Nigeria: Inside story of Naira’s fall


CBN Governor Charlse Soludo

The naira has been taking a beating for some time now, while the US dollar – a low-performer in the international markets – waxes stronger in comparison. Can the naira possibly stage a comeback? What are the forces to help – or stop – that from happening? Weekly Trust sheds some light on the issue.

Every day, long lines of trucks and trailers leave the Lagos sea port to the hinterland laden with goods from foreign lands that would be moved

 through hundreds of kilometres into even the most remotest village in Nigeria to feed the local market and to douse the appetite of consumers for products ranging from refrigerators, television sets, DVD players and electric sockets to shoes, textiles and garments. This supply chain from import to local market is so vast and extensive that even toothpicks, toothbrushes and machetes are among the foreign imports into the local market. It is a lifeline of sorts from countries like China, the United Arab Emirates, the U.S, Britain and countries in the European Union for a country whose local manufacturing sector has long been comatose.

Even though this foreign lifeline has helped prop up Nigeria’s economy and has given it an artificial semblance of activity, the country pays for it through the huge amount of dollars it sends abroad to sustain its addiction. But addictions could be expensive especially if the money that helped sustain the bad habit is no longer available. In Nigeria’s case the sharp fall in oil revenue since the onset of the global economic crisis has meant less dollars accruing to the country. And the withdrawal symptoms? The naira has lost twenty percent in value and the slide has continued, sometimes with the currency falling in value twice within a single day.

“Business has not been good for us these past months since this dollar-and-naira issue started rearing its head,” says Ismaíla Isa, an electronics goods importer at Wuse Market in Abuja. “I have exhausted most of my stock but I’m afraid to travel out and buy because If I import at the current exchange rate and the currency value should improve I would be selling at a huge loss.” Most traders spoken to by Weekly Trust say they are afraid if they import at the current value of the naira to the dollar their goods will lie in their stores without buyers. “Some of the buyers blame us for the high cost of goods, accusing us of wanting to make more profit when in actual fact we are only reacting to the market realities,” says Aisha Mohammed who sells imported jewelry and textile materials in the same market. The uncertainty in the market has led traders to jerk up the prices of their goods, ranging from foodstuffs, merchandise and services, in preparation for the gloomy outlook ahead.

The Central Bank had said the naira will appreciate soon and the outlook is not as gloomy as it is made to look. “With the new reform and our decision to now fund the exchange rate operated by the banks, we believe that the rate will be crashing down very seriously in the days ahead,” Central Bank governor, Chukwuma Soludo, assured after his briefing with the Federal Executive Council. The measures the CBN governor is talking about is the decision of the apex bank to stop supplying dollars to the Bureaux De Change until they shore up their capital base and sanitise their operations. The Central Bank came up with new directives which divide BDCs into category A and B. Category A operators must meet a minimum capital base of N500 million and maintain a mandatory deposit of $200,000 with the CBN. BDCs wanting to operate in that category will also be required to pay a licensing fee of N1 million and an annual renewal fee of N250, 000. Under the new policy, the CBN will now only be selling foreign exchange to class A Bureau De Change and the bank Bureau De Change. “Our first policy is to conserve the hard-earned foreign exchange resources, we cannot do this by selling foreign exchange to road users,” said Soludo while explaining the basis of the new policy

The new directive however saw the naira depreciating further in value as scarcity hit the parallel market where most Nigerians get their dollars from. “People tend to think that we are the cause of this problem but they are wrong as we are also suffering the loss too. We are trying amongst ourselves to see that we can put certain rules because from all indications the CBN seems to have lost control of how to arrest the drowning situation,” says Ibrahim Abdulrazak, Managing Director of I.G.F Bureau De Change. “How can you control something that you do not have, they themselves do not have the dollars to meet up the demands of the people. To be sincere we are not well-organised and only if we get our acts together can we survive this naira fall.”

“Honestly, I don’t think the CBN can be able to control as much dollars as there is in the market,” says Professor of Economics at the Ahmadu Bello University, Mike Kwanashie. “The reality of the Nigerian situation is that there is a high demand for the dollar in the market, but the question is what are they using the dollar for? Their demand for the dollar is not for the productive sector, it is not to sustain the industrial base, it is not to respond adequately to the economic crisis. The demand is rather to meet the need of those who are importing goods into the country. The CBN can try to hold the currency against the dollar but it is going to be difficult in a marginal economy like ours. You cannot blame the CBN for not trying to address the real sector of the economy.”

In a way, the prophecy that weak economies might be the most hit by the current global economic recession is a prediction beginning to come true. Nigeria with a mono economy built on the sale of crude oil has seen its revenue declining at a time when other sectors of the economy are in urgent need of a fix. The CBN governor said “from about July last year, the outflow of foreign exchange has actually outstripped the inflow” where he cited an example where the total inflow for a previous month was “about $800 million while the total inflow this month is about $691 million.”

Says Prof. Kwanashie: “There is a fundamental contradiction in the economy. The best the CBN can do is to continue what it is doing now by strengthening its surveillance of the entire banking system, by watching over the financial market and let’s hope the crisis does not worsen.”

Even now, despite burnt their fingers in the capital market where banks engaged in margin trading, the CBN has to come out and issued serious warnings to the banks not to grant loans to Bureau De Change for the purpose of shoring up their capital base. This is after the CBN got wind of information that some BDC operators are seeking loans from banks to help them recapitalize to meet the new directive of the CBN. “Banks are therefore advised not to grant credit for the purpose of capitalization of the BDCs. Erring banks will be appropriately sanctioned,” the apex bank said in a statement.

It is something of an irony though that some banks are still willing to risk further losses in the market at a time when the economic crisis is really resonating at their doorsteps. This puts to question the efficacy of the new CBN policy that tries to put banks at the centre of the sale of foreign exchange.  The question is have they really outgrown some of their bad habits that put the economy at risk?

But it remains a puzzle how a dollar which should be depreciating because of the massive losses from the American housing market and the credit crunch in the country where the government is bailing out big banks is appreciating against the naira. “Theoretically, the global economic meltdown should have made the naira appreciate against the dollar, but unfortunately what we are witnessing is that the dollar is rising above the naira,” says Hamza Salihu, an economist. “It could mean that more Nigerians are patronizing the dollar maybe to invest in the crashing real estate business in America and Europe with the hope that the meltdown will soon be over. The demand for the dollar is clearly more than the supply. This will affect the value of the naira.”

There are other reasons why the naira is receiving such a serious beating, reasons some economist say is more connected with the economic policy the government has been promoting for years to encourage Foreign Direct Investment to come into the country. “I think what we are witnessing is capital flight from the country,” says Prof. Kwanashie. “I think we are witnessing a situation where people who brought their resources into this country are moving them out. We are witnessing a situation where even Nigerians who hold their wealth in this country are moving them to areas where they believe in a global crisis they will be secured. We ordinarily expect this type of development in a peripheral economy, a weak marginal economy in an attempt to feed themselves on foreign capital and investment. This is a manifest reality of what we are trying to build in the last decade.”

Despite all that what is causing some concern is not just the mistakes made in the past but rather fresh ones that are been made and the almost lukewarm attitude of the Nigerian government to begin to think of a way to redesign the economy of the country, chiefly by weaning it off its dependence on oil. Now, governors of the 36 states in the country are clamouring for the sharing of money kept by the federal government in the excess crude account at a time when they have not been able to come out with concrete and implementable programme about how they hope to protect their populace from the impact of the economic recession. In 2008 what the three tiers of government shared was a whopping N2.9 trillion.

Even though the former Minister of Finance Dr. Ngozi Okonjo-Iweala had advised that the federal government should withdraw $13 billion dollars from the foreign reserve account kept abroad to cushion the hardship of the global economic crisis on the citizens of the country Prof Kwanashie says it is something that is already happening. “I think we are already doing that,” he says. “Because in the last one week our foreign reserve has been declining. We have built up the reserve so that we are able to draw from it in a period of crisis. That is the logic. We should be more concerned with how long the crisis will last than drawing up from the reserve, because if we finish the reserve and the crisis continues what are we going to draw from? The issue is not to draw from the reserve but how best to draw from the reserve, the timing and the sequences, and when do you think the crisis will be over?”

It is a question better answered by the Yar’adua administration and its economic team on the one hand and the state governments who somehow don’t want to wake up from the reality that the oil boom is over and it is now time for some belt-tightening, part of which economists say is the need for the government to step up its fight against corruption so that the little fund available could be utilized to the benefit of the citizens. In a gesture meant to show that it is sensitive to the plight of Nigerians, the federal government and some state governments had announced reductions in the package paid to political office-holders. But critics say that alone will not suffice. “The government needs to step up its fight against corruption,” says the economist, Salihu. “Because most of the money stolen by politicians are been converted to dollars.” Will they listen? If experience is any yardstick to go by, the solution to this crisis is a long way off.

Daily Trust