Naira’s structural crisis

The declining fortunes of the Naira have become a dominant theme in debates and policy discussions even among ordinary Nigerians, with unnecessarily complicated and convoluted explanations leading nowhere. With our national currency losing so much in relation to other currencies in such a short time, these concerns are understandable. It would help, however, if we start by asking some basic questions about currency exchange rates and why they matter.

Obviously, if we do not need to buy anything from other countries, or if they are willing to receive our Naira, the question of exchange rate would not arise. It is when we need to trade, as we must in today’s world that we then have to ask how much naira we need to buy their own currency so that we can pay for the goods or services we require from them. The exchange rate (or foreign-exchange rate) is the price at which one currency is bought and sold for another. So, if we exchange 180 Naira for one US Dollar, it means the Dollar is worth 180 of our local currency.

How do we arrive at an appropriate exchange rate? Basically, it is a matter of supply and demand, as well as policy choices. If we produce plenty of the goods and services that they require they pay us in Dollars, Euros or whatever currency we are willing to receive. If we want to buy from them we pay them in the currency they can use to buy more, or to buy something else from some other country. We can receive payment in Naira if we wish, but we soon come to a crisis if we accept Naira back, and then have to import raw materials or machinery, the supplier may insist on the Dollar. They too may accept our paying them in Naira, if there are other things, of sufficient quality and quantity that they like to import from us. So the more goods and services we can supply, efficiently, cheaply and of superior quality, the more we can sell abroad to earn foreign exchange to buy those things we do not have.

The catch is, over the years we are trapped in a structural crisis. We have a development model heavily dependent on imports, and only one major source of foreign exchange. Aside from oil, we do not export enough to earn the forex required to purchase the imported food, clothing, cars and cosmetics we are used to, not to talk of paying for the spare parts, machinery and expertise we need for our agriculture, industry and other sectors. Our saving grace is the Dollars we get from petroleum rents and profit tax. Over 80% of Nigeria’s foreign currency earnings accrue to our governments. The Central Bank of Nigeria collects the Dollars and subsequently exchanges same for Naira which it then issues to the different tiers of government. The Forex still belongs to Nigerians. CBN uses that to facilitate governments, corporate and individual payments and settlements abroad based on how much there is and at a rate that will guarantee continuity. Forget any fiction you hear about the “market” setting the price. The more it has the more flexible and generous it tends to becomes, selling the Dollar at a lower rate. That was what happened when oil prices were high and we accumulated a large reserve, and even paid up our foreign debts.

In the current crisis, with investors, both foreign and local, wanting to move their funds into more convertible and secure currencies, too much Naira was chasing the Dollars that were available. What was coming in was declining with the fall both in oil prices and even in the actual amount of crude petrol exported due to crisis in the Niger Delta. Our aging industries need more and more inputs and spares. Others need better and newer machines. Some of our politicians, top civil servants, consultants and contractors want the latest SUVs, mansions abroad and fat foreign accounts. All these represent Naira chasing Dollars and Euros.

Remittances from abroad have declined. Those who earn foreign exchange prefer to leave it outside. The CBN is the only source of new supply of forex, and it cannot continue this way.

The naira is now, and will remain for some time, in a nose dive. The CBN cannot continue to pump money to stabilise it forever. It must curtail demand, block leakages (read: corruption) and stimulate forex earnings by the real sector.

What is required, at the risk of sounding naive about the ability of this ruling class to pursue any serious developmental vision, is to break the log-jam. Agriculture and industry must begin to generate their own forex. They should be assisted to produce more, better and cheaper. That way they can sell abroad and earn the forex they require for sustaining, equipping and expanding their operations. They also would help reduce what we import and thus lower our demand for this Dollar. We must select dynamic industries with the greatest employment and linkage potentials (e.g. chemicals, iron and steel) and assist them and not waste the limited forex we have in useless products and projects. We should strive to produce most of the raw materials, inputs, machines and spares we need right at home.

By lowering our import requirements and exporting more we should see a strong Naira and enough Dollars and Euros to meet our current needs and future plans. What really matters is how much the naira buys both domestically and abroad. Devaluation may even make our exports attractive. As long as we remain dependent on only one source of foreign exchange, we cannot get out of this mess.