On predicting one thousand naira will exchange for a dollar in my first venture as a columnist in August 2021, and the prediction coming to pass within the given time frame of two to three years, I am flummoxed that the dollar is approaching two thousand naira this time within a year! When the window between the CBN rate and parallel market was collapsed in 1999, the CBN rate was twenty-two to the dollar and the parallel market was eighty. The naira did not lapse into free fall as we experience today. What could be different?
Things are not much different from 1999, as back then, foreign reserves were very low-$3bn-after being crashed from a high of $12bn within ten months of former Head of State General Abdulsallam. Also hanging around the nation’s neck was a debt of 33bn dollars, higher than what it is today when gdp is factored into the equation. Yet the naira never went into free fall as we are experiencing. Today’s free fall is being blamed on street traders and speculators, including those refusing to hold naira as a store of wealth.
Where there no speculators then or were they less pernicious? Speculators and speculation are part of economic activities and blaming them is seeking out straw men or red herrings. Here is a summary of roles speculators play in an economy: price discovery, liquidity provision, efficient capital allocation, and pioneering new sectors. One of the roles is telling governments they don’t know what they are doing by betting against national currencies which speculators perceive have underlying weaknesses no matter what the Governor of a Central Bank or Chancellor of the Exchequer says in trying to calm economic waters.
With this in mind George Soros took a position against the pound sterling in 1992. Believing the Sterling was overvalued he undercut it, and walked away with a billion dollars while the Bank of England had to capitulate. Soros went after the Malaysian Ringgit in 1997 forcing the Malaysian authorities to devalue the Ringgit. Speculators are in the mould of Soros and are more financially literate than the average policy maker or bureaucrat. Meaning, making straw men of them is not going to fly. If as Emefiele did, you want to fight them, this time around attend to the fundamentals that anchor a country’s currency just as the Malaysians later did.
What fundamentals are speculators banking on that they are willing to pay two thousand naira for a dollar? I believe it is the inadequacy of the nation’s foreign reserves that is said to stand at around $33 billion.. Unfortunately, this figure is misleading, as unencumbered foreign reserves is really below $20 billion dollars after allowance is made for loans taken on by CBN using the foreign reserves as collateral.
How many months imports into Nigeria would a $20 billion or less reserve fund? Between three and four months, considering Nigeria’s average montly import was $5 billion in 2022. This is lower than the six months imports considered a comfortable cover for imports in an economy as ours where extraneous factors like an oil price crash occur regularly.
The nation’s ability to replenish its reserves is also compromised. Oil theft continues unabated in the Niger Delta and the dollars for the oil so lifted has been received in what is called ‘futures’. Remittances, FDIs and FPIs that supported our reserves in the past are all headed south in. I wish someone will point me to some favourable news on increasing our reserves.
From the lows of 3 billion dollars in 1999 Nigeria grew its reserves to a height of $65 billion between 2008 and 2011. This was the period the naira remained stable, until the profligacy of 2012 to 2014 took over, rather than our reserves growing with $100 oil, it started to decline until it reached a low of $28 billion in 2016 and volatility returned to the naira. Therefore, we see a direct relationship between the reserves and whatever is happening to the naira vis-a-vis the dollar.
This is what is missing in all actions taken by the CBN, our reserves isn’t growing, period. Messrs Yemi Cardoso and Wale Edun should get our reserves growing and see whether the naira will not stabilise. Mere financial engineering cannot achieve this, as it is gesticulation to the speculators and to those who have resorted to the dollar rather than naira as store of value. Nothing more than the fisticuffs Emefiele engaged in. Unfortunately, the latter class of value seekers are on the increase adding pressure on the dollar because it is perceived by many as the wiser thing to do. And isn’t it? When half your naira holdings in wealth is wiped away in months with no end in sight.
Some have argued that the reason for the sinking of the naira, is in the manner the market harmonisation was done. A form of gradualism should have been better, this is couched under what is termed ‘managed float’. But when did gradualism ever work in allowing the inadequate supply of dollars determine the value of the naira. Gradualism was in play in the Babangida years as we moved from one acronym to another. Here is a list of them: SFEM, AFEM,-my memory fails me-yet the naira continued to depreciate. Slow motion gradualism was the order of the day in the Emefiele era. Forex management moved from multiple exchange rates to Import Export (IE) window to NAFEM. Yet, the naira lost five times its value in eight years of Buhari and Emefiele. This can be viewed against the loss of just 100 percent of its value in the sixteen years after the float of the naira in 1999.
This much I agree with the gradualist. The naira, after being floated is sinking but I disagree with the methodology of saving it because the lifeguard to save it, the CBN, is also drowning, and they had earlier fitted the naira with holey life jackets as well, read printed excessive naira. The CBN does not have the strength nor ammunition to save the naira.
I am yet to read the CBN tell the streets what they are doing to meaningfully lift our reserves. They have set no goals for it therefore no methodology to achieve such a goal. Payment of NNPLC proceeds into coffers of CBN should be a step in beefing up reserves but such a move is not enough. Alongside it and the increasing inflows of remittances, FDIs, and FPIs should be new sources of forex inflow as we can’t continue to depend on these old sources.
As the saying goes, the devil is in the detail. Counter balancing this saying is the fact that immense opportunities lie in lifting Nigeria’s forex reserves to the region of a hundred billion dollars in the mid term. Invariably, jobless Nigerians would have to be mobilised in most sectors of the economy to achieve this target. A wise cracker might say, “one hundred billion reserves is not feasible”. To this I say, why has Emefiele’s Road to 200BN dollars program, that should be in it’s third year, been put in abeyance? Not a word about it. This is the only program Emefiele, in his nine years in offic, put in place that could increase our reserves immensely by increasing non-oil exports from $5 billion annually to $50 billion, yet it was abandoned with no replacement. Why wouldn’t naira race to two thousand to a dollar.
A repeat of history might also be playing out . In 1999 there was a four fold correction. Could this be playing out in 2023 when official rate was 450 naira to the dollar and a a four fold correction, would put the naira to dollar at 1800. A nation that refuses to learn from the past is condemned to repeating its mistakes. Malaysia learnt from its mistakes of the 1997 Asian financial crisis and has not experienced a currency crisis thereafter. The same can’t be said of Nigeria.
Dr Olugbenga Jaiyesimi jerry3jaiye@gmail.com
