Why we should worry over naira’s macabre dance? | Independent Newspapers Limited
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Why we should worry over naira’s macabre dance?

Posted: Feb 28, 2016 at 9:18 am   /   by   /   comments (1)

With the naira still crashing at the exchange market after a short lived rebound, there is need to worry about the future of the local currency and what long term strategy government will adopt amidst the hullabaloo of suggestions, advice and policy interventions, writes NICHOLAS UWERUNONYE.


To many, Ifeanyi Ubah, businessman, publisher and philanthropist, is controversy on two legs. So when he challenged President Muhammadu Buhari to task him with the job of stabilizing the local currency at N200 to a dollar in the parallel market, last week, there was understandable uproar in the public. The call by Ubah was a rigid stand against devaluation of the naira at the time a dollar sold at N345. Mainstream policy wonks believe that President Buhari had to officially devalue naira, raising it up from its official N199 to a dollar at the official rate. Others disagree, though. But expectedly, barrage of brickbats were lobbed at Ubah for his seeming effrontery.

He is not even an economist, some said of the business man. Others accused him of seeking patronage from the presidency with the comment. Still others went personal, pointing out at the motley of unproven business and financial malfeasances against him as reasons why he shouldn’t be trusted.

But barely 24 four hours after Ubah’s open challenge, naira rebounded, loosing almost N100 to a dollar to close at N245 on Wednesday. Some attributed the dip in dollar against naira to the ‘Ifeanyi Ubah effect’, albeit wrongly though. Even though the upsurge was fleeting with naira slumping to $358 in the parallel market by Friday last week, the businessman’s prognosis of the money crisis may well offer an explanation and a way out of the money crisis facing the naira and indeed the economic wellbeing of the country.

The currency, like the economy, is suffering a down turn on account of the slump in oil prices in the international market. Nigeria’s economy is sustained by oil revenue mainly. Coupled with export dependent polity with little contribution from the country’s real economic sector, the cost of acquiring dollar to pursue these fancies has been on the high side. But Ubah’s take is that the slump in oil prices regardless, the naira shouldn’t be taking this much of a beating in the exchange market if trends in other oil producing/dependent countries are anything to go by.

“Yes, we have issues with dwindling price of oil. But other countries have it too. Dubai has it, but has its money gone beyond 3.65 to the dollar that it has been in the last 20 years? Is there any other magic they are using? Is their foreign reserve depleting,” asked Ubah rhetorically. Like many who argue against the devaluation of the naira, Ubah believes dollar scarcity is being manipulated to force Buhari’s hand into devaluing the local currency. For many like him, here lies the danger. “There are no clear rules to it because the scarcity is speculation induced,” says Alaba Olusemore, former top banker, fellow, Chartered Institute of Bankers of Nigeria (CIBN). The banker and analyst says that influential players in the money industry, like some commercial banks in cohort with Bureau De Change (BDC) and street currency dealers hoard these currencies and create scarcity so as to force the prices of dollars up.

According to Olusemore, the Federal Government is to blame largely for this trend. “When you restrict access to forex, you must provide policy direction in the areas where such restriction does not apply,” explained the analyst. With the Federal Government in control of the largest forex reserve, there should have been policies meant to stimulate the economy as soon as those restrictions are in place, said Olusemore.

Bismark Rewane, CEO, Financial Derivatives, puts the matter in clearer perspective. “The CBN said it sold $8 billion BDCs in nearly two years but who are the owners of these BDCs? The issue is if you are a manufacturer and you get dollar at N197 from the CBN to import raw materials. There are two decisions to make.  Manufacture the goods and sell as if you bought dollar at N310 to a dollar because of the wide gap between the official and parallel market rates, or open a Letter of Credit and refuse to import. Then roundtrip the money and make 50 percent outright profit,” he said.

Until last Friday when President Buhari convened a national economic summit, it was apparent to many that there was clear absence of direction in the economic front in the country.

These, for other pundits, necessitated the clamour for Buhari to devalue naira. For experts who believe in this course of action, the forces of demand and supply are at play here. Simply put, if demand for the dollar increases in Nigeria, it becomes more expensive to buy because the demand will create the scarcity. Also, if the supply of dollars reduces, even if demand for it stays the same, a scarcity will occur, which will lead to a rise in the price of the dollar. In 2015, the official price for buying $1 was roughly N200. At this price, Central Bank of Nigeria said that the demand for and supply of dollars is at an equilibrium, that is, the point at which demand and supply of a product are equal.

But things have since happened since then to make the local currency lose its value. First, oil prices crashed. As a result, says National Bureau of Statistics (NBS) by quarter three of last year, lost $50 billion in oil revenue. Secondly, non-oil exports are struggling. Between 2014 and 2015, non-oil exports dropped from $10.5 billion to $4.4 billion. Thirdly, foreign investment is also shrinking. According to NBS, the country lost an estimated 53.53 percent in foreign investment the same year under review. The combination of these events means foreign exchange supply in Nigeria has dropped by over $60 billion in one year.

Akin Oyebode, economist and policy analyst, says that with such huge loss in revenue profile, naira cannot simply retain its value. “If the naira is over-valued, exporters don’t have an incentive to bring their foreign currency proceeds into Nigeria,” he said. Oyebode and Rewane say that there is need to weaken naira. “We know that the president means well in not supporting the devaluation of naira,” says Oyebode, but he argues that the benefit of a weaker naira outweighs the drawbacks. “A weaker naira also makes local goods and services more attractive. While Nigeria might not be a major exporting nation, we must not ignore the large domestic market. When a country’s currency weakens, it will inevitably increase the price of imported goods, which will force most people to look for domestic alternatives. A weaker naira might be bad for those looking to import Honda and Toyota cars, but it will certainly make more Nigerians buy Innoson vehicles. Instead of spending months negotiating lopsided trade agreements, Nigeria can use its exchange rate policy to drive a coordinated trade agenda that makes domestic products more attractive, without adjusting import tariffs,” the economist said. But President Buhari does not see their point of view, and perhaps for good reason.

With a high rate of unemployment and underemployment in the country, Mr President understands that the spending power of the average Nigerian is essentially low. President Buhari, say his confidants, agonizes over the crushing effect the measure will have on the common man, albeit on the short term.

But economic wonks insist that the country must make hard choices that have long term benefits. Rewane said naira devaluation is the answer to Nigeria’s economic woes. The economist said there is a big difference between economic drama and reality, adding that people denying the need for devaluation are same people that keep stealing from the people. He said those who want the naira not to be devalued should remember that it is all about competitiveness, adding that the local currency can also appreciate if things are done rightly.