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Can CBN save the Naira and Nigerians?, By Henry Boyo

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The Naira exchange rate has suffered severe battering in recent times and depreciated from N90=$1 (PM) in 1999 to about N197=$1 in 2014, even when our national experience, clearly suggests a close correlation between deepening poverty and weakening 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 50kobo 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 (N12,000/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, 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 unrestrained dollar demand, further, pushes parallel market rates well above N300=$1, this would seriously challenge CBN’s mandate for price stability; nonetheless, CBN may again, unwittingly, jerk up the official rate above N300 to remove the embedded ‘subsidy’ from the prevailing arbitrarily fixed, official Naira exchange rate, so that the dollar price would 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 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 4 decimal redenomination of that currency in 2007; regrettably, however, a decade or so thereafter, the Ghanaian authorities have still failed, abysmally, to control excess CEDI supply in the money market while the New Ghana Cedi, inevitably, presently trades above 4 New Ghana Cedis i.e. over 40,000 old Cedis, to a dollar. Consequently in 2015, the IMF 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, Emefiele, must be concerned that the Naira does not also mirror the fortunes of the CEDI; indeed the forex controls that CBN 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 CBN’s money market control measures can effectively reduce the pressure of dollar demand to stablise or indeed improve the Naira exchange rate?

Curiously, in his defence of the ban of almost 3,000 Bureau de Change (BDCs) from 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 $5000 or less”. Conversely, according to Emefiele, “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 CBN.” It is not clear how much tax was generated from these heavily subsidized mega transactions! Inexplicably, nonetheless, no known BDC operator has so far been prosecuted for any wrongdoing!

It is bewildering also, that despite of the host of eminent intellects and IMF’s regular oversight, the Apex bank, in Emefiele’s words, ONLY LATELY recognized, 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 ten 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 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 unauthorized imports which challenge the competitiveness of local industries. See www.lesleba.com; for article titled “Funding smuggling and money laundering from BDCs,” published 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”!

Keep Naira clean

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 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 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 Naira devaluation 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 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 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 Naira unrestrained devaluations, then our economic and social agony will continue for much longer!!

POSTSCRIPT 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 is 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 in February 2016, to N305-360=$1 after this article was published!

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