The rate at which the value of the naira has been battered over the past six years is historic, to say the least. Over the period, the value of the local currency has eroded by more than N350 naira. And the trend seems to be inexorable.
Professor Tayo Bello of the Department of Private and Commercial Law, Babcock University, predicts that the dollar will exchange for N800.00, and more than N1,000.00 for the pound sterling by December.
No doubt, the loss of value of the naira goes hand in hand with inflation, which in turn has implications for the welfare of Nigerians.
Hence, you are in good company reading what aficionados had to say about the hemorrhaging of local currency recently at a webinar forum organized by The Alvin Report and Nairametrics.
The forum was laced with some of the brightest minds that did justice to the topic: The Hemorrhaging Naira: Way Forward.
Tope Fasua, economist and chief executive of Global Analytics Consulting Limited, who set the ball rolling, largely viewed the problem through the lens of perception. He caveated that a unified exchange rate is never going to happen as he stressed that there is hardly any unified exchange rate between the parallel and official markets in any country. He said 50 percent of the value of any currency is based on perception, and that individuals were entitled to their individual freedoms to bargain whatever rates they were willing to exchange their money for.
He said the black market will continue to exist. He argued that Nigerians’ understanding of economics must evolve as there is no grounding point for saying that the country’s currency must be determined by demand and supply.
He also stated that one of Nigeria’s problems is that we seem to have an innate belief that the naira is rubbish. Fasua added that 50 percent of the value of a currency is based on perception—if you think your currency is rubbish it will be rubbish, which is a self-fulfilling prophecy.
Stressing that the issue of the value of the naira is based on perception, he alluded that Ghanaians value their currency more than the dollar, which is different from what obtains in Nigeria and paying off for them.
He cautioned that there is information asymmetry when it comes to the price of money. “If we allow the currency to be determined by demand and supply, there is only one way, down, because the naira is up against the currencies of some of the most economically diversified countries in the world, such as the USA. He also cautioned that if you fix your currency it will move against you because it will be shorted. He added that if you borrow too much your currency will fall.
The economist said devaluing the naira cannot have any positive effect any longer because the price is determined by Nigeria. He cited the Marshall-Lerner condition, which states that currency devaluation will only lead to an improvement in the balance of payments if the sum of demand elasticity for imports and exports is greater than one.
He also said Nigeria needs to have a good economic complexity index, which is a holistic measure of the productive capabilities of large economic systems, usually, cities, regions, or countries, which looks to explain the knowledge accumulation in a population and that is expressed in the economic activities present in a city, country or region.
Fasua, although earlier stating that there can never be a unified exchange rate, said BDCs constitute part of the problem of the hemorrhaging naira because some people profit from it, which is corruption because such people put demand pressure on the naira.
But beyond perception, Fasua picked on the issues of diversification and productivity. Beyond the government, Fasua said individual Nigerians must ask themselves what we are producing. He added that diversification should not be mouth talk but must be followed by action. He said for currencies to be strong there must be fundamentals.
He said FDI is the better investment to have, not hush money. He added that the CBN should expand illegible transactions, which will meet the supply for forex.
Fasua had blamed the security situation in the country as having a run on the economy because the situation stalls investments. He stated that the government has been investing a lot of money to support the people in the form of palliatives but that has not translated to productivity, which also has a toll on the naira because that all that money is in the system and chasing the dollar, which is also contributing to the naira hemorrhage.
Ascribing the hemorrhaging of the naira to the entire Nigerian project, Fasua advised that the naira not be fixed to any currency as that would be a recipe to short the local currency.
He also said Nigerians should stop the self-fulfilling prophecy that the naira is worth nothing. He said with that attitude the naira would lose value.
He also queried the idea of over-borrowing and devoting 95 percent of the revenues accruing the government going to the servicing of debt, warning that it would be dire if multiple creditors have the payments due at the same time.
Jimi Ogbobine, head, Agusto Consulting, on the other hand, viewed the hemorrhaging naira through the lens of fundamentals. He said as the rate of a country’s inflation rises, the value of the naira will fall. He said the inflation rate drives the value of the currency down. Jimi charged that we are fixated on the exchange rate, not the bottom line, which is inflation.
He said with high inflation, investors’ expectation on yield is higher as smart money is looking for yield above the rate of inflation; otherwise, it is a loss on investment. He said giving higher yields is the way to go. Otherwise, investors will hedge against inflation. He said more Nigerians are trying to hedge against an eroding naira into the US dollar because of high inflation rates.
Ogbobine said Nigeria does not over-import, but under-exports. Nigeria should export more. If people want to seek services and goods abroad, they should go. But it should reflect the price.
Tackling the root of the problem, he said Nigeria needs to give attention to the drivers of inflation, which includes running a chronic budget deficit. According to him, “We are increasing the money supply to fund our budget deficit. Monetary supply spending without a fundamental increase in production will only increase inflation.”
He also urged the government to harmonize exchange rates to attract foreign direct investment (FDI). He added that people will bet if the gap is widened.
On his part, Segun Akanji, the Divisional Head of Strategy, Heritage Bank blamed the hemorrhaging naira on the institutional void. He said institutions are not strong, which causes corruption, which in turn causes crime.
He said the country needs strong policies, which should help us determine price, premium, and return. He also queried the country’s balance sheet, which he said is not strong. Akanji said a strong balance sheet should give confidence to investors.
He stated that the CBN needs to relook at its balance sheet with international assets. “The CBN balance sheet is too nairanised. There need to be some international assets,” he said. “Bring in international institutions to facilitate financial clearing so that we have sitting capital, not transit capital.
He said Nigeria has lost its productive base, adding that Nigeria should build trade and productivity while employing sophisticated trading instruments and financial solutions. He also queried that Nigeria is a transit asset economy. He said Nigeria should create employment and enhance production.
Akanji also said not selling dollars to BDCs is a good step that has ended badly because whereas the BDCs are bad, the CBN has not provided enough forex, and corrupt people are taking advantage of it by round-tripping. He said the BDCs should be regulated.
Akanji added that Nigeria needs to imbibe international financial instruments and regulations that would add value to the markets and the economy. He stressed the need to create a financial hub that would allow for dollar clearing.
He said the Treasury Single Account (TSA) is a wrong policy because the government is too big to be having all the money in the CBN to freeze.
“We need an A-team to manage our economy. We need to advance into beneficiation for Nigerian products and bring global standards to enhance employment,” he added.
“Make policies light. Kill corruption. When that is done people will have hope. Once there is hope and a means of doing the right things people will stop doing the wrong things. Once it gets easier here people will stay home and work. And the local currency will gain value,” Akanji summed
If Fashola, an attendee, expressed disappointment that no instruments are being traded on Nigeria’s oil, hence no value addition. About policies, she said, “Nothing is going to move forward as long as policy directions are not clear. No one wants to invest in uncertainty. Uncertainty drives away everything.”
Olumide, who joined the webinar from the U.S. bolstered Segun Akanji’s submission and added that the result of our weak institutions is our lack of ideals.
Segun Akintemi supported the argument of Dr. Tope Fasua, who had mentioned corruption as one of Nigeria’s biggest issues right now.
Ernest Edgar who joined the webinar from Canada stressed that there must be balancing acts between fiscal and monetary policy. He buttressed Tope Fasua’s argument that perception of a currency contributes to stability. He added that stable policies are necessary to drive perception.
Oluwa Shobowale however treaded cautiously, saying assumptions are always wrong when put side by side with analytics. He said we can’t draw conclusions of the causes of the hemorrhaging naira without subjecting those assumptions to analytics. He observed that every time there is an announcement made by the CBN governor the currency loses value. He said there are many variables that do not correlate. If assumptions can stand the test of analytics then we will know what to tackle. Or we may be tackling the wrong problem.
Olumide Wanwayor, on his part, said bad policies are killing exports. He said it is expensive to export out of Nigeria, which affects the value of the naira. “Why are people paying dollars for services in Nigeria?” he asked.
Promise George, who works for the Bank of Industry (BOI), said industrialists are discouraged because of the bad investment environment and resort to importing finished products, which put pressure on the naira.
Nonny Ugboma, who joined the webinar from the United Kingdom, said Nigerians need to create value and not extract value.
Aminu Gwadebe, the president of the Association of Bureau de Change Operators of Nigeria (ABCON) said as long as the government continues to have a monopoly of diaspora remittances there will always be problems.
The forum ended on a note of yearning for more regular meetings as such.