Naira’s Plunge a Verdict on Mismanagement
By Sahabi Abdul
Nigeria’s naira currency is in a race to the bottom in a clear verdict on the perilous state of the country’s economy after decades of mismanagement. The sum of it all is that there aren’t that many people who have confidence in the country’s economy, nay its future.
So as many people there are voting with their feet to physically escape the shores of the country, you also have more, who can’t leave but have chosen to depart the national currency in favour of more stable stores of value, from dollars to crypto currencies. All have their naira chasing scarce foreign exchange.
The naira closed last week exchanging at 570 per dollar, having dropped more than 10 percent of its value in just four weeks and more than 20 percent since the start of this year.
The roots of the current crisis go back to the recession of 2016, when the plunge in the price of crude oil, Nigeria’s main source of foreign-exchange, caused dollar shortages that hit the country hard for its import dependency on everything from toothpicks to children’s education. Many middle class Nigerians who were taken unawares as inflation and devaluation wiped off both income and savings, learned their hard lessons.
The answer for many was to make foreign-currency investments, in dollars, pounds, euros, gold, crypto currencies. Nigerians became the number two dealers globally in bitcoins after the United States, and a slew of emerging fintech companies enabled cross-border investments in stocks that made it possible for Nigerians to buy bits of Apple, Microsoft, Amazon, Tesla and other top performing stocks from international securities markets.
In the circumstances, the more the Central Bank of Nigeria scrambled to fight the demand for hard currencies, a mere symptom, the more obvious it became that the goat left the barn quite a while ago.
The Covid-19 pandemic was the spark for Nigeria’s second economic contraction in four years. As the spread of the coronavirus forced cities worldwide into lockdown for most of 2020, demand for oil came to a halt at a point, with bad consequences for Nigeria once again.
In the firm grips of the “oil curse” for decades now, Nigeria over the years acquired a political leadership so addicted to the plunder of oil wealth that it could neither help itself or be helped out of the ruinous path of mindless consumption and corruption. Genuine nation building, the organization and management of national production and distribution of goods, therefore, never became as important as simply capturing state power, plundering its resources and sharing patronage.
And as long as hydrocarbons maintained their pride of place in the global energy mix, so long could the flow of income continue, and the political establishment wouldn’t have any need to change their ways. Indeed, as President Muhammad’s Buhari sought office ahead of the 2015 election, the aim was to preside over the sharing, rather than production, of national resources, essentially oil wealth.
When on taking office he was faced with an unexpected steep plunge in oil prices, his government was left flat-footed, unprepared. As the country’s currency came under pressure amid foreign-currency shortage, Buhari espoused his belief in the virtues of a strong naira, apparently, blissfully unaware that a strong currency is predicated on a country producing most of the goods its needs and importing less.
Watching Buhari’s body language, CBN Governor Godwin Emefiele and his team failed to advise him that an import-dependent country can only expect a strong currency if it has the foreign currency reserves to meet all import bills and more for decades into the future. Not when it’s back is against the wall.
Nigeria’s foreign reserves have hovered between 35 and 40 billion dollars during Buhari’s government, enough to meet less than a year of imports at the current appetite.
To curb demand for foreign exchange, the CBN has taken measures including banning 41 items from the country’s import list, ordering closure of bank accounts used to trade crypto currencies, and ending the sale of dollars to foreign exchange bureaus. Each of these measures have resulted in more people pivoting to the parallel market to source for foreign currencies.
Emefiele’s war on foreign-exchange demand was taken to ridiculous heights at Friday’s monetary policy briefing, where he singled out a website, Abokifx.com, which provides parallel market rates, for blame as cause of the recent nsira plummet. Any Nigerian who uses a local money changer knows that the rates are more or less the same.
This CBN has frequently disparaged the parallel market as the tool for shady transactions and illegal speculation, that shouldn’t be used to gauge the true value of the naira. But Nigerians know that the real rates reflecting market sentiments accurately are in the streets.
The parallel market underlines the divide between the formal and informal economy. It has also proven time and again that it’s the main driver of the authentic Nigerian economy as against the “oil curse” economy managed by the establishment.
Only a segment of the population that relates with government business, multinational companies and large manufacturing and service companies deal with the formal economy in Nigeria. The mass of the general population are in the informal economy. They obtain the goods they need from markets in Lagos, Onitsha, Aba, Kano, Kaduna, Ibadan and what have you, with little or no government mediation.
One estimate has it that foreign orders worth more than $6 billion do emanate from the Onitsha Main Market alone every year. A rough estimate of other markets based on this number gives an idea of the size of the informal economy in Nigeria. And all of them source their foreign exchange from the parallel market.
This dichotomy and the consequent alienation explain why the central bank under Emefiele appears to be chasing shadows in its management of foreign exchange. Having lost its prime lever, abundance of petrodollars reserves, it’s now relying on adhoc measures. This is because the real solution, which is to change the parasitic nature of government so that it is truly a manager of productivity and genuine agent of development, is beyond the CBN.
Rather than make the work of the central bank in ensuring price stability easier, the government has made it even more difficult. Buhari’s failure to deal even handedly with the country’s ethno-religious frictions, especially the conflict over grazing land where the government is perceived to be partial to the president’s fellow ethnic Fulani pastoralists, has further undermined Nigeria’s political stability, spawning secessionists and bandits alike.
The economic consequences have included disruptions to the country’s food-supply chain, with a spiraling impact on food inflation, the main driver for the rising composite price index in the past year.
As the government sought alternative funding sources to meet mostly consumption, rather than capital investment needs, the national debt ballooned. Central bank measures further suppressed borrowing costs, virtually wiping out interests on deposits at some point last year, ostensibly to encourage investment rather than saving. Governments at all levels have increased their drive for taxes to augment falling revenue.
Then there is the demographic factor to the problems of the naira. Youths under the age of 35, who make up more than 64 percent of Nigeria’s population of more than 200 million people, have embraced the new technologies they were born with. They have been the drivers of the fintech revolution sweeping Nigeria and most have embraced crypto currencies, the new digital form of money that appears to be increasingly threatening the old financial order.
Since foreign currencies required for these investments can’t be easily secured through official banking channels, many resort to the parallel market. Indeed, the rates offered by most fintech companies for the purchase of foreign securities – including stocks, bonds and cryptos – are parallel market rates.
The consequence is that more Nigerians, a majority of them young people, are choosing other stores of value rather than the naira. For many, any loose money that could go into savings are either invested in crypto currencies or foreign securities. And fintech companies that provide this service, such as Bamboo, Chaka, Risevest and others, have become the raves of the moment for many younger people, earning regulatory scrutiny in the process.
All these are for no other reason than the fact that these Nigerians have lost confidence in their economy. The only way to stem the current tide is to win back the confidence of the people in their country. Then they will put their money where their heart is. It will take more than platitudes to achieve this.
Sahabi Abdul is a reporter at Nairaweb.ng