How does Naira abuse affect our exchange rate?

These are interesting times, no doubt! Both the citizens and the government are not having it easy. While both continue to blame on who is responsible for the state of the economy, our exchange rate is completely oblivious of the argument and continues to eat away the fabric of our Naira. With the CBN trying to figure out what indices need tinkering to stabilize the exchange rate, one area that has received less attention is the way and manner we handle our currency – The Naira!

A few days ago the CBN, during a sensitization session of all its initiatives in Gombe State, reminded Nigerians that the law prohibiting people from abusing the naira is still subsisting and threatened to punish offenders. What has become common discourse among all concerned, i.e., the CBN on one hand and the general public on the other, is the fact that the relationship between the abuse of the naira and our exchange rate has been put in obscurity. It is seldom discussed as the focus has been on its wider implication on health having to cause allergies, respiratory tract infections and conjunctivitis otherwise known as “Apollo”; cost of production, as it cost a lot to print the notes; opportunity cost, i.e., when funds that should have been used to finance projects are now used to print currency; getting worn out and defaced, and people’s apathy towards worn out notes; national pride, etc.

Unknown to us, amongst these imperatives is the inherent stealthy effect on our foreign exchange reserve and exchange rate. Some people have argued that since the printing is now done in Nigeria as against our previous contractors abroad, the issue of FX should be irrelevant. While I have my position, which I intend to share in this article, I will like to put a few things in perspective.

Firstly, the printing of our currency is done in Nigeria by the Nigerian Security Printing and Minting (NSPM) Plc. This has been so since the 1960s, except for the period it was contracted to foreign firms. A typical currency contains roughly between 70-95 percent cotton, plus other materials like wood fiber, animal glue, aluminum chloride and melamine-formaldehyde resin. The paper currency used for our Naira is not made of wood but cotton and Nigeria is not a known producer or exporter of cotton. This is a major problem as you will soon see. Nigeria is a net importer of textiles. While there are no local records to analyze our international and local cotton trade, a few data available do give an insight.

Secondly, the international cotton market is worth $38 billion. In 2020, Nigeria earned about N32.4 trillion from international trade. About 4.3 percent was attributed to non-oil. No export or import data are available for raw cotton. Meanwhile, in Burkina Faso, about $394 million was earned from exporting raw cotton in 2019. A year 2016 data available to the public show that Nigeria produced about fifty-one thousand metric tonnes of cotton out of which 49 percent was exported and 51 percent consumed locally. In that same year, Nigeria’s production was about 0.2 percent of global production which stood at twenty-four million metric tonnes. This clearly shows that Nigeria is not a cotton-producing nation and that if, per adventure, we were, revenue from that source is highly insignificant. What this then means, is that Nigeria imports processed cotton whenever it is needed and for whatever it is needed. This comes at a cost denominated in Fx!

Thirdly, I have read a few commentaries where people decried government spending on currency printing. For instance, it was widely reported that the government spent the sum of N301 billion to print currency over a period of seven years from 2014 to 2019. That means an average of N43 billion annually or about $120 million converted at N360/$1. The critics had concluded that they had expected the cost to be less, especially when production was now local and no longer foreign. While there are no ready data to examine the cost of printing Naira notes, data related to the USA show that one metric tonne of cotton is used to produce slightly over one million currency bills/notes. With $2 for a kilogramme of cotton in the international market, it may well cost over two billion dollars to buy cotton required to produce about a hundred million dollars, assuming all the bills/notes are $100. It becomes worse for the lower denominations. I am careful not to pull up too many figures, but permit me to use a few that can help underscore my position. To print a $100 bill, America spends 15.5cents while 19.4cents are spent to print a $50 bill. The cost of production does not respect denomination. Currency printing is an expensive venture that should not be toyed with.

However, let me quickly mention here that from my earlier point, where the ingredients of production are purely import-dependent, it might even be cheaper to seed production abroad. Whether we produce locally or abroad, either way, both methods mount significant pressure on our reserves and ultimately the exchange rate. My submission is on the premise that apart from the raw materials of cotton and the likes earlier mentioned, other factors of production of labour may involve imported skills. This is where it becomes everyone’s responsibility to respect the Nigerian currency – Naira.

In 2017, the federal government, through the CBN, enacted a law banning the abuse of the Naira.  In that law, sections 20 and 21 described amongst others, the activities outlawed as:

Hawking the Naira: This happens at parties. All manner of parties, ranging from funerals to weddings. Vendors come with bundles of new Naira notes or “Mint” as we popularly call it, to sell at a discount of between 10 – 20 percent. The old note is usually substituted for the new note at the agreed discount. This is worrisome and nauseating especially when these new notes are rarely available at branches of commercial banks for use when needed. Till date the source of these traded notes begs for revelation.

Spraying of the Naira: This involves the transfer (spraying) of money from the guest to the host at a party. It is usually done during dancing as most celebrants prefer to be handed (sprayed) the cash in this manner. For some, it is a way of showing off the ‘’quality” of their guests, while for others, it is just to “pepper them”. The guest pastes the currency on the forehead, shoulder or any convenient part of the body of the celebrant. Most recently, guests have introduced a bizarre means of spraying the naira by throwing it into the air (in loose packs) and then watching it spread all over the floor as the currency finds its way to the ground, amidst shouts of excitement. This is the greatest disrespect one can do to a nation.

Squeezing of the Naira: This also means rumple. It usually happens between two people who for a certain reason want their transaction to be obscured from public view and knowledge. Transporters and commuters, friends giving out handouts, collections at places of worship are common examples where this is practiced. Despite repeated education and orientation, many have formed the habit and it has become difficult to drop.

Dancing on top of the Naira: This also occurs at parties when guests transfer cash to the celebrant. Guests are seen consciously dropping currency at the feet of the celebrant and coupled with the drops of the loose packet thrown upwards, the floor becomes covered in cash. Both guests and celebrants are then seen dancing on top of our combined national wealth! What a pity!

Writing on the Naira: This involves the conversion of the Naira note to a writing pad. This usually happens when people want to temporarily keep a record or information when they meet in places far from writing materials. Many are seen using the Naira to take addresses, phone numbers, etc. This was popular before the advent of the GSM when everything was manual.

Salvaging the Naira from abuse is every citizen’s responsibility! In fact, it should be added to the civic responsibilities of the Nigerian citizen as enshrined in the constitution. An Act that lacks the motivation to implement, is not sufficient, especially where the penalties have been overtaken by the effluxion of time. The penalty as stipulated in the current CBN Act states that violators would either be imprisoned or pay N50,000 as an option. What is fifty thousand naira to someone with N250,000 to N1,000,000 cash for spraying at a party? Regrettably, members of the law enforcement agencies that are supposed to ensure compliance oversee these actions of abuse.

What other form of validation do perpetrators require when armed forces gaffers, high ranking political persons are present in parties where the Naira is abused recklessly. What does not get measured, they say, does not get done. The federal government, as a matter of urgency and in a bid to defend the Naira, should contract a task force managed by the private sector for the monitoring, prosecuting and enforcement of the provisions of the CBN Act as it affects the abuse of the Naira. While I recommend a further review of the Act, an active monitoring and enforcement strategy may suffice in the interim.

The cost of printing Naira notes, sorting, recycling and eventual discard is a direct hit on the external reserve whether they are printed in Nigeria or not. If the Naira must appreciate, if the external reserve must grow and if the Naira must compete with other major currencies of the world, then, every Nigerian citizen should rise and defend the Naira and not use it in a manner that siphons our common wealth.

___________________________________________________________________

Adolphus Aletor, FCA, MCIB, a banker and finance analyst, is the managing director/CEO, Rigo Microfinance Bank; he can be reached on +2348033410380 (WhatsApp only) or jiyere@yahoo.com