Opinion: The drop of the Naira against US dollar
The Nigeria economy has been facing hash times with the continuous weakness of the naira against the dollar since the 137th monetary policy meeting decision of the Central Bank of Nigeria held on 27th July 2021, when the CBN halted the supply of foreign exchange to Bureau De Change operators in order to clamp down on the illegal activities of the BDC operators.
The CBN governor, Godwin Emefiele, said the BDCs continued to create artificial FX scarcity in a bid to seek abnormal profits thus introducing risks to the Nigerian financial system.
He highlighted some of the activities of the operators that were inimical to the CBN’s price stability objectives as interest in large margins, dollarization of the Nigerian economy, subversion of the cashless policy, common ownership of several BDC by the same owners to obtain multiple FX, and ‘regrettably’ international organization and embassy patronage of illegal FX dealers.
The aftermath of the CBN’s decision on the economy was the continuous drop of the naira against the dollar. This latest development would no doubt put more pressure on sourcing dollars for the 44 items banned by the apex bank.
There is no doubt that the current travail of the naira in the forex is as a result of the mono-product economy of the country and it’s over dependence on proceeds from crude oil. The various efforts and initiatives of the Buhari-led administration to diversify the economy have yielded little results. This is evidence in the free fall of the naira.
To this end, a former Deputy Governor of the CBN, Prof. Kingsley Moghalu said the value of the naira is determined by the level of productivity of the economy in international trade.
He said Nigeria’s economy is exposed to instability in its main income source, crude oil, which 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 said.
Among series of solutions, Moghalu advises that the CBN should stop subsidizing the currency. He said although this may create immediate spike in the price of the dollar, it would have two advantages for the nation’s economy. “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.” He believes that this would create an incentive for complex production of a quality that can be competitive in the international market.
Equally important is far reaching policies that would provide ease and encourage local production mostly for export. Trade policies must support and create such incentives for massive exports of finished, value added goods from Nigeria.