The mass media is awash with news that the Central Bank of Nigeria (CBN) defended the naira with a whopping $7.6 billion in the past five months. As we will explore later in this write-up, that amount is indeed huge and an unnecessary drain of Nigeria’s scarce foreign reserve.
This is not the first time the CBN is using dollar to stem the slide in exchange rate of naira to the dollar and other foreign currencies. The practice has been going on over the years but the more the CBN attempts to defend the naira with the dollar, the more the exchange rate plumates.
Any discerning mind will draw the conclusion that digging a hole to cover a hole is a fruitless exercise. If CBN fails to abandon this strategy of defending naira with the dollar, in no foreseeable time, exchange rate of the naira to the dollar will hit N1000/$.Like we said earlier, the CBN’s strategy in exchange rate management appears to be faulty being based on a wrong basis. For the avoidance of doubt, economic theory has it that exchange rate is determined by inflation, interest rate, public debt, political stability, economic health of the country, especially growth and development, balance of trade and current account balance, among others.
The wrong basis calls for a review of strategy, indeed a change of strategy by the CBN to save the naira from perpetual slide and stabilise the economy. CBN strategy is faulty because it seems not to take into account the structure of the Nigerian economy. Firstly, Nigerian economy is largely informal. Analysts believe in the absence of a reliable data that the economy is roughly 70 percent informal and 30 percent formal. Secondly, Nigerian economy is an import dependent economy or a trading economy. There are more SMEs in commerce than manufacturing.
Rather than use monetary policy, which is more suitable to a formal economic set up to manage exchange rate, the CBN should use trade and exchange policy to manage the naira exchange rate. The 70 percent informal to 30 percent formal economic set up is the reason the economy is not responding to CBN monetary policy which is complemented by fiscal policy of federal government. That is why the CBN strategy of defending the naira with dollar over the years has not succeeded in stemming the depreciation of the naira vis a vis other foreign currency.
Using trade and exchange policy as a tool was tried during the Ibrahim Babangida era when the then Finance Minister, Dr Kalu Idika Kalu advocated, and indeed implemented the policy of devaluing the Naira to boost export and foreign exchange earnings by making exports cheaper . Indeed, that is the genesis of the free fall of the naira because of the shoddy implementation arising from the fact that exports were not invoiced in naira post devaluation.
This writer was Treasurer at Indo-Nigerian Merchant Bank , now a legacy group of Sterling Bank in August 1986 when the first Dollar auction was held. Opening rate was $1.3326 to N1 in the morning when banks started to turn in their bids in sealed envelopes. Closing rate was $1 to N3 or thereabout. That began the journey to naira devaluation. In recent times, exchange rate is officially $1 to N422 but as low as N700/$ in the parallel market.
The economic principle of devaluing home currency to boost exports will only be beneficial if after devaluation , exports are invoiced in home currency to boost exports . What I mean is that IBB ought to have implemented a policy of invoicing exports in Naira post devaluation to activate the benefit of devaluation . What has happened is that after devaluing Naira, exports are invoiced in dollars, how then will exports be cheaper. ? The effect is that naira content of imports became higher making operations very difficult for SMEs to import raw materials. That is why industrial estates across the country disappeared in late 1980s to early 1990s. The situation has continued till today.
Devaluation of the Naira is also the reason why the CBN raised the minimum capital of banks which in 1990 was N12 million for merchant banks and N20 million for commercial banks to a uniform N25 billion in 2005.
It remains to be added that invoicing exports in NAIRA WILL NOT STOP NIGERIA FROM EARNING DOLLARS OR OTHER FOREIGN CURRENCIES. Importers of Nigerian goods and services will come here with Dollars, Pounds, Euros etc. to buy goods and services. This policy will put the CBN that officially is the issuer of Naira to be on top of the situation in exchange rate determination. The policy will also attract more business for banks in Nigeria as they will act as correspondent banks to foreign banks . It will also boost tourism and economic activities arising from demand for Naira which is equal to demand for goods and services Naira will buy .With increased demand for Naira, it will become scarce, and the value will rise and continue to appreciate instead of depreciating and in that wise end the wasteful and fruitless effort to defend the value of Naira using the Dollar will become a thing of the past .
Devaluation of the Naira impoverishes Nigerians and Nigeria as a country does not in any way derive any benefit from it. When we devalue Naira , the world is not bothered because Nigeria is not in competition with them in the international export market especially as Naira is not a convertible currency for international trade settlement.
Have you bothered to ask why the USA will issue a threat to for sanctions when China or Japan devalue their currency? The reason is simple. Chinese and Japanese goods are of same quality with American goods . Japan and China invoice their goods in home currency Yen and Yuan respectively so when they devalue their currency, Japanese and Chinese goods will become cheaper than American goods in the international market. With Nigeria nothing is gained by devaluing Naira except the government that get fiduciary money to spend which is why even as Naira is depreciating is a vis other currency, the IMF keeps telling Nigeria to devalue further. Do they want to kill Nigerians?
The best way to stop IMF from making such demands is for Nigeria to begin to invoice exports in Naira so that there will be no need to monetize petro- Dollars which creates excess liquidity in the economy . It is only then that the benefit of devaluation will accrue helping the Naira to recover and taming imported inflation thereby helping Nigeria to become productive and shed the tag of being classified as poverty capital of the world.
Enyinnaya, a fellow of Chartered Institute of Bankers, writes from Lagos
