Can CBN save the Naira and Nigerians?


The Naira exchange rate has suffered severe battering in recent times and fallen from about N160 to the present N197=$; indeed, since our national experience defines a close correlation between deepening poverty and weakening Naira exchange rates, Nigerians should advisedly be concerned if the Naira further slides.

CBN Governor, Mr Godwin Emefiele
CBN Governor, Mr Godwin Emefiele

Evidently, the unyielding Youth exodus and the mass migration of skilled professionals to more prosperous economies, certainly took root as the Naira exchange rate plummeted from 50kobo to N200=$, despite our often celebrated bountiful export reserves; furthermore, over 100 million Nigerians, reportedly, now also live below the poverty benchmark of $2/day (N12,000/month); regrettably also, our rapidly expanding industrial landscape gradually shrunk and became challenging and uncompetitive as production costs skyrocketed with precipitate and serial Naira devaluations.

Interestingly, the gradual collapse of the manufacturing subsector and the consequent explosion in unemployment, clearly do not support the popular belief that weaker Naira exchange rates would instigate economic diversification and promote exports of Made-in-Nigeria goods. Consequently, Nigerians must be wary of any persuasion that prescribes further Naira devaluation as the antidote to our beleaguered economy.

Historically, the CBN has compulsively devalued the Naira to bridge increasingly widening gaps between official and parallel exchange rates, even when these gaps were caused by the obtusely contrived monopolistic market dynamics of demand and supply. It would undoubtedly create much discomfort for CBN Management if unrestrained dollar demand further pushes parallel market rates well above N300=$1; in such event, CBN may again unwittingly, jerk up the official rate above N300 and remove the embedded ‘subsidy’ from the official Naira exchange rate so as to raise the dollar price and discourage demand and hopefully also minimise the inherent rent seeking market opportunities.

Regrettably, however, the Naira/dollar exchange rates will still not remain stable thereafter, because, a 50% Naira devaluation would severely deplete all Naira income values and induce panic amongst Naira income holders, who would seek to protect their income from another round of devaluation; sadly such response would simply instigate more dollar demand in the open market. Ultimately, if CBN is unable to restore public confidence in the Naira as a store of value, another widening gap will once again evolve between official and parallel market Naira exchange rates to make further serial Naira devaluation inevitable.

Incidentally, the Ghanaian currency, the CEDI followed a similar trajectory from 1Cedi=$1 to eventually exchange for 10,000 Cedis before redenomination of the currency in 2007; instructively, however, the Ghanaian authorities failed abysmally to control excess CEDI liquidity and it is inevitable that the New Ghana Cedi now trades at about 40,000 old Cedis (i.e. 4 New Ghana Cedis) to a dollar. Consequently in 2015, the IMF sadly had to provide for over $900m emergency loan so that Ghana could reduce the huge market deficit in dollar supply and hopefully protect the Cedi exchange rate; regrettably, the end of the travails of the Ghanaian currency is still out of sight.

Clearly, Godwin Emefiele, must also be concerned that the fortunes of the Naira do not mirror the story of the CEDI; indeed the forex controls that CBN announced in January 2016 are clearly foraging attempts to protect the Naira value and thereby save more Nigerians from falling below the poverty benchmark. The million Naira question, however, is whether or not CBN’s policy control measures can effectively reduce dollar demand pressure and stablise or indeed improve the Naira exchange rate?

Nonetheless, in his defence of the ban of almost 3000 Bureau de Change from official forex allocations, Emefiele, expressed grave concern that BDC operators had abandoned the original objective to serve retail end users who need $5000 or less. Conversely, according to Emefiele, “the currency dealers became wholesale dealers in foreign exchange to the tune of millions of dollars per transaction” and then “criminally, thereafter used fake documentations, such as passports, etc to render weekly returns to CBN.” It is not clear how much tax was generated from these mega transactions.

Inexplicably, however, no known BDC operator has so far been successfully prosecuted for any wrongdoing! It is bewildering, nonetheless, that inspite of the host of eminent intellects and considerable IMF’s regular oversight, the Apex bank, only lately recognized, in Emefiele’s words, that “Nigeria is the only country in the world where a Central Banks sells dollars directly to BDCs!” Furthermore, it is equally baffling that no one wondered, not even the equally star studded Monetary Policy Committee and our well travelled and exposed media practitioners, why the number of registered operators rose steadily from “a mere 74 in 2005 to 2786”, since the CBN began to sell forex directly to BDCs.

Equally worrisome, also, is the CBN’s incredible belated realisation, despite several articles by this writer in various media that BDCs provide a ready conduit for money laundering, round tripping, as well as the funding of unauthorized imports which challenge the competitiveness of local industries. (See Understandably, however, the financial burden being placed on our limited foreign exchange is certainly ‘more disturbing’ according to Emefiele, who revealed that before the recent forex controls, CBN “sold $60,000 to each BDC weekly” making a total of $8.6bn per year.

This stupendous forex provision to the parallel market certainly does not include the equally liberal facility for an unlimited number of Nigerian tourists to access upto $150,000 per annum at official rates with Nigerian debit cards from ATMs abroad, notwithstanding the fact that such facility would inevitably be widely abused by prolific rent seekers. Alarmingly, there is nothing to suggest that manufacturers and other job creating real sector operators enjoyed the same liberal access to forex as those inexplicably pampered operators in the grey areas of the economy. Some critics may describe such unpatriotic policy directions as provocative and retrogressive and deliberately supportive of corruption and rent seeking.

Similarly, in another policy directive, designed to stabilise the forex market, the CBN also lifted its ban on foreign currency cash deposits in commercial banks. However, the ban of forex sale to BDCs would invariably significantly dampen any expectation of substantial dollar inflow into commercial banks from deposits from other autonomous sources. Consequently, surging dollar demand will persist and sooner rather than later the gap between the rate of officially sourced and open market dollar sales will rapidly expand to once more resume a cycle that invariably leads to further Naira devaluation with its related adverse economic and social consequences.

Instructively, however, the release of CBN’s stranglehold monopoly on the forex market, will invariably reduce the persistent self-induced challenge of excess Naira liquidity which overwhelms CBN’s regular auctions of dollar rations, and the Naira exchange rate will become stronger.