Since the COVID-19 pandemic, the Nigerian economy has been struggling and the naira has been under the weight of foreign currencies. The growth rate decreased by -1.8% in 2020, increased by 3.4% in 2021 and is expected to maintain the pace in 2022. The economy is experiencing a high inflation rate of 15.9% (March 2022 ) and a high unemployment rate of 33.3% (Q4 2020). The value of the naira fell from N360/dollar in 2019 to N580/dollar in 2022; the national reserve is shallow ($39 billion in April 2022) despite soaring energy prices since the Russian-Ukrainian war. What is the future of the naira economy?
Four years ago I wrote an objective critique of one man’s advocacy (of over two decades) on the value of the naira. The advocacy was aimed solely at improving the value of the local currency and the continued monopoly position of the Central Bank of Nigeria in the foreign exchange market. The general idea of the longstanding advocacy is the liberalization of the foreign exchange market and the introduction of dollar certificates as payment to statutory beneficiaries.
The man was Sir Henry Olujimi Boyo.
Sir Boyo described the foreign exchange market in Nigeria as unilaterally controlled by the CBN. He explained that the CBN unilaterally sets the Naira exchange rate after withholding all foreign currency revenue from (sub-national) governments. Based on this fixed exchange rate, the CBN disburses warrants in naira as an allocation to the statutory beneficiaries: state governments, ministries, departments and agencies. The CBN also sells to exchange offices and commercial banks at the same rate. This rate is the official exchange rate.
Sir Boyo argued that by retaining the state’s dollar revenue and paying the equivalent in naira to statutory beneficiaries, the CBN creates excess liquidity in naira (against the dollar) which creates inflationary pressures and devaluation against the naira. To curb inflationary pressure, the CBN intervenes by selling foreign exchange reserves and/or securities through open market operations. This cycle continues until the reserve balance is exhausted.
In a paper presented to the National Economic Intelligence Committee in 2002, Boyo and his colleague, Adaighofua Ojomaikre, explained what they believed to be the solution to the “salient features” of the Nigerian economy due to economic mismanagement. . They proposed a liberalized exchange rate framework where the CBN issues dollar certificates to statutory beneficiaries instead of naira warrants. These recipients would in turn present the dollar certificates to commercial banks asking for naira. In this context, the dollar seems to be buying/chasing the naira: the requested currency is appreciating.
In his many short articles, opinions and comic illustrations, Sir Boyo has consistently linked the country’s socio-economic challenges to mismanagement of foreign exchange earnings and inconsistencies in fiscal and monetary policies. He criticized several policies including; the CBN’s position on the monetary policy rate (MPR) above 12%, Nigeria’s borrowing and debt profile, presidential import waivers and arguments over the administration of fuel subsidies . He stuck to his ideas that the correct valuation of the naira, under a transparent exchange rate regime, would lift many Nigerians out of poverty. Sir Boyo died in November 2019.
Since 2019, the parallel market exchange rate has fallen by 61%, inflation has increased by 39.5%, and foreign exchange reserves fluctuated around $40 billion. Similarly, the stock of external and domestic debt increased by 38.6% and 34.8% respectively (from 2019 to March 2022): the devaluation of the exchange rate means that the stock of external debt in local currency increased. Boyo wondered why a country that is accumulating foreign currency revenue from oil price appreciation at near zero interest in its surplus crude account would engage in debt financing at interest rates of high interest. A recent article by The Economist reiterated Boyo’s thoughts: “Nigeria, paradoxically, could find itself in a more difficult situation as oil prices rise. Although it exports the product, it also burns money on fuel subsidies, which rise with the price of oil. It issued a $1.25 billion seven-year bond in March, but at a high interest rate of 8.4%.”
Sir Boyo was a singular and constant defender of the naira. He ended most of his articles with the phrase “Save the naira, save the Nigerians”. This was an unbeatable record of defending the naira for almost two decades. Unfortunately, no one has taken up the torch since his disappearance. Foreign exchange management today is in desperate need of a shrewd solution: the CBN would not admit that it is lost in the maze after attempting several interventions to shore up reserves and increase the flow of currency into the market. Despite the recent spike in crude and energy prices, the shortage of foreign exchange is stifling international transactions. Recently, many commercial banks announced a restriction of international transactions on naira cards to $20 (from $100) per month. For Boyo, unless the CBN ceases payments, in naira, to statutory beneficiaries, the economy will be haunted by the cycle of excess liquidity and devaluation pressures on the naira exchange rate despite rising oil revenues .
We need to open discussions on the future of the naira: do we want a weak currency to support export trade or a strong currency that transfers purchasing power to citizens? Do we want to fix or float the exchange rate? What are the far-reaching welfare implications of either option?
When we plan poverty eradication strategies, we need to include discussions about the value of local currency and the role it plays. It is through currency devaluation that the government can confiscate people’s income. By devaluation, not by tax, devaluation! We have to worry about the stability of the local currency.
Okafor is a specialist in economic and commercial research
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