Within the past few days, the Naira has fallen below N400/$1 for the first time since August 2016, expectedly there has been a lot of cheer and excitement and even commendations for the Central Bank of Nigeria (CBN) and the Federal Government (FG). Personally, I do not think it is worth any celebration and if any thing it shows the penchant of the CBN and FG for easy, band -aid solutions for rather complex issues.
So why don’t I agree?
I disagree with this ‘policy’ (if it passes as one) because it is clearly unsustainable. The CBN cannot continue pumping money into the currency market to ‘defend’ the Naira indefinitely especially as revenue from oil sales has declined (is declining )significantly; in January alone, they spent about $1.7 billion doing so and have spent $2.5 billion between February and March for this purpose. How long will this continue?
At this point, it is worth recalling how the exchange rate depreciated from N199/$1 to its current level of N390/$1. The depreciation occurred as a result of the fall in oil prices. Prior to mid- 2014, when oil prices started to fall, oil was trading between the $100 – $120 mark, so Nigeria was awash with dollars gotten from the sale of crude oil. There was sufficient supply of dollars to meet its demand within the country. However, with the over 67% crash in oil prices, the amount of dollars generated from the sale of crude oil fell significantly. This was worsened by the fact that oil production levels in the country also fell due to pipeline vandalisations. The supply of dollars therefore fell significantly relative to its demand and thus the exchange rate shot up to rates averaging N400, at a point it was almost at N500 .
With this is mind, it should be clear that there are only 2 scenarios where the exchange rate can appreciate, that is trend downwards to the N199/$1 mark. The first is if oil prices increase significantly, so that the supply of dollars increases to be able to meet the demand. The second is if we are exporting other good or goods that can provide us with a comparable amount of dollar revenue like oil. It is only under these two scenarios that the appreciation of the Naira can be deemed sustainable to an extent, anything else is just a quick fix.
But we know that these scenarios are yet to occur. First oil is still hovering around the $50 dollar mark and in fact fell below $50 last week for the first time in 2017. Second we are not exporting any good or combination of goods that will provide us with a comparable amount of dollar revenue as oil – oil still accounts for over 90% of our exports. Worse still, we are depleting our limited foreign reserves by constantly intervening in the market rather than engaging it in more productive uses. There is no indication that oil prices are going to rise significantly in the foreseeable future, so why deplete the foreign reserves when there is no clear path to replenishing them?
Even if a miracle does occur and oil prices rise, we still would not have solved the underlying cause of fluctuating exchange rates which is due to our over dependence on oil.
My point is while the CBN’s job at the moment is clearly challenging, they owe it to Nigerians to produce well thought-out and sustainable solutions to problems instead of haphazard quick fixes. Rather than flood the market with dollars whose source is unknown and unsustainable, they should focus their energies on trying to harmonize all the prevailing exchange rates in the country -we have at least 5 (school fees, pilgrimage, Bureau de change etc.) These multiple exchange rates are creating opportunities for round tripping and corruption of a huge magnitude to the detriment of ordinary Nigerians. Worse still, they are a huge disincentive for both local and foreign investors because of the uncertainties they create.
It is only when we have a fairly predictable and relatively unified exchange rate and a consistent monetary policy that we can be able to attract the type of Foreign Direct Investment (FDI) needed to get us out of this economic mess. It is therefore unfortunate that the CBN has rather chosen to engage in activities antithetical to what the country actually needs.
Nigeria is not the only oil – producing country facing an exchange rate crisis. Egypt too is, but rather than follow Nigeria’s path, in November 2016, they decided to actually float their currency and remove currency controls. After the expected initial shocks that are expected i.e rising inflation, inflation is now on a downward trend, rates are converging and Foreign Direct Investment (FDI) and remittances are returning.
There are lot of best practices to learn from countries going through similar problems – ours is not entirely unique by any definition.