It is indeed vacuous to posit that the progress of an economy is not necessarily a function of the strength of its national currency. This position, unfortunately, usually forms the backdrop of the postulations and pontifications of most economists on the growth and development of an economy. Yet, the weaker the currency of a country is, relative to other (trading) currencies, the weaker its economy is likely to be, all things being equal. In other words, the real strength of any currency is its value relative to currencies of other (trading) nations: that is, the exchange rate of that particular currency.
In Nigeria of today, it is no longer news that our national currency (the Naira) has lost much of its strength (value) vis-à -vis most foreign (trading) currencies (especially the dollar) in the past few months. Fifty years ago (1973) at the inception of the Naira, it was stronger than the British Pound Sterling, the U.S. dollar and most other currencies across the globe. In course of time, however, Nigeria’s economic vicissitudes and vulnerabilities saw the national currency consistently losing strength (value) against other currencies. But while it is true to assert that the fate of the Naira has been attributable to endogenous and exogenous variables, its present lingering weakness is largely a function of recent policies.
Now, let us run through some of the recent economic/fiscal/monetary policies, seriatim; and try to explore their impact on the strength or otherwise of the Naira. First was the removal of the fuel subsidy by end-May which ripples shot up the prices of all goods and services sky high. This gave a push to an unprecedented hyper-inflationary trend; with the rate standing at about 27 percent as at end-September 2023, the highest level in about two decades. Surprisingly, soon after the subsidy removal, the government coerced the Central Bank of Nigeria (CBN) to float the Naira. And effective June 14, 2023, the national currency was fully floated — meaning, literally, being thrown into the same ‘boxing ring’ with the Dollar, the Pound Sterling, the Euro and other hard currencies.
This singular policy practically amounted to an ‘instant death’ for the Naira, for a day or two after the floatation, its exchange rate against the dollar (official) collapsed from N465/$ (as at May ending) to over N700/$. From then on, the Naira has literally been on a tailspin, whether in the official or parallel (black) segment of the foreign exchange (FX) market. By end-September to mid-October, 2023, the Naira exchange rate had hit or surpassed N1200/US$ (in the black market) and once crossed N900/US$ in the official FX market.
Unfortunately, rather than interrogating the new policies that are collapsing the Naira value, the government has gone ahead to initiate kindred measures that are further ‘sinking’ the local currency. For instance, in trying to deal with shortage of Premium Motor Spirit (PMS) consequent upon subsidy removal, the government elected to issue more import licenses for importation of the product. Naturally, these new licensees moved to source dollars from the ‘already stretched’ FX market, where demand for dollars far outstrips supply. This additional pressure has been helping in devaluing the Naira to no end; this is because while dollar demand is piling up, supply of the green back is almost static/inelastic.
Again, apparently in a move to implement a set of predetermined policies, the new leadership of the CBN under Governor Olayemi Cardoso dug into the past to find some policies to reverse. It came across the list of 43 items whose importers had been denied access to FX through the official window by the apex bank since 2015 — eight long years ago! Truly, in 2015, the CBN took steps to implement the import-substitution industrialisation strategy — by encouraging the local production of some items. These were mainly light technology items, including toothpicks, matches, vegetable oils, toilet soaps, etc.
As expected or intended, many investors went into the local manufacturing of many of those (43) items; others embarked on backward integration to source most of their raw materials and inputs locally. These, obviously, have helped in conserving the scanty FX reserves of the country in the past eight years as well as encouraged local value-addition/industrialisation and job creation. But in a bizarre move, the Cardoso-led apex bank had to dig eight years into the past to bring the 43 items into the official FX market to continue with unrestrained importation. This immediately translates to more demand for the scanty dollar; more weakening of the Naira; stiff competition against imported brands for local producers of (any) of the 43 items. And the eventual ‘collapse’ of the local producers, because of the uncompetitive environment — Nigeria — where they are domiciled.
In all, therefore, the collapse of the Naira in recent times has been largely policy-induced. Currency floatation or devaluation is likely to benefit the (home) country, if it has a lot to export; but Nigeria is still largely a mono-product economy: depending so much on sales and FX inflow from crude oil. On the other hand too, the country is also largely import-dependent: so much machinery, goods and services are being imported at all times. Nigerians, historically, are known to have high taste (or preference) for foreign (imported) things. Conspicuous consumption is the lifestyle of so many.
A plausible or sensible initiative should have been to strictly encourage the consumption of Made-in-Nigeria goods; encourage local production (especially substitutes for imported items) to better conserve available FX stock and strengthen the Naira. Therefore, to begin to deal with the current endless loss of Naira value in the FX market, some strategies are imperative. One, everything should be done to sustainably improve the supply (or earning) of dollars in the economy. Two, every impediment or challenge to crude oil production/sale must be quickly and effectively dealt with. Three, the absurdities called oil theft, pipelines vandalism and sabotage must be checked decisively.
Nigeria has a large elbow room to increase its oil production and sales within its OPEC quota, which at present stands at about 1.8 million barrels per day, as against current production level that is hovering around 1.2 million barrels per day. Similarly, investment drive to prop gas utilisation should be intensified with all vigour. In real terms, Nigeria needs effective diversification of its economy; no more mere lip service or mantra. Non-oil export drive must be prioritised, with necessary incentives packaged to encourage the exporters to repatriate their proceeds.
This is why the CBN should be encouraged to dust up its RT200 which it was coerced to abandon when it floated the Naira mid-June 2023. The RT200 was an initiative with a package of incentives to expand and sustainably grow Nigeria’s non-oil exports. The reality of today Nigeria demands that the policy be either fully restored or adapted to give proper focus and fillip to the growth of non-oil export. This also calls for a timely reconsideration of the ‘readmission’ of the 43 items (removed eight years ago) into the official FX market. Many of them are already being produced locally; and the government should do more to protect and nurture them.
There is also the need for a policy to curb the dollarization of the Nigerian economy: many transactions in many sectors of the economy are now being consummated in dollars rather than Naira — the legal tender. This trend is obviously rooted in the fact that the local currency has practically lost one of the key functions of money: serving as the store of value. Owing to rising inflation and outright devaluation, the Naira has gotten battered in recent times, to the extent that most economic agents no longer want to store/save their assets and valuables in the local currency.
Definitely, all these call for an urgent reappraisal of recent economic policies of the President Bola Ahmed Tinubu administration. This is imperative, if the Naira is to regain some value; and the economy to gain stability and make progress. Living on forlorn hope is no longer an option. In the long run, we are all dead, says the renowned Economist, Maynard Keynes.
