OPINION

Crashing value of the naira – Causes and solutions By NICK AGULE

Introduction

During the last week, news broke that Operatives of the Economic and Financial Crimes Commission (EFCC) raided Wuse Zone 4 where most bureau de change operators in Abuja run their businesses. It was further reported that sources at the EFCC gave reasons for the raid as:

“We (EFCC) are working on intelligence that some forces with massive naira inflow have mobilised resources and, are busy buying up available foreign currencies especially the US Dollar, to either hoard or smuggle the same out of Nigeria.”

This ignominious action by the EFCC comes after the Central Bank of Nigeria (CBN) infamously accused an online exchange rates platform (AbokiFx) as being responsible for the crashing value of the naira.

CBN and Nigerian currencies.

Nigerian Government Chasing Shadows!

A currency is a commodity, and its price depends on the forces of demand and supply. And often that price is not dependent on the value of the commodity or its importance to human life but rather on its availability. So, water is more valuable to life than gold but the price of water is far less than gold because water is more plentifully available, like you can see water for free in River Benue but not so for gold! (this is what economists call the paradox of value). So anytime a commodity becomes scarce, its price tends to rise and that is precisely what is happening to the dollar.

A few years ago, for those with naira who wanted to buy the dollar, the price of a single dollar note was N150. Today the price of the same single dollar has risen to over N700. The price of the dollar is said to be rising or gaining strength against the naira as you need a lot more naira today to buy a single dollar. Conversely, the value of the naira has been crashing because a few years ago, those with dollars who wanted to buy the naira got N150 for every dollar they sold. Today, the same dollar fetches them N700. The value (price) of the naira is therefore said to be falling as you can buy a lot more naira today with the same single dollar. This is how the foreign exchange (forex) markets work.

In the forex market in Nigeria today, there are more buyers of the dollar than buyers of the naira so even if angels fall from heaven, they will not help the naira rise against the dollar! The ONLY thing that will lift the naira is if Nigeria reverses the trend such that those with dollars looking to buy the naira are more in the forex market than those with naira looking to buy the dollar! And the ONLY way to reverse the trend to have more naira buyers than dollar buyers in the forex market is for Nigeria to produce goods and services. When Nigeria begins massive production of goods and services for both the domestic and export markets, two things will happen to help the naira gain strength against the dollar:

1 Since Nigeria will be consuming goods and services produced locally, there will be no need for importation. Once importation is curtailed, there will be no need for holders of the naira to buy the dollar again. For example, we currently sell petrol in naira and the naira is used to buy dollars to enable us import petrol. If our refineries are producing petrol locally, it will be sold in naira and there will be no need to buy the dollar to import petrol. The same effect will happen if we raise the standards of our schools and hospitals so that instead of people with naira looking to buy the dollar and pay fees/other costs and hospital bills abroad, they will simply use the naira to pay for the services in Nigeria.

2 As we begin to produce goods and services locally, foreign buyers will bring in dollars to buy the naira and pay for our goods and services which they will export. The trend will be reversed because it will be the dollar now looking for naira and thus the naira will begin to gain strength against the dollar. So, like in the example above, if our refineries are producing enough products for local consumption and a balance for export, foreign buyers will bring in dollars, buy the naira and pay for our petroleum products. Same will be the case for foreigners who bring in the dollar to buy the naira to pay school fees/other costs and medical bills to our functional world-class schools and hospitals.

How the Naira will gain strength

The naira will gain strength if Nigeria breaks from a consumption economy to a production economy. And the ways this will happen are as follows:

1 Power Supply – electricity is the lifeblood to any modern 21st century industrial age economy. By global standards, an industrial economy needs 1,000MW of electricity for every 1 million people to operate optimally. Nigeria therefore by global standards needs 200,000MW of electricity for optimal production but the economy is practically starved with only 3,000MW made available. There is no industrial age economy that will grow this such an abysmal power supply! 3,000MW should be electricity for only the FCT! Our contemporaries Brazil is supply 150,000MW for 215 million people and India is doing 400,000MW for 1.4 billion people, not up to global standards but much more than the abysmal 3,000MW Nigeria is supplying! So that first and most sustainable way to strengthen the value of the naira is to provide the economy with electricity simple!

2 The Central Bank must stop printing money – news broke a few weeks ago that the Federal Government’s total borrowing from the Central Bank of Nigeria through Ways and Means Advances (aka printing of money) rose from N17.46tn as of December 2021 to N19.01tn as of April 2022. This is what is substantially causing the “massive naira inflow” according to the EFCC which is distorting the forex market because the printed naira finds its way into the forex market. There are even allegations that government officials no longer accept naira in kickbacks/bribes and demand dollars from people who are left with no choices than to approach the forex market.

3 The Central Bank to stop the dual forex market – by creating a dual market – the so-called official market and the parallel market (also known as the black market), the central bank has created a rent-seeking platform that feeds the roundtripping of dollars procured in the official market at N400+ and sold in the parallel market at N700+. The CBN has created a spread of over N300 to fuel arbitrage between the two markets.

4 Increase dollar supply – the Nigerian economy is starved of dollars because the state of insecurity means foreign direct investment (FDI) is no longer coming in as before. Also, the NNPC is no longer dropping dollars from crude sales into the federation account because the entire proceeds of crude sales are paid to suppliers of petroleum products. Diaspora remittances have also suffered decline due to Covid and the war in Ukraine that is pressuring family incomes globally. The CBN therefore has no more dollars to pump into the forex market to support that naira leading to its free fall. Only an increase in dollar supply to the Nigerian economy will reverse this trend.

There are other ways to shore up the value of the naira but the above are the main ones and lack of space limits the full disclosure of all the ways.

Conclusions:

Bottomline is that production of goods and services is the only way the naira will be restored as a convertible currency and appreciate to even N1 to a dollar or become stronger than the dollar as it was the case in the years past. Banning AbokiFx, raiding bureau the change, blaming exporters who don’t repatriate proceeds, blaming the NNPC for non-remittances of crude sales etc. will never stop the value of the naira from crashing! Only production of goods and services will!

References:
https://guardian.ng/news/efcc-raids-abuja-bureau-de-change-operators-over-dollar-scarcity/
https://punchng.com/fgs-borrowing-from-cbn-hits-n19tn-inflation-may-worsen-report/

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