Nigeria’s currency is in a mindless race to two thousand to the dollar after its worse week on record. But who can stop this race to the abyss for the local currency of Africa’s most populous nation? The prospects for the Naira are frightening and even the none-easy to be moved young ones among the people are scared about their future.
The Naira closed the week at a mind-boggling N1,170/$ on the parallel market. On the official window, the local currency managed to pare some of its earlier loss, ending the week at N808 to the US dollar. Two days earlier, it sold for N999/$ on the official market according to a report by Reuters.
The massive decline in the value of the Naira under the watch of the new government is particularly worrying not just for the staggering pace of the devaluation but most importantly, many believe the government is failing at one of the core areas in which it had been expected to excel in.
Days after the inauguration of this government, a pattern began to appear and since then the value of the local currency has gone in one direction. On June 14, the Naira suffered a staggering loss of 25% of its value relative to the previous day rate, falling to an all-time low of N620/$ at the official window according to data from Refinitiv before falling further to N664 two days later.
The claim initially that speculators were at work is at best trite. The government has been woeful in enthroning a market friendly foreign exchange market which many Nigerians crave. The signaling that is the hallmark of market management and tone setting is missing and this failing is hurting all Nigerians badly.
The Nigerian economy has undergone substantial reforms in recent weeks, after President Bola Tinubu was sworn into office on 29 May. In the monetary arena, on 9 June, Tinubu suspended the Central Bank governor, hinting at a sharp policy shift. On 14 June, the CBN announced the abolishment of the multiple exchange rate system and paused its intervention in FX markets. The complex web of exchange rates, coupled with constant intervention, had been a drag on the economy, creating significant distortions such as dollar scarcity and impeding foreign investment. Problem though, was the government had not thought through this policy and the full ramifications including the linkage to prices especially petrol price. In the circumstance, the government has shown it was not ready to handle or better still contain the dire consequences of the deregulated FX market it unleashed.
It was clear from the beginning that the new FX regime will push up inflation in the short term to medium term via a larger import bill; moreover, the removal of fuel subsidies in late May has added further upward pressure. On the flip side, it was expected the floating exchange rate will strengthen investor sentiment and buttress capital inflows but none of that has happened. In the end, the FX market reforms have been disjointed and have been devoid of the supporting policies that should underpin a massive transformation like this.
According to Andrew Matheny and Bojosi Morule from Goldman Sachs, “as we have argued previously, introducing currency flexibility and/or easing restrictions on access to FX would very likely need to be accompanied by higher local interest rates (with prevailing short-term market interest rates currently deeply negative in real terms.”
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Analysts at the EIU were more forthcoming about the risks to the outlook of the Naira when they said, “there is a high risk of the policy being reversed if higher inflation threatens overall stability—something we cannot rule out given the speed of market reform. Mr Tinubu appears bent on short-term, intense economic pain followed by long-term gain, a risky strategy in a fragile country.”
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Instead of the gain in investor confidence, the haphazard nature of the implementation of the reforms have caused more chaos and apprehension.
In the despair the market is looking for direction from the authorities. It took months to do away with the ban on 43 items and even now there are still a plethora, some say 16 circulars by the old management of the Central Bank that have yet to be abrogated or clarified in the light of the on-going reforms of the market.
Many hailed the onset of the FX reform in Nigeria saying it would end years of complex foreign exchange management that allowed well-connected business and individuals in Nigeria to access US currency at subsidised rates.
“The difficulty of getting your money out inhibits putting your money in,” said Tope Lawani, managing partner of Helios Investment Partners, an Africa-focused investment firm which would not invest in Nigeria for at least six years because of this. Abandoning the currency regime would be “a hugely positive move,” said Patrick Curran of Tellimer, an emerging market research company, adding that the issue “has been one of the biggest obstacles in Nigeria”.
But the chorus of praise from within and abroad has died down as the pain creeps in and with Nigerians struggling to understand what exactly the government is doing and if there would be light at the end of the tunnel.
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The government has already paused the adjustment of petrol price which is currently indexed on a rate of N698/$ for fear that any further alignment of petrol price to the dollar rate will provoke wide-spread social up-rising in a country where the number of multi-dimensional poor is rising by the minute. The implication of this pause is that it is allowing subsidy to creep in once again.
Stopping the bleeding will require courage and consultation and must start with articulating a clear plan to sell down state asset in a transparent manner as well as the symbolic cut in the cost of government in a country where the people hardly see value delivery from their leaders. The government should move from there to entering negotiations with the International Monetary Fund, IMF without delay for a support programme capable of crystalizing up to $10bn in FX inflow and also providing the discipline in resource allocation. A sell down of up to 10% of our holding in oil joint ventures should bring in significantly more cash and allow the industry to be better managed. Time is running out for Tinubu, and he must act fast to save Nigeria. It is the least he must do. He asked for this job and boasted about his so-called record in Lagos. So far, his record as president of Nigeria has been less inspiring.
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