Many older Nigerians often reminisce about the halcyon days when ₦1 was equal to $1. In fact, during the 2015 election campaign, it was rumored that President Buhari had promised to make ₦1 equal to $1 again. Although the story was quickly debunked, the narrative stuck due to the popular belief that the exchange rate can be assumed as a fundamental indicator of the strength of an economy.
Many Nigerians hold the erroneous impression that the strength of an economy is determined by the value of its currency, often the currency’s exchange rate to the US Dollar. This popular but erroneous belief can simply be summarized thus: the stronger the currency relative to the dollar, the better-performing the economy. This belief is fundamentally incorrect as the exchange rate is simply value of one currency relative to another currency. Therefore, as an indicator, the exchange rate is insufficient as a measure of assessing economic wellbeing. For instance, the exchange rates of the Japanese Yen and the Cuban Peso to the US Dollar are 108 Yen to 1 US Dollar and 1 Cuban Peso to 1 US Dollar respectively. Therefore, based on the fallacious premise that the stronger the currency, the better-performing the economy; one would get the impression that Japanese currency is weak and that the Japanese economy is doing poorly while the Cuban currency is strong and the Cuban economy is in great shape. However, such impression cannot be farther from the truth.
The reality is that the exchange rate is just one of several economic performance indicators. In fact, indicators such as the GDP growth rate, GDP per capita, inflation rate etc. are more important for assessing economic wellbeing. Unfortunately, in Nigeria, there has been a fixation on maintaining a strong exchange rate for the Naira, often regardless of influencing exogenous factors.
Following a slump in global oil prices in 2015 which depleted public finances and dried up the nation’s dollar supplies, there were wide expectations that the Naira would be devalued. A devaluation of the Naira in 2015 would have allowed the CBN adjust to a new reality and design policies which could have laid the foundation for future sustainable growth. Nevertheless, the Central Bank of Nigeria (CBN) and President Buhari resisted calls by experts to devalue the Naira but instead undertook numerous measures to maintain the impression of a strong exchange rate. Although President Buhari and the Central Bank of Nigeria (CBN) Governor Godwin Emefiele had argued that a weaker currency would lead to higher inflation and economic pain for Nigerians, the undertaken measures have come at great cost to the growth of the economy and perhaps future solvency of the nation.
Since 2015 when the Central Bank of Nigeria (CBN) rolled out a string of policies geared towards maintaining an artificially strong Naira, the Nigerian economy has suffered a plethora of woes including mass exodus of foreign direct investments, low GDP growth and high inflation. Basically, by implementing a monetary policy which tries to achieve the impossible trinity of a fixed exchange rate, free movement of capital and an independent monetary policy, the nation has found itself in an unpalatable economic situation characterized by low GDP growth rate, high inflation and plummeting foreign direct investments.
Furthermore, the monetary cost of the Central Bank’s ‘strong Naira’ policy has been massive. The CBN’s 2018 Annual Activity Report reveals that the apex bank increased its liabilities by 250 per cent – from ₦16 trillion to over ₦40 trillion within three years. 34 percent of this amount, almost₦14 trillion, represents Open Market Operation securities which were issued to manage liquidity. This implies that in order to maintain the desirable, artificial high value of the Naira over the last three years, the CBN increased its liabilities to over ₦40 trillion, mainly through the issuance of OMO securities. This not only represents a precarious threat to the same currency the bank seeks to protect, but also exposes the wider economy to several risks.
In addition, due to the artificially strong value of the Naira, the nation’s non-oil exports have become more expensive and less competitive. For a nation intent on diversifying its economy away from a reliance on oil, maintaining an artificially high exchange rate is counterproductive. Typically, when nations attempt to boost production and increase exports, they tend to devalue their currencies to make exports more competitive. Nigeria instead did the opposite.
In summary, the CBN has condemned the nation to an unpalatable economic situation of low growth, high inflation, depleted reserves and uncompetitive exports for the sake of an artificially strong naira. Given that the nation is also straining under the weight of its debt which currently stands at over N24 trillion, it is unconscionable that economic administrators are systemically rendering the nation insolvent yet spending massive sums just to maintain a high value of the Naira.
Unfortunately, there is no easy way out of this quagmire in which the country has found itself. Any brash move undertaken by the CBN might create excess liquidity in the economy which could then force down interest rates and scare off currently active foreign portfolio investors. Such outcome will subsequently result in a scarcity of foreign exchange, a highly undesirable situation.
Another probable option could be a devaluation of the Naira as was widely suggested in 2015. However, given that both the President and Governor of the Central Bank have both railed against devaluation, this option seems untenable.
Overall, maintaining an artificially strong Naira has come at great cost to the Nigerian economy, with no easy solution in sight. Every feasible solution will require a depreciation in the value of the Naira, an option the CBN and presidency are reluctant to consider.
Nevertheless, sooner rather than later, this problem will need to be addressed head-on. How that will happen remains a mystery.
Lanrewaju Rufai
Rufai holds a first class degree in Management and Masters degrees in Management and Finance. He is a finance and strategy analyst and can be found on Twitter @LanreRufai_.
