Can CBN save the naira and Nigerians?

The naira exchange rate has suffered severe battering in recent times and depreciated from N90=$1 in 1999 to about N197=$1 in 2014, even when our national experience clearly suggests a close correlation between deepening poverty and weakening the naira exchange rates.

Evidently, the unyielding youth exodus from Nigeria and the mass migration of skilled professionals to more prosperous economies certainly took root as the naira rate plummeted from 50 kobo before 1975 to almost N200=$, despite our relatively more bountiful average export dollar reserves in 2016. Furthermore, more than 100 million Nigerians, reportedly, also now live below the poverty benchmark of $2/day (about N12,000 per month), while our erstwhile bubbling industrial landscape has shrunk significantly to become less competitive, as serial naira devaluations have driven higher production cost.

Interestingly, however, the gradual collapse of the manufacturing subsector and the consequent explosion in unemployment clearly do not support the popular belief that weaker naira exchange rates drive economic diversification and promote export of Made-in-Nigeria goods. Consequently, Nigerians must be wary of any persuasion that prescribes further Naira devaluation as the antidote to our beleaguered economy.

Historically, the CBN compulsively devalued the naira rate to bridge widening gaps between official and parallel exchange rates, even when these gaps were knowingly caused by the contrived, monopolistic market dynamics of demand and supply.

Arguably, if the unrestrained dollar demand further pushes the parallel market rates well above N300=$1, this would seriously challenge the CBN’s mandate for price stability; nonetheless, the CBN may and unwittingly jerk up the official rate again above N300 to remove the embedded ‘subsidy’ from the prevailing arbitrarily fixed official naira exchange rate, so that the dollar price will rise and dampen demand pressure while also minimising rent seeking opportunities.

Regrettably, nonetheless, a 50 per cent devaluation to about N300=$1 would severely deplete all Naira income values and induce panic amongst naira income holders, who would hurriedly seek to protect their income from further devaluation. Sadly, this rational response would in turn instigate more dollar demand.  Ultimately, if the CBN fails to restore public confidence in Naira, as a safe store of value, another widening gap, between official and parallel market Naira exchange rates will again evolve and sustain serial Naira devaluations.

Incidentally, the Ghanaian currency, the cedi, followed a similar suicidal trajectory from 1Cedi=$1 to eventually exchange for 10,000 cedis before the four decimal redenomination of that currency in 2007. Regrettably, however, a decade or so thereafter, the Ghanaian authorities have still failed abysmally to control the excess cedi supply in the money market, while the new Ghana cedi inevitable trades above four new Ghana cedis, that is, over 40,000 old cedis to a dollar. Consequently in 2015, the International Monetary Fund provided over $900m emergency loan to reduce Ghana’s dollar deficit and protect the cedi exchange rate; remarkably, however, the end of the travails of the Ghanaian currency still remains out of sight.

Clearly, the CBN governor, Godwin Emefiele, must be concerned that the naira does not also mirror the fortunes of the cedi. Indeed, the forex controls that the apex bank announced in January 2016 are clearly foraging attempts to protect the naira value and save more Nigerians from falling below the poverty benchmark. The million naira question, however, is whether or not the CBN’s money market control measures can effectively reduce the pressure of the dollar demand to stablise or improve the naira exchange rate.

Curiously, in his defence of the ban of almost 3,000 Bureau de Change from the official forex allocations in January 2016, Emefiele expressed grave concern that BDC operators had “abandoned the original objective to serve retail end users who need $5,000 or less”. Conversely, according to the CBN governor, “the currency dealers have become wholesale dealers in foreign exchange to the tune of millions of dollars per transaction,” while they allegedly “criminally, thereafter, use fake documentations, such as passports, etc, to render weekly returns to the CBN.” It is not clear how much tax was generated from these heavily subsidised mega transactions! Inexplicably, nonetheless, no known BDC operator has so far been prosecuted for any wrongdoing!

It is bewildering also, that despite the host of eminent intellects and the IMF’s regular oversight, the apex bank, in Emefiele’s words, only lately recognised that “Nigeria is the only country in the world where a Central Bank sells dollars directly to BDCs!” It is equally baffling that for over 10 years no one wondered; not even the equally star studded Monetary Policy Committee and our well travelled and exposed media practitioners, questioned this strategic aberration or why the number of registered operators rose rapidly from “a mere 74 in 2005 to 2786, after the CBN began direct forex sales to BDCs”.

Equally worrisome, also, is CBN’s incredibly belated realisation, despite several articles by this writer and related discussions in various public media since 2004, that BDCs provide a ready conduit for money laundering, round tripping, as well as the funding of unauthorised imports, which challenge the competitiveness of local industries. See <> for the article titled “Funding smuggling and money laundering from BDCs,” published in September 2008.

In retrospect, that article contains the following observation: “We are fortunate to have ‘excess’ dollar reserves to support the dollar profligacy to BDCs for now, but what happens when the dollar income from crude oil is depleted? Presumably, in order to continue funding BDCs, we may need to borrow more from our international ‘friends’, who happily, not too long ago, fleeced $18b from our tattered pockets in the name of ‘debt forgiveness”!

Instructively, Emefiele has also decried the practice, in which CBN ‘gleefully’ sustained the self-destructive unforced error of selling “$60,000 to each BDC weekly,” making an annual total of $8.6bn before the latest forex controls. This stupendous allocation of over a quarter of available total forex to the parallel market, did not include the equally suspicious, liberal facility for every Nigerian tourist to access up to $150,000 per annum at official rates from ATMs abroad, with their Nigerian debit cards, even when such a facility predictably became widely abused by prolific rent seekers. Pray, how many Nigerians earn $150k per annum?

Alarmingly, however, there is nothing to suggest that manufacturers and other job creating real sector operators enjoyed the same liberal access to forex as these inexplicably pampered operators in the grey areas of the economy. Some critics may describe such unpatriotic policy directions as provocative and retrogressive and deliberately supportive of corruption and rent seeking.

Admittedly, however, a ban on forex allocations to BDCs will instigate a surging dollar demand and sooner, rather than later, the gap between officially sourced and open market dollar rates will expand and, once again, make another devaluation of the naira inevitable. Arguably, an official naira exchange rate of N300 will invariably drive higher inflation rates and restrain consumer demand, while fuel prices would rise and make increasing fuel subsidy inevitable, despite the collateral complement of the oppressive economic and social consequences!

Instructively, however, the release of the CBN’s stranglehold monopoly on the forex market will invariably strengthen the naira by reducing the self-induced persistent challenge of excess naira liquidity, which constantly overwhelms the CBN’s simultaneous regular monopolistic auctions of dollar rations. Consequently, if the Senate Committee on Finance and Public Accounts, believed Emefiele’s recent (behind closed doors) cock and bull explanation for the unrestrained devaluation of the naira, then our economic and social agony will continue for much longer!!

POST-SCRIPT July 2019: The above article was first published on January 25, 2016. It is not generally known that the alleged over $20bn annual remittances from Nigerians in the Diaspora may not reduce pressure on the naira rate as often speculated. This is because dollar remittances from such outfits, such as Money Gram and Western Union, regrettably make minimal impact on domestic forex supply because the $20bn estimated annual remittances always remain domiciled abroad and therefore, make no positive impact on dollar liquidity and naira exchange rate. Incidentally, the naira was officially devalued on February 2016, to N305-360=$1 after this article was published.