THE rate at which the Nigerian currency is tumbling against international currencies is a real tragedy. Although there has been a consistent decline in the value of the naira in the international market, the last four months have witnessed an unprecedented run, attributed to the floating of the currency by the present administration which decided to allow market forces to define the value of the local currency. In 1984, the dollar exchanged for 80 Kobo, in 2014 it did for N155 and today, it is N1040.
Some Money and Market commentators insist that the Nigerian currency had lost its value a long time ago but the currency retained a semblance of strength because it was either pegged or artificially sustained by the Central Bank of Nigeria which pumped in dollars to stabilise the local currency. Whatever it is, there is no longer any doubt that there is enormous pressure from different socio-economic activities in the country on the United States dollar, and it is likely going to worsen in the last quarter of the year.
This is very likely because a lot of people would want to import goods for the approaching season and taxes will be paid on end-of-year transactions. Secondly, there will be pressure from those returning to school outside the country that would require foreign exchange to pay fees. Academic sessions are beginning and the numbers of people who are going back to school are legion. Thirdly there is a sharp rise now in the number of people who want to leave the country, the Japa syndrome. A good number of them plan to do so at the end of the year, and so there is a surge.
Political activities also put pressure on the dollar as politicians mop up the currency for use in their campaign activities. The approaching off-season election in Kogi, Imo and Bayelsa States is likely going to worsen the current situation. The value of the dollar is rising because there are few dollars and a lot of naira chasing it.
Fundamentally, there is more demand now for petrol and diesel because we are entering the last quarter of the year when there are lots of social activities and we have a lot of hotels needing more volumes of diesel and a lot of people needing more petrol to move around for social events at the end of the year. A lot more are going to be travelling within the country and there are also those travelling outside for Christmas. With the impending mass movements within the country, it means more petrol has to be imported. More contracts would have to be awarded to bring in petrol, which will be done in dollars. Those going overseas need to buy BTA for their travels. The airlines have to purchase more aviation fuel, all in dollars. So there is much pressure on the dollar.
The impact of this humongous rise in dollar value with the naira rising for the first time, since independence, above 1000, is monumental. First, with an increase in importation, the cost of goods and services will go up. The Customs raised import duty calculation risk from 423 to 587 to 771 as the dollar is rising. Now the naira is more than 1000 to a dollar, so the Customs is about to increase the duty rate on a calculation basis. If that happens, it means more duty would be paid on cargo. The more duty paid, the more the cost of goods will rise and eventually passed to the final consumer. Therefore, there is going to be a rise in the cost of goods and services based on importation.
Secondly, the cost of buying fuel overseas is going to rise, because it is the dollar that would be used for the importation. More naira would be used for the dollar. Since the dollar is more expensive, the pump price is going to rise. If that happens, the cost of food as well as services will rise because people will have to move around to buy and sell items. The high cost of doing business will lead to the folding up of many businesses because companies will not be able to afford the dollar at the prevailing rate to buy raw materials and carry other consequential overhead costs. The result will be involuntary unemployment.
The cancellation of the special window for students and medicals in the foreign exchange market means a lot of students might not continue with their education. Also, those who are unable to travel overseas for medical care will face a serious dilemma because they might not be in a position to buy the dollar at preferential rates. There will be an astronomical rise in inflation and the rate of depression might likely increase and so will suicide cases.
Although there are no quick fixes to the monumental challenges that the present government inherited, there does not seem to be enough tactical response to the situation yet. The question then is: has the government put together a team to study this situation? Does the government have a well-defined economic team to decisively look at cross-cutting issues? Although drastic situations require drastic solutions, the government’s insistence that market forces should determine the rate of the exchange at this time is causing dislocations across all the economic and social sectors.
Thursday last week, the CBN restored 43 items it prohibited eight years ago from having access to the official foreign exchange window. Importers of the affected goods are now free to purchase foreign exchange in the country’s foreign exchange market. The items were initially prohibited because they could easily be produced in Nigeria and would conserve foreign exchange. The lifting of the ban is seen as a major step in resolving the current foreign exchange crisis. The move, according to the apex bank is part of efforts to improve liquidity and stability in the market and attract foreign investors into the country. The CBN indicated that as part of its responsibility, it will intervene from time to time to ensure price stability in the country’s FX market.
Now that the apex bank has a new governor, we think that he should be allowed to do his job independently. The CBN Act gives the governor sufficient room to act independently, which is why he cannot be removed by the president except by Senate recommendation. The CBN governor should work with the Bankers Committee and come out with some direct interventions. The CBN and the Bankers Committee, as regulators of the monetary policy could, after proper interrogation of the situation, do the needful to cushion the local currency’s free fall.
Where there is no defined economic team, as it seems at present, the relevant economic ministries should work together with the CBN and the Bankers Committee to come out with a holistic solution to the present predicament which has seriously slowed down economic and social activities across all sectors in the country.
The situation is bad and is likely to get worse. The most embarrassing development at the moment is that letters of credit from Nigerian banks are now being queried by overseas banks who suspect that sufficient cash backing might become an issue. If there are no cashbacks by relevant dollars then the naira is as good as tissue paper. So the bankers committee must meet on this with the CBN governor and advise the president that leaving the matter to market forces cannot be a solution to the foreign exchange challenge.
Although successive governments have been mouthing diversification of the economy, the volatile nature of the oil market more than ever before recommends a serious push for diversification away from over-reliance on crude oil revenue. Domestic refining of the country’s crude oil could offer some relief to the current pressure on the local currency against global trading currencies. We are aware that work is ongoing on the four major refineries in the country to ramp up domestic refining capacity, and so recommend that additional speed in this direction will go a long way.
Also, the International Monetary Fund (IMF) has been on Nigeria’s back for years to remove the fuel subsidy. Now that it has been done, we expect the Bretton Woods institution to help out with some support package for the struggling naira.
We acknowledge the fact that Nigerians in the Diaspora have been making significant contributions to the country’s economy through their remittances back home. With the “favourable” exchange rate of the dollar to naira, this would be a more auspicious time for them to send extra funds to their families at home as the holiday season approaches. It is also a good time for them to try and invest more in Nigeria as such investments could play an important role in rejuvenating the economy.
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