Worries over naira’s declining fortunes

The unprecedented decline in the value of the naira against other foreign currencies in recent times remains a source of growing concern to many who fear this development may have rippled adverse effect on the economy. In this report, Ibrahim Apekhade Yusuf and Charles Okonji examine the issues

 

TO think that at some point in time, the value of the naira, Nigeria’s legal tender, used to be a source of joy, especially when compared to other foreign currencies is as incredible as it is heartwarming. But not anymore.

One way to have a better understanding of how the value of the naira has diminished is to go outside the country.

In 2013, when our correspondent first visited South Africa and he attempted to exchange the naira on arrival at the O.R Tambo International Airport, Johannesburg, the attendant said the naira was not amongst the choice currencies in demand like the West African CFA franc, a currency used across eight independent states in West Africa: Benin, Burkina Faso, Guinea-Bissau, Ivory Coast, Mali, Niger, Senegal and Togo respectively just as the Central African CFA franc, the medium of exchange for Cameroon, Chad, the Central African Republic, the Republic of Congo, Equatorial Guinea, and Gabon is accepted in the late Madiba country.

Lamentably, between 2013 till date, the naira’s fortunes has further declined with most African countries within and outside the sub-region not willing to touch it with a ten foot pole!

Reality bites

It is instructive to note that some of the highest currencies in Africa are from nations that have a wealth of commodities. So, their currencies are strong because of the price increases in their commodities. African currency rates are only strong when their values are worth more than that of other countries. Having a strong currency means it becomes cheaper to import goods. It also means it is trading at historically higher levels than before. When a country’s medium of exchange is strong, it reduces its volatility in the forex market.

The way the cookie crumbles

As has been noted, the naira has had a free fall in recent times, a development, not unconnected with forex racketeering by some unscrupulous persons.

Naira vs others

The naira has fallen by 108 per cent against the CFA in the past five years as the latter rallies to wipe out the hitherto wide trading gap between the two currencies.

According to data sourced from the CBN, CFA gained 36 kobo from August 19, 2015 to close at 0.6888 CFA/N1 on the CBN rate last week. This translates to a 108-per cent loss for the struggling naira.

Further analysis shows that the naira, unlike the past five years, held firmer against the now-aggressive CFA in the first half of the decade reviewed. The naira closed at approximately 29 kobo for one CFA on August 21, 2010. It maintained its market dominance until 2013, when it started a gradual easing.

It was not until 2015 when CFA began to take a spot as a competitive currency and started an aggressive rally that would remarkably close the previous wide differential between the two currencies. Between August 2015 and August 2016, the naira lost about 69 percent against CFA year-on-year.

Within 12 months, the naira lost about 23 kobo to CFA, a currency that symbolises French economic imprint on the West Africa sub-region. The currency has recorded a similar leap in its value appreciation against the naira year-to-date, climbing from 0.5228/N1 it opened the year with to 0.6888 /N1 (translating to 32 percent) at the close of last week’s trading.

A weakening exchange rate against CFA means it is cheaper for citizens of the eight neighbouring countries to import from Nigeria and it is more expensive for Nigerian traders to do business in those countries.

But while the cost of importing from those countries is on the increase with an average Nigerian household feeling the pains, the country does not seem to gain much in terms of export injections into Benin, Togo and others in the category.

The West Africa region, for instance, accounted for just 11.5 percent of the country’s total export value in 2019, which the National Bureau of Statistics (NBS) put at N19.2 trillion. Nigeria was not also among Beninoise top 10 import sources last year. The only two of Africa’s countries that made the list dominated by Europe and Asia were Togo, its neighbour, and Morocco.

Benin, topmost Nigeria’s smuggling source, procured 13.6 percent and 11 percent of its last year imports from India and China respectively. Much of the imported goods were passed on to Nigeria through the porous borders – a trade practice many experts have blamed for the country’s troubled real sector.

It may be recalled that the federal government, last year, closed the country’s land borders against Benin, Chad and Niger as a major strategy to battle insecurity and dumping – twin challenges that have stunted growth in recent times.

Unofficial trade between Nigeria and Benin is a major factor deciding the country (Nigeria)’s food price inflation. The price of rice experienced a spark last year, few weeks after the government announced the border closure. The price has thus increased by around 100 percent in the past year.

The CBN had last week sold the pound above N500, as naira continues to battle major headwinds. For the first time, the CBN on Wednesday sold a pound for N501.98 and quoted N500.659 as its buying rate. At the parallel market, the currency is going for as much as N600. With the official rate hitting and surpassing N500 before the naira gained a momentary respite on Thursday, a new yardstick may have been set at the foreign exchange market

The naira has faced daunting challenges since the beginning of the year. The apex bank’s plan to converge the rates has faced serious scrutiny.

Stakeholders’ viewpoints

To a school of thought, the CBN should take the blame for the misfortunes of the local currency for encouraging three separate exchange windows, including the CBN rate, bank rate, and the BDCs rate. This development, Wale Akinbiyi submits is the major reason the value of the naira has remained relatively unstable.

In the view of Mr. Lawrence Agboola Jompe, Managing Director, Victleo Investments Limited &Financial Consultant, the rejection of the Naira by African countries is not a surprise as Nigeria is not producing. “If you are not producing, you cannot export and if you don’t export, how do you expect to have a positive balance of trade. Again with the border closure, our neighbouring countries that used to buy some commodities and petroleum products from Nigeria could not do so any more, so they don’t need Naira for anything,” Jompe noted.

Pressed further, Jompe said, “The double standards in the exchange rates is another problem of the Naira, in a situation whereby the CBN official exchange rate is N380, and the parallel market is N480, this will encourage round tripping and it is not healthy for the Naira, because the privileged would get dollar from the CBN at the official rate and sell at the parallel market for over N480. This is bad. All the odds are against Naira.”

When there is a rising inflation, there will be general price instability and when there is general price instability, coupled with unhealthy balance of payment due to the drop in the price of crude oil, and Covid-19 pandemic, Nigerian earnings dwindled. The continuous fall in the price of crude oil has greatly affected the country’s balance of payment position. This became so intense on the Naira because we import almost everything, including tooth-pick, he noted.

“If you are an import-dependent country, the exchange rate of your currency would go up, which is what has happened to Nigeria. The implication is that when you are holding Naira at N380 per dollar today, by tomorrow it may have loss value to become over N480 per dollar which means that you are losing value per day. This leads to loss of confidence in such a currency. Nobody would want to hold such currency, because it is not useful for store of value, which is one of the functions of money.”

CBN trump card

Worried by the negative showing of the naira, the apex bank issued a directive during the bi-monthly virtual meeting of the Bankers’ Committee, which came barely 24 hours after the Bank announced the abolition of third-party “Form M” payment.

Thus as part of the CBN effort to increase foreign exchange liquidity in the country it directed all banks in the country to submit the names, addresses and Bank Verification Numbers (BVN) of exporters that have defaulted in repatriating their exports proceeds, for further action.

Specifically, the CBN Governor, Mr. Godwin Emefiele, had last Tuesday, adopted the strategy to discourage over-invoicing, which some businesses have allegedly used to divert foreign exchange from the country, through the opening of “Forms M” for which payment are routed through a buying company, agent, or other third parties.

It will be recalled that the CBN, in the past, had also warned exporters conducting export activity against diverting foreign exchange from the export proceeds, instead of repatriating same home.

The Bank, in collaboration with the Bankers’ Committee, had threatened heavy sanctions against exporters who failed to repatriate foreign exchange proceeds from their international business. The CBN stressed that its Foreign Exchange Manual provided that all exporters should repatriate export proceeds back to the country to support the local currency and boost the economy.

Way forward

In the view of analysts, until the factors that caused loss in the value of the Naira are handled, the loss of value will persist.

To address the causal factors, the economy has to increase production, import less and ramp up local production. These are the controllable factors that can revamp the economy, analysts noted.

While acknowledging the fact that factor such as oil price volatility may impede the nation’s balance of payment position, analysts stressed that there is need to diversify the economy away from oil.

“But apart from depending on crude oil, we have to expand our export. There are many things exportable in the country that could be focused on to earn more foreign exchange. Look at all the solid minerals illegally mined in Zamfara and all the proceeds do not come into the coffers of the federal government,” Jompe emphasised.

Return of the BDCs

In a move to strengthen the naira, the CBN has hinted of plans to resume dollar sales to Bureau De Change (BDC) operators on September 7.

The BDCs are to get $10,000 twice weekly. They are to fund their naira accounts with the dollar equivalent.

In a statement, CBN Director, Trade and Exchange Department, Dr Ozoemena Nnaji, said: “As part of efforts to enhance accessibility of foreign exchange particularly to travelers following the announcement of the limited resumption of international flights by the Honorable Minister of aviation commenting with Abuja and Lagos, the Central Bank of Nigeria hereby wishes to inform the general public that gradual sales of foreign exchange to licensed bureaux de change operators will commence on September 7.”

Besides, the CBN also announced the applicable exchange rate for the disbursement of International Monetary Transfer Operators (IMTOs) proceeds as IMTOs to banks, N382 to dollar; banks to can, N383 to dollar, CBN to BDCs, N384 to dollar and BDCs to end users not more than N386 to dollar.

The absence of the BDCs in the market led to rise in naira volatility, with the local currency exchanging at N379/$ at the official market. The naira exchanged yesterday at N477 to dollar at the parallel market.

The CBN suspended the sales of foreign currency to BDCs on March 27.

This follows the request made by the Association of Bureau De Change Operators of Nigeria (ABCON) for the CBN to grant them holiday as a measure to control the spread of the Coronavirus outbreak. The suspension has not been lifted since then.

However, this does not affect dollar transactions in the Investors & Exporters (I&E) window. Thus, portfolio investors, as well as businesses that still require FX for foreign transactions settlement, can access the I&E window. Several businesses currently operate minimal activities as major commercial hubs maintain restrictions in a bid to control the spread of COVID-19.

Nnaji said the purchase of foreign exchange (forex) by BDCs shall be on Mondays and Wednesdays in the first instance. The operators are to ensure their accounts with the banks are duly funded, with equivalent naira proceeds on Fridays and Tuesdays.

Speaking on the new policy, President, Association of Bureaux De Change Operators of Nigeria (ABCON), Alhaji Aminu Gwadabe, said: “It is indeed a welcome development that will strengthen the naira as BDCs remain potent monetary instrument in boosting foreign currency liquidity in the economy.

He said the funds will help support the naira restoring its dwindling fortune in the market. “I, therefore, urge all our members to live up to the responsibility and justify the confidence of the CBN and our terming clients for return to sanity in the market.”

 

 

 

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