Nigerian Naira @ auction! It’s going … going … going?

One of the key policies of the President Bola Ahmed Tinubu administration in Nigeria is the unification of exchange rates of the national currency at the foreign exchange market by ‘fiat’; otherwise called Naira floatation or (un)wilful devaluation. This singular policy, in spite of its perceived good intentions, has, from the onset, commenced the crashing of the Naira against other hard currencies, especially the Dollar, Pound Sterling, the Euro and others. While the national currency exchanged at about N460/US$1 in May, by August 10, 2023, it was exchanging at about N955/US$1 in the parallel (or black) market. Almost two months after the policy commenced, its twin goals of facilitating a “realistic” exchange rate and eliminating the wide gap existing between official exchange rate and parallel (or black) market rates have remained a mirage.

As a point of fact, today, the gap between the official exchange rate (called I & E window) at N767.76/US$1 and the black market rate at N956/US$1 is close to N200/US$1. And the likelihood of further deterioration remains very high (unless the unexpected happens). This pessimism is purely founded on the interplay of market forces — demand and supply — which is what the authors of the exchange rates unification policy want to rule the forex market. And barring any unforeseen, the Naira is surely on the fast lane to crashing to N1000/US$1 and beyond anytime this year — with devastating effects on the economy. Already, the International Monetary Fund (IMF) has heightened the anxiety in the land when, a few days ago, it said “loose fiscal and monetary policies” being put in place in Nigeria make it difficult for the Naira to stabilise. Such policies have rather unleashed and sustained volatility in the forex market.

This fate of the national currency is largely ineluctable, because the supply of dollars in Nigeria is seriously constrained by very low non-oil export earnings (Nigeria being almost a mono-product economy that depends on crude oil). Yet, in the forex market, demand is very high (even if artificial), largely driven by speculators, hoarders and massive unchecked money laundering by state and non-state actors. Politicians, public office holders, bandits, kidnappers, and ‘connected’ contractors, aided by lax oversight of officers of deposit money banks and bureaux de change, are driving the forex market with ill-gotten Naira. Dollar demand by genuine commercial enterprises and manufacturers truly constitute a minuscule of the weight against the Naira.

Regrettably, too, some ancillary policies of the government of the day are not helping matters. For instance, the government, rather than initiating moves to have local refining/supply of petrol, keeps licensing more importers of premium motor spirit (PMS). Obviously, these importers of PMS have joined in the huge demand for dollars in the forex market — and this puts further pressure on the already weakened Naira. This exactly is what is playing out; and as these importers deploy so much Naira to get the dollar, it pushes up their ‘landing cost’, leading to a spiral of further increase in the pump price of PMS. Already, reports indicate that oil marketers (importers) are warning that the cost of PMS would rise to between N680/litre and N720/litre in the coming weeks — since the dollar keeps trading from N910 to N950/US$1 at the parallel market.

Still on the supply side, Nigeria is still faced with an acute shortage of dollars. Indeed, the Organisation of Petroleum Exporting Countries (OPEC) of which Nigeria has been a member for upwards of five decades, in its oil market report for August showed the continued decline in the volume of Nigeria’s crude oil production/export for a while. OPEC’s report shows that Nigeria’s oil production has dropped to slightly below one million barrels per day in July 2023 from the prior level of two million barrels per day. Concomitantly, the bizarre phenomenon of oil theft has kept ravaging the crude oil sector — leaving the nation with very little to export. Again, OPEC’s report for July 2023 has shown that Nigeria has lost its prime position as the largest oil producer/exporter on the African continent. It has been overtaken by Angola, Algeria and Libya.

In terms of foreign exchange reserves, Nigeria — Africa’s largest economy by Gross Domestic Product (GDP) — ranks low too. In fact, the country is ranked fourth (with reported reserves of US$43 billion) behind Libya (US$88.4 billion), Algeria (US$79.4 billion) and South Africa (US$61.5 billion). This report for August 2023, by agenceecofin.com says that although Nigeria has huge oil and other resources “but with lean revenue to show for it, due to controversial issues such as corruption, subsidy and other internal socio-economic factors.”

Even as the country is confronted by this dire situation, the powers that be are yet to commence any effective measures to stem the tide of the Naira collapse. Rather than undertaking any initiative — such as a meaningful non-oil export drive — to earn more dollars, the nation’s high import-dependency remains “as usual”. Curiously, in the past couple of months, forex demand for “invisibles” (including medical tourism, academic pursuits, etc.) has been on the increase. Desperate unemployed youths keep deploying all tricks and methods to procure forex and pay their way out of Nigeria to practically any other country. The ‘japa’ phenomenon has assumed a life of its own: Nigerians of various ages, social strata and education are leaving the country in droves.

In the corporate sector where many blue chips and multinationals operate, not a few of them have millions of their (un-repatriated) revenues trapped. Many have literally been forced to ‘re-invest’ their duly earned dividends in their businesses — against the plans and policies of their parent companies in the metropoles. Today, the situation has gotten to a crisis point, where some are ceasing operations in Nigeria, and moving to other more stable and business-friendly climes. Apart from the British pharmaceutical giant — GlaxoSmithKline (GSK) — which recently officially announced the formal closure of its operations in Nigeria, many others are feared to be warming up to close shop in the country too.

It is no longer news that virtually all major companies listed on the Nigerian Exchange Limited (NGX) reported huge “forex losses” in their first half 2023 statements. These losses that run into billions in Naira terms, if unchecked, could be replicated even in worse dimensions in the second half 2023 — and render these businesses bankrupt. Meanwhile, these businesses, in pursuit of survival strategies, are being compelled by the forex challenges to ‘withhold’ their expansion, growth/recruitment plans, among others.

For Nigeria as a ‘corporate entity’, it is already very ‘highly geared’; and does not have the elbow room to raise more funds (via bonds) from the international financial markets. It is no longer news that practically a hundred percent of the federal government revenue is being deployed to public debt servicing. Nigeria’s Debt Management Office (DMO) is also known to have raised the alarm that the country’s debt profile is no longer sustainable. It is therefore obvious that Nigeria, as far as access to dollar (inflow) is concerned (whether via earnings or borrowing) is already in a very tight corner. In view of this, any manipulation of the available dollar stock by the Central Bank of Nigeria (CBN) to ‘strengthen’ the Naira is certainly unsustainable.

Nigeria cannot ‘eat its cake and have it’ by fully liberalising the foreign exchange market (full Naira floatation) and turn round to be secretly influencing the exchange rate of the local currency. It is either clearly another policy somersault to quickly retreat from Naira floatation or a voodoo or abracadabra for the apex bank to be ‘propping’ the local currency secretly. Certainly, both local and foreign investors and all stakeholders will see such ‘new strong Naira’ as merely artificial and deceptive. Yet, in the forex market, transparency and integrity are key.