on crude oil driven mono-product economy.
He warned that the fall may get worse if the country fails to diversify.
He made this known in a statement posted on his official Facebook page. Moghalu said the most important determinant of the value of the Naira is whether or not the Nigerian economy is productive and competitive in international trade.
“…So if we don’t diversify but continue to rely on crude oil as a mono-product economy, the Naira crisis will get worse, not better,” he said.
The former presidential aspirant explained that diversification of the economy is not by trading cashew or yam tubers but by adopting value-added commodities that are products of serious engineering and innovations.
“I am not talking about diversification to cashew nuts and yam tubers. No. Those are primary commodities, not complex, value added ones that are the product of serious engineering and innovation,” he said.
Moghalu’s remarks come amidst an unprecedented fall in value of the Naira, especially at the black market after the ban of forex sales to Bureaux De change operators by the CBN.
Moghalu noted that what Nigeria needs to do is to let the Naira find its level in the market. Thus, the CBN should stop subsidizing the currency.
“Since we obviously don’t have such an economy, our main FX earner is crude oil, which gives us 90% of our FX. Unfortunately, we don’t control the price of crude. Its pricing is volatile and unstable as a result of various international political and economic factors.
“This means that because we are essentially a one-product country, a one-trick pony, we are exposed to instability in our main income source. When the price of oil drops, and as the world innovates toward alternative energy sources, the amount of external reserves we have to back up the international value of our legal tender (our reserves) frequently comes under pressure. It’s those reserves, our main defense in a soccer analogy, that determines the value of the Naira.
He advised that the CBN should allow the Naira find its level in the market. “In order, words, the CBN should stop subsidizing the currency. While there will likely be an immediate spike in the price of the dollar, this move will have two advantages. The first is that, because Nigeria has a big, profitable economy and market, dollars will likely swamp the market seeking profits for investors.
“When this happens, the laws of demand and supply will work in favor of the Naira. Alongside this, maintaining different exchange rates for different kinds of transactions must end. This is called rate convergence.
“The second, and more important benefit is that, since the current practice of the CBN pumping dollars in the FX market (from the reserves, which also depleted them) is essentially a subsidy for imports, which has made Nigeria more and more import dependent, letting go of the subsidy on the Naira will refocus the economy towards exports.