WILL THE NAIRA EVER RISE AGAIN?

BY SIMON KOLAWOLE

Someone recently said on social media, and I agree in toto, that the exchange rate has the biggest impact on the costs of goods and services in Nigeria — far more than the price of petrol. I somehow never dwelt on this fact, even though it is bleeding obvious that movements in exchange rates have direct impact on the cost of living in an import-reliant country such as ours. All along, I had been more concerned about the price of petrol, maybe because transportation costs react instantly to the pump price. The impact of exchange rate changes can take weeks, even months, to reflect on prices. We can understand this from the catastrophe that followed the recent attempt to float the naira.

Conventional wisdom is that if the gap between the official and parallel markets is bridged, there would be a semblance of market-determined rate. It was optimistically projected that while the official rate may move up, the parallel rate would come down and the unidentical twins would meet somewhere in-between and live together happily ever after. When President Bola Tinubu was inaugurated on May 29, 2023, the official rate was around N460/$ and the parallel rate — that is, on the streets — was around N750/$. The experts said if the official peg was moved, or removed, the exchange rate would find its level around N650/$ by December 2023. They cannot say that again.

Ladies and gentlemen, as the official rate moved forward, the parallel too kept leaping ahead — as if singing “you cannot catch me”. As I write this, the open market rate is around N1,230/$ while the national currency is officially N844/$. There are a million and one reasons for this downward journey, so I am forced to wonder: will the naira ever rise again? Ex-President Muhammadu Buhari was known for opposing devaluation. His argument, at least in private, was that no currency ever recovers from it. He also thinks Nigeria does not stand to benefit from devaluation, maintaining that only exporting economies enjoy an advantage because their exports would be cheaper.

But Buhari didn’t countenance one other thing: there is a difference between when devaluation is voluntary to encourage exports and when it is compulsory in response to changing economic realities. You can voluntarily decide to lose weight because you think it is good for your body and soul, but your doctor can also ask you to lose weight because you have or may have medical issues. By 2014 when the Nigerian economy started a downward journey largely because of a drop in oil revenue, devaluation was no longer optional — it was inevitable. Instead, we chose to start drawing down on our FX reserves to “defend” the naira. By the time we woke up, we were running on empty.

While I still disagree with those who see devaluation as a magic formula to the FX crisis, I also admit that holding tight to the exchange rate is not a solution either. I have heard many Nigerians reminisce again and again about the “good old days” when “our economy was very strong” and 80 kobo exchanged for $1. A new car was N5,000, a return ticket to UK was N200 and so forth. Ironically, it was not that “our economy was very strong”, as some people tend to argue, but we just had a sustained inflow of petrodollars and started drinking ourselves to stupor. The windfall dramatically altered our collective IQs and gave us a false sense of prosperity. We’re still paying the price.

In the 1970s, there were about 70 million Nigerians feasting on an oil output of about 2.4 million barrels per day. Today, we are over 200 million while the oil that made “our economy strong” has dropped to 1.2mbpd. I will be surprised if Nigeria’s share of this is up to 300,000bpd. Years ago, we were getting up to 800,000bpd from onshore production alone before the oil companies started relocating offshore to avoid host community issues and other stories that touch the heart. I would be shocked if NNPCL has remitted one dollar to the federation account in three years. Rather, it has mortgaged our share of oil production to import petrol or do all kinds of “fiscal support” deals.

If you are expecting the naira to recover or stabilise anytime soon, you may have to calm down. There are many reasons for my plea. One, the major problem is severe shortage of forex. We simply do not earn enough forex to meet our needs and wants. For a country that depends heavily on imports — raw materials, finished products, medication, and intangibles, etc — the demand for forex is not going to reduce soon. In a good month, we need maybe $5 billion. I doubt we earn up to $1 billion in real cash (not the book figures). We were taught in O’Level economics that when demand outstrips supply, price will rise. For every $1 we earn, we maybe need $5 to spend. Do the math.

Pre-2014, the NNPC (without the L) was remitting averagely $3 billion cash monthly. Occasionally, it was as high as $5 billion. We were also receiving steady foreign investment inflows. The CBN could meet every FX demand. Manufacturers could order raw materials without hassles. Airlines could access official market to repatriate their ticket sales. Our naira cards could dispense foreign currencies abroad. The gap between the official and parallel market rates was roughly N2. You really didn’t need to go to a bank to buy PTA or BTA. The N2 difference was not going to hurt you. This is what happens when you have enough forex reserve to play with. Everything goes like clockwork.

But it also comes with a problem: you start wasting your foreign reserves. You spend on unnecessary items, especially in a country with a preponderance of warped mentality. Only God knows how much we have burnt on importing petroleum products since our refineries stopped working decades ago. Every dollar we spend on importing products weakens the naira. A country that should be exporting petroleum products (and earning more forex) is spending its forex income from crude oil exports to import petrol, diesel, kerosene and other products. This is in addition to the billions of dollars we traditionally spend every year to “revive the refineries”. More dollars will not give you more sense.

Two — and this is closely related to forex shortage — there is an unrelenting FX demand. The demands of a country with over 200 million who rely on foreign goods and services are better left to the imagination. We import textiles, foodstuff, drugs, shoes, phones, and so forth. A friend estimated that the 43,482 Nigerian students that emigrated to Canada between January and June 2023 alone needed $1.3 billion to cover tuition, tickets and proof of funds. That is just Canada and that is just half year. All these are legitimate demands. Nigerians of means are relocating their families abroad and sending “upkeep” every month. The inescapable fact is that FX demand will continue to grow.

The CBN under Buhari tried to use “demand management” to contain the haemorrhage by restricting eligibility for forex to scores of items. Advocates of free trade would never support this option for many reasons, particularly as it stifles a major economic activity. Trade is the livewire of economic activities. I would argue that while restricting trade is not the best option, some desperate times require desperate measures and such situations can prompt you to look inward and discover your capabilities and capacities. The “demand management” policy did not work and has now been discarded. All items — including incense, rice and private jets — are now eligible for forex.

I’m out of space, but I will make my third and final point: currency substitution. There are two parts to this. The first is that the currency of corruption in Nigeria is the dollar. Before the introduction of BVN, corrupt money could easily go through the banks. Government officials would open accounts and operate them anonymously, some using the names of their drivers and cooks. BVN disrupted this. Cash became the solution. The dollar readily replaced the naira in this dirty business. Although not new, it is now the order of the day. Rather than drag bags of Ghana Must Go full of naira notes, you can keep the dollar equivalent in your pockets. This is how political bribes are shared.

The second part of currency substitution is that the unstable condition of the naira has created a vicious circle caused by hedging. People want stability and even better value, and the dollar is the currency of choice. Why keep the naira when it keeps losing value? Moreso, speculators trade in the dollar as a commodity. This raises the FX demand pressure. A social media user recently joked that if you owe someone N120,000, you could give him $100 to hold and tell him that the money would be complete “soon”. This was when it was, I think, N950/$. In weeks, it jumped to N1300/$. In such a situation, it would be very difficult to persuade some people to keep their monetary assets in naira.

Finally, if you are reading this and saying, “Well, let me buy and keep the dollar then,” you are part of the problem — but you are only making a rational decision. I wouldn’t blame you. It is because of the nature and structure of the Nigerian economy. When militants were attacking the pipelines in the mid-2000s and the oil companies started moving offshore, we did not realise it would affect Nigeria’s share of oil revenue someday. When we neglected our refineries and took to full-scale importation of petroleum products, we did not calculate the impact on our FX reserves. When our education and health care services were going down, we did not realise that the naira would pay the price one day.

In the final analysis, what we are dealing with is not much of a demand ailment but a supply disease. The lasting solution is for us to earn enough forex to meet our needs. Simple. If demand is $5 billion and supply is $10 billion, we would be fine, trust me. A shortcut to improved supply would have been another oil windfall, but that was when we were getting a decent share of oil production. These days, high oil prices do not mean much to us. Gone are the days when we were earning $3 billion monthly. Meanwhile, other sources of forex would be an exponential growth in non-oil exports and massive inflow of investments but it doesn’t happen overnight. In other words, the naira needs a miracle.