Analysis… Diminishing value of naira: Whodunit?

In from Ali Smart . . .
One of the assurances given by President Muhammadu Buhari during the electioneering campaign was that the value of the naira was going to be firmed up as soon as he gets on board. But that promise is far from being achieved as the naira has been on a free fall in recent months, especially in the last few days.

Specifically, at the weekend, the naira fell to its lowest, from N245 to N260 to the dollar, the worst since its introduction in 42 years.

In December 1980, exactly 35 years ago, the naira went for one dollar and eight cents. But the naira which was introduced by the Central Bank of Nigeria (CBN) on January 1, 1973, fell to its lowest last Friday, trading at N260 to the greenback on the parallel market.
The local currency continues to plunge as the CBN holds on to its stringent dollar sales policy at the black market.

Earlier in 2015, the CBN had introduced the policy of selling over $80m to Bureau De Change (BDC) operators, to keep the unofficial rate close to that of the parallel market. The policy is however undergoing review, as a CBN circular has set out new guidelines for the 2016 BDC transaction of dollars.

The circular, which will come into effect in January, “orders retail money exchanges to deposit a mandatory cautionary deposit of N35 million in an account with the central bank, in addition to a minimum capital requirement of N35 million.”

The decision, experts believe, would trim the number of BDC operators in the country. When the local currency was introduced in 1973, the nation started with notes for 50 kobo, 1, 5, 10 and N20.

The 50 kobo notes were phased out in 1989, 1990, before N50 notes, better known as ‘Wazobia’, were issued in 1991. Former president, Olusegun Obasanjo, holds the record as the president to have introduced the highest number of notes in Nigeria’s democracy, introducing N100 in 1999, N200 in 2000, N500 in 2001 and N1000 on October 12, 2005.

Who bears the brunt?
The free fall of the naira from N241 to N260 last week has raised fears of a foreboding of trouble for the economy, with many arguing that this development does not bode well for the economy because of the immediate and long terms implications.

In the view of some traders who spoke on the fall of the value of naira, the devaluation may have been caused in part by scarcity in the market as well as the CBN forex restriction policy.

To parody JP Clark’s ‘The Casualties’, there are many people who have indeed fallen as casualties since the naira took a nosedive. From construction, hospitality, travelers, to airlines, importers, businessmen, manufacturers, all are casualties.

Speaking with Ripples Nigeria, the Chief Operating Officer of Dana Airlines, Mr. Obi Mbanuzuo lamented the falling value of the naira, describing it as an unhealthy development for struggling domestic airline carriers.

He stated that the situation has led to astronomical rise in the cost of aircraft maintenance, payment of salaries adn aircraft spare parts which he said are dollarised.

“We are not coping with the diminishing value of the Naira. Maintenance is there to look at; salaries would have to be paid. We just have to cope. Things will turn around very soon with this government.”

It was learnt that some airline operators are already tinkering with the idea of passing on the increased costs of aeroplane maintenance (which is done in dollars, hence the increase) to their travelling customers.

The airline chief stated that the cost of aircraft maintenance could double coupled with insurance premium which could also be high. It is already a tough era for operators in the Nigerian aviation sector as wary international aircraft lessors classified the country among “high-risk nations” for doing business.

National Assembly t o the rescue
The Senate had in September summoned Godwin Emefiele, governor of the Central Bank of Nigeria (CBN) over the state of the economy, especially on the falling value of the naira.

The senators were worried that the free fall of the naira had serious implications on the economy.
This followed a motion moved by Senator Nafiz Suleiman (Bauchi north) titled: “The state of the economy: Naira depreciation and its implications,” in which the lawmaker identified the illicit fund flow and money‎ laundering through Nigerian financial system as one of the factors contributing to the weakening of the naira.

Suleiman said he is worried that the naira has depreciated in the last few months at a much faster rate than it had appreciated over the last two years.

The senator argued in the motion that there is the need to review the procedure for processing demand and supply of foreign exchange by the CBN and consideration of other appropriate additional options to stem the precipitous depreciation of the naira and to discourage currency speculators.

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CBN plausible argument
The CBN governor, Godwin Emefiele while defending the continued fall in the value of the naira, attributed it to factors beyond the control of the CBN and the federal government.

This, he said, informed part of the reasons the central bank chose to devalue the naira few months ago, rather than continue in the defence of the nation’s currency from the external reserves.

Emefiele, who spoke at the Bankers’ Dinner organised by the Chartered Institute of Bankers of Nigeria in Lagos a fortnight ago, disclosed that the bank had spent a huge chunk of the external reserves in defending the naira from falling, adding that the best thing to do is to devalue it.

He said although the decision to devalue the national currency would come with pains, it would lead to benefits in the long run.
The CBN boss stated, “The CBN took the decision that it would be sub-optimal to continue to heavily deplete the country’s reserves in defending the naira. This decision was appropriate because neither the central bank nor the federal government is in control of the major factors causing the depreciation of the nation’s currency.

“In fact, the Russian central bank has abandoned its defence of the currency and allowed the depreciation of the currency, but only after it was said to have spent over $90bn in defending the currency over a couple of months.”

The CBN governor also noted that in recent time, Nigeria had faced a simultaneous dwindling supply of the dollar and rise in demand.
This, he said, had led to a rise in the price of the dollar at both the interbank and Bureau De Change segments of the market.
Speaking further, Emefiele claimed that the underlying factors that led to the dwindling supply of the dollar were mainly global and not country specific.

The factors which he said were beyond the CBN and the government included the fall in the global oil prices, the end of the United States Quantitative Easing programme and the global fall in the price of other export commodities apart from the crude oil.

Divergent views over naira devaluation
Opinions are divided as to the propriety or otherwise of the devaluation of the naira, with some analysts arguing that it will trigger increase in effective demand, thus ultimately result to increase revenue. But a few others have said this is hardly cheery news.
In the view of Prof. Chris Onalo, Chief Executive, Institute of Credit Administrators, “The devaluation of the naira given the economic situations recently is a move towards the right direction. Any country that depends solely on oil revenue such as the case with Nigeria will be facing same situation.”

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Emeagwali Pius, a financial analyst in Lagos, is not on the same page with Onalo. According to him, “The CBN needs a sound fiscal policy, a pattern of government spending that will be monitored for effective result.

“The former governor of CBN will not have devalued our currency, rather he would have adopted strategies aimed at discouraging speculation which would have halted the continuous slide in the value of the naira. This decision by the current CBN governor is really bad and would further hunt the ailing economy”, he said.

A number of financial analysts suggest that the average Nigerian must learn to reduce their tastes for foreign goods until the economy stabilizes, and that money launderers must reduce their activities substantially and above all, Federal Government spending must be geared on viable economic projections.

Others note that everyone has a role to play in restoring sanity to the economy, and that it is not just an assignment for the CBN alone.

Others disagree, noting, that control of foreign exchange must be the sole responsibility of the CBN without Federal Government’s direct or indirect intervention, and that there are great avenues and loopholes by which politicians are releasing foreign exchange without the knowledge of the Central Bank.

Whatever the reasons adduced for the falling strength of the naira, most Nigerians are however of the view that the current administration owes it to the electorate to ensure the nation’s currency is strengthened, to stand favourably against other international currencies, especially the US dollar, since this is one of the major promises that got them into power.

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