The Buffeted Naira

 By Luke Onyekakeyah

The recent announcement by the Central Bank of Nigeria (CBN) on the introduction of newly redesigned N200, N500 and N1, 000 banknotes, has political and economic implications. Like a thunderbolt, the move has jolted many people, particularly, politicians who promote money politics. Those who have amassed naira and dollar waiting for the forthcoming elections are biting their fingers.

The move is a masterstroke against corrupt politicians, who have hoarded huge sums of money for vote buying during the 2023 general elections. By redesigning the naira and releasing it barely a month to the elections, the CBN may have played the trump card to frustrate all the permutations by politicians who banked on the hoarded naira. That way, the CBN may have contributed to the country having a more credible election in 2023.

But the economic fallout is more far-reaching. The dramatic intervention in the fortunes of the buffeted and battered naira may serve as the last straw that breaks the camel’s back. Before now, the CBN had applied several interventionist measures on the naira in an attempt to boost the currency’s strength but all to no avail.

The measures include implementing floating exchange rates, moving away from pegged rates, monetary policy that allows for trading with the market, government policies to attract foreign investment, and the country purchasing its own currency. But the naira still remains on a free-fall.

To keep the pegged foreign exchange rate stable, the government must hold large reserves of the currency to which its currency is pegged to control changes in supply and demand.

Unfortunately, the foreign reserves, which gives the CBN the power to defend the naira, reportedly declined by 5.47 percent to $38.28 billion on September 29, 2022 from $40.50 billion at the end of last year.

The latest intervention would likely make no difference. Before it is launched, it has pushed the naira to N850/$ in the black market. There is fear that if nothing is done to halt the speedy downward spinning, the naira would in a matter of weeks cross the N1000 bar to the dollar and the crisis would escalate from there. That would spell more crisis for the economy.

The reasons for the collapse of the naira include improper valuations or pegging of the naira, chronic low growth and inflation. Currency collapses are caused by a lack of faith in the stability or usefulness of money—either as a way to store value or as a medium of exchange. A situation where people purchase and hoard dollar in preference to the naira is injurious to naira. People have more faith in the dollar than in the naira.

The question as to whether it is good to have a strong currency is pertinent. There are both pros and cons to having a strong currency. Pundits say it depends on the country’s trade balance. Net importers like Nigeria will prefer to keep their currency strong, since it will make their imports cheaper, while net exporters like Japan tend to benefit from a weaker local currency, as it makes their exports more profitable.

Again, it depends on the productive capacity of the economy. I have said in this column before that no amount of financial engineering or tinkering would strengthen the naira outside a buoyant economy that is powered by industrial and agricultural productivity. Without a strong productive base like in the 60, 70s and 80s, there would be no back-bone for the naira, and as such it would continue to fall with nothing to wedge it.

It is unfortunate that rather than put heads together to come up with a proactive strategy to revamp the economy as a basis for revamping the naira, the economic planners appear to concentrate on dishing out policies that provide ad-hoc remedy to the naira predicament. I must appreciate the fact that the country is in a quasi state of war that has made life unbearable to the people due to the ravaging state of insecurity. Consequently, there can be no stable and sustainable economic plan that would work. We need stability for economic plans to work.

For instance, the CBN’s Anchor Borrowers Programme (ABP), was designed to provide loans (in kind and cash) to smallholder farmers to boost agricultural production, create jobs, reduce food import bill and thereby create economic linkages between smallholder farmers and processors with a view to increasing agricultural output and ensuring food price stability. That is a laudable intervention that has the capacity to leverage the economy through sponsored agricultural productivity.

But the programme has since run into troubled waters, for no sooner was the programme launched and farmers took the loans and planted crops than bandits, herdsmen and terrorists operating in the North-west and North-east launched attacks on the helpless farmers and destroyed crops, leaving the farmers frustrated with huge loses. The result is that many of the farmers could no longer repay their loans and that has left the programme in quandary. The expected economic benefits that would have been derived from the progrmme have gone down the drain.

One way to make the naira strong is through increasing terms of trade in which there is greater demand for the Nigeria’s exports. This, in turn would result in increasing revenues from exports, which would boost the demand for the naira and an increase in the currency’s value. Unfortunately, nothing is being exported except what is left of the crude oil that is being stolen. No agricultural or industrial products are exported and as such the naira can’t be strong no matter what.

The persistent free-fall of the naira is an indication that none of the interventions being applied has worked. Otherwise, there would have been some respite for the beleaguered naira, even minimally. The latest move is being interpreted by pundits to mark the beginning of a broader currency census and the mop up of black money. But are these the main problems facing the naira?

Nigeria is an import dependent economy, which requires foreign exchange availability to function. While there is nothing wrong in trying to retune the economy to be inward-looking, the feat cannot be accomplished overnight by executive fiat. A strategic return to agricultural and industrial productivity is the only solution to the naira mess. The naira should be supported with foreign exchange earned through export of industrial and agricultural goods. The current import dependent economy is suicidal.

Dr. Onyekakeyah is a commentator on public issues