• Businesses to Close, Price of Goods to Rise—LCCI
• CBN Overwhelmed, Needs FG’s Support to Save Naira
Naira official rate fell below parallel market rate
The Naira’s official exchange rate fell below the street value, signaling the Nigerian currency may be closer to its fair market level after plunging to a record against the Dollar this week. The Naira closed at N1,482.57 per Dollar in the Nigerian Autonomous Foreign Exchange Market (NAFEM) window on Tuesday, according to data published by the Financial Market Infrastructure Group Warehousing, (FMDQ) which calculates the exchange rate. The currency traded at N1,475 on the parallel market on the day, according to Abubakar Mohammed, Chief Executive for Forward Marketing Bureau de Change Ltd., which compiles the data. The Naira dropped to a record low against the Dollar on the official market on the day, FMDQ Exchange data showed on Wednesday, slipping below rates on the unofficial parallel market in intra-day trades. The Naira fell as low as N1, 531 to the Dollar during trading on Tuesday, FMDQ data showed, compared with N1, 460 quoted on the parallel market. The currency later closed at N1, 482.57 on the official market, according to FMDQ.
The latest fall occurred after market regulator, FMDQ OTC Securities Exchange, said its methodology for calculating closing rates on the currency was revised last week to include more data, and that the levels on its computation had changed. The Naira has lost around 40 per cent since the start of 2024. Its official exchange rate has been drifting towards the parallel market level as foreign currency shortages in the West African nation funnels demand to unofficial sources. The Central Bank of Nigeria(CBN) has warned lenders about underreporting transactions on the financial market, leading to misinformation, attempts to create price distortions and market manipulation, and said such activity would be sanctioned. On Wednesday the currency eased on the forwards market, with traders quoting the Dollar as low as N1,650 in a year’s time.
Economic turbulence looming
Financial experts say the Naira may hit N2,000 to a Dollar exchange mark very soon considering how the currency continues to depreciate both at the official and parallel markets. That is despite efforts being made by the Central Bank of Nigeria (CBN). According to Simon Akilo, a financial expert, the CBN seems to have reached a point where it can no longer face the demand of stabilising the foreign exchange market alone. He said: “Looking at the development, the Federal Government must be ready to support the CBN more significantly than it is currently doing. The NNPCL initiative with the Afreximbank is good but not enough”. Cyril Ampka, an economist, observed that the rate at which the Naira has been falling is alarming. He said: “My worry is that it seems the Naira is condemned to its worst devaluation in history. This is not encouraging businesses as some of them need forex to keep their company as a going concern. “I will suggest that Nigeria should as a matter of urgency consider selling some moribund assets to raise the needed foreign exchange to stabilise the market”.
This came as members of the organised private sector and economists say the fall of the Naira at the NAFEX window would likely lead to business shutdowns, job loss- es, hikes in the prices of commodities and services, and high inflation. According to them, the depreciation of the Naira at the official window to N1, 482.57 a Dollar at the close of trading on Tuesday had wider implications for the economy. The Lagos Chamber of Commerce and Industry says that many production factories would shut down if the government failed to save the Naira. Speaking, the President of the Lagos Chamber of Commerce and Industry, Gabriel Idahosa, blamed the unrestrained activities of currency speculators as the major reason behind the continued devaluation of the Naira.
He noted that the country’s forex crisis was largely due to declining exports. Idahosa said: “Nigerian economy hardly plays by the book. In this particular case, it is just a bunch of wicked people, who are hoarding the Dollars. The CBN cannot control the value of the Naira. It is people who export or refuse to export that control the value of the Naira. “As long as we don’t export, Dollars will be scarce, and anything scarce, the price will go up. It is scarce because we have refused to export. We just sit down and blame CBN and the government. Let’s stop living in this dream world where our problem is the CBN. “As far as foreign currency is concerned, our problem is with us, Nigerians. Let us look at our dining tables every day; all the products there, how many of them are produced locally?” Idahosa further said due to how the Naira has been devalued, players in the real sector of the economy would have no option but to keep implementing price hikes to stay in business.
He noted that companies were already folding up in the country and that more would join once they were stretched to breaking point because of the current exchange rate regime. He added: “Once your customers can no longer afford your products, you would either resort to getting local raw materials or you close shop. Companies are already closing. It is happening already. “Some of the multinational companies that close did so for this exact reason because the prices of products will become too expensive if you keep buying Dollars from the parallel market. Those are the big companies; there are others I do not know about.” Also speaking, the President of the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture, Dele Oye, said the development would lead to closure of many companies in the country. According to him, the present currency crisis has been exacerbated by panic buying of Dollars by people, who have no need for the currency but continue to purchase it to protect their funds from devaluation.
He said: “Companies are already closing up. The reason they are closing is because they are not able to sell their current stock. Some of them entered contracts for certain supplies at a particular price. By the time they approach the market for raw materials, the price has gone up. So, it is going to create room for all sorts of disagreements and litigation. So, when they cannot sell, they close. “We all know that stability is an important element of business. The currency issue is a major catalyst behind inflation. It affects planning. It affects production. Businesses are afraid to produce because when they do, they cannot recoup to be able to restock. So, if they sell their products at the current rate, they won’t be able to restock. So, what that means is that almost all economic activities will come to a standstill.” Similarly, the President of the Small Business Owners Association of Nigeria, Femi Egbesola, has lamented that businesses are already dying because of the forex crisis and the inflationary pressure in the economy.
He said despite verbal assurances from the government of favourable policies that would enable businesses to thrive, there has been little or no action by policymakers to help businesses navigate through the current business headwinds, which have been themed by the incessant devaluation of the Naira. Egbesola said: “The exchange rate situation is killing business by the day. Business- es are dying by the day. Those businesses that are not dead are ailing. Many businesses are folding up. Today, an aluminum company called to inform me that they are closing by Friday after injecting a loan of about N30million about two months ago, inflation has eaten it up. “One major indicator of inflation is forex. You cannot plan. Today, you go to the mar- ket, it is N1,300. Tomorrow, it is N1,400; next tomorrow it is N1,500. You know most of our input is imported. We import raw materials; we import equipment, and there is an extent you can pass these costs to consumers. When the purchasing power of consumers is near zero, you can’t pass it on to them.
“The government is also not helping matters. The tariffs keep increasing. The levies keep increasing. Lagos State has just introduced another levy on businesses. It is killing. If we are to read the body language of the government, it is like they are not interested in micro and small businesses.” On his part, the Vice President of the Nigerian Association of Small-Scale Industrialists, Segun Kuti-George, said, “We are closing down. It is happening. Businesses are shutting down.” Agricultural products are not spared. The President of the Coalition Network of Stakeholders in Agricultural Mechanisation, Ola Oladimeji, lamented. Last week, manufacturers had hinted that they would implement fresh hikes in the prices of commodities in the market. The President of the Manufacturers Association of Nigeria, Francis Meshioye, said: “It is not possible to remain profitable with this exchange rate. The first challenge is breaking even. It means the prices of things will be higher, and the income is not there for people to buy things as they should buy as things become more expensive.” Meanwhile, the CEO of Financial Derivatives Limited, Bismark Rewane, says without fixing supply gap issues in the economy, the Naira will continue to fall.
“It doesn’t matter which window. Unless there is a sufficient supply of Dollars in the foreign exchange market in Nigeria, the situation will remain the same.” The Managing Director, Cowry Assets Management Limited, Johnson Chukwu, believes the CBN efforts at unifying the exchange rate are commendable but pointed out some of the downsides. According to him, with the official rate hitting N1, 500 a Dollar, fuel prices and food prices are expected to go up as well. He also stressed the need for the CBN to fund forex demand at the official window to stabilise the exchange. He said: “With the depreciation of the Naira at the official window to N1, 500, it is expected that fuel prices as well as food prices will go up. The new rate will impact diesel prices, and this will translate to an increase in transportation costs and food prices. Also, for imported products, it is expected that the new exchange rate will translate to higher prices of goods and services.” Elsewhere, the International Monetary Fund(IMF) believes the Naira is not trading at its fair rate against the Dollar yet.
Nigeria’s Country Representative, International Monetary Fund, Dr. Christian Ebeke, recently said, “There is also uncertainty in the market. “I am not sure that the parallel rate is the ultimate rate. At some point, we may think about a fair Naira rate that is probably between what we see in the parallel market and the official market. But it is very difficult while you are still in the transition phase to talk about what is a fair value and what we are seeing.”
CBN clears $500m backlog
The CBN, in its determination to address the backlog of verified foreign exchange transactions, released $500 million to settle the backlog of forex the country is owing, which comes barely a week after the bank paid approximately $2.0 billion to settle outstanding commitments across manufacturing, aviation and petroleum sectors. Reacting to the development, founder of B. Adedipe Associates Limited, Dr Biodun Adedipe, applauded the apex banking sector regulator, saying that this is a proof that CBN has capacity to extinguish the matured obligations and that necessary forensic audit has confirmed that the obligations paid are genuine. Adedipe said: “This should build confidence in the foreign exchange (FX) market and inspire a restart to normalcy.
“It is also a good signal to prospective foreign investors that have been tentative that the risk perception about profit and principal repatriation at investment maturity is not as high as commonly thought.” On his own part, Professor Uche Uwaleke, a former Commissioner of Finance in Imo State and recently appointed Special Adviser to the Chairman of the Senate Committee on Banking, Insurance, and Other Financial Institutions, stated that despite CBN’s interventions, the country still needs “a Buy Nigerian Law,“ if noticeable impact must be made on the local currency. He said it goes without saying that export- based diversification remains the only sustainable solution to the present Forex crisis.
Uwaleke said: “The current strategy of the government appears to focus on the supply side involving borrowing Dollars to improve liquidity in the near term. “But it may not record any significant success except the unbridled demand for Forex is dealt with. This is because the forex hole to be filled is quite huge.” To curb the demand pressure, Uwaleke in a chat with a national newspaper, suggested that the government should compel a change in consumption behaviour by enacting a ‘Buy Nigeria law’ akin to the ‘Buy America Act’ of 1933 and recently the ‘Build America, Buy America Act’ of 2021. He also said that Nigeria’s import data support revisiting and scaling up the CBN’s currency swap deal with the Peoples Bank of China.
“Given that the bulk of Nigeria’s imports are from China, it stands to reason, therefore, to explore ways of bypassing the dollars and settling these transactions in the Yuan. “This was the idea behind the currency swap with China which was largely inadequate in size. “In order to increase the stock of Yuan in our external reserves, Nigeria can issue panda bonds, which are bonds denominated in the Chinese Yuan and are considered cheaper than Eurobonds,” the former finance commissioner recommended.
How to strengthen weakened Naira
Two experts, a Nigerian political economist and former Deputy Governor of the Central Bank of Nigeria (CBN), Professor Kingsley Moghalu and the Lead Faculty of Tekedia Institute, and Chairman of Tekedia Capital, Professor Ndubuisi Ekekwe, have expressed opposing views about how to strengthen the weakened Naira, and whether or not the ‘floating’ decision was good or bad. To the former CBN Deputy Governor, the problem with the Naira today is not that it was or has been “floated”. According to him, Nigeria no longer has the oil revenues (for various reasons) to underpin a managed float exchange rate regime with robust foreign reserves. “The real failure of Nigerian economic policy is that of having failed to diversify its economy away from reliance on natural resources for forex supply towards an export economy based on value-added manufacturing and services.
This is the zone of industrial and trade policy. The reason for this failure lies in Nigeria’s political culture that fosters a renter economy. “The floating is inevitable because we no longer have foreign reserves or a healthy Dollar revenue income stream to back up the value of the Naira. Spending Dollars you don’t have to back up the value of the Naira while you are amassing foreign debt has failed, “Moghalu wrote in his X handle last weekend. This is coming barely two days after the Governor of the Central Bank of Nigeria (CBN), Yemi Cardoso, declared that the Naira is undervalued, promising to expedite the discovery of genuine price in the near term. According to Moghalu, habits, especially bad ones, are hard to break. But Malaysia, Thailand and Chile, all originally resource based economies, successfully achieved ‘economic complexity’ over time, manufacturing and exporting increasingly sophisticated products. For Nigeria to achieve this, he said, it would require what its present generation of politicians appears to lack, “for you cannot give what you do not have.”
He said: “The level of political will required to change course is extraordinary, and requires a focus on merit and competent technocratic management rather than crony- empowerment based on vested self interest. Until these fundamentals are fixed, there is little hope for the Naira. The world has changed from the days of our being awash with oil money. Many other countries that are not in OPEC now produce massive amounts of oil.” Professor Ekekwe did not agree with Moghalu’s position completely. Instead, he said that the current floating of the Naira is one of the worst economic policies in Nigeria since 1999. To him, that decision has a score of “F” (failure), because if demand continues to rise for US dollars in Nigeria and the country has no means to improve the supply of US dollars (as is the case now), the Naira has been disarmed, since market forces will weaken its positioning.
The unstable state of the Naira is more dangerous to the economy than mismatch on pricing between official and black market currency rates, which ironically the Naira floating did not close, making the core reason for the floating largely unrealized,” he said. According to him, despite what any person could say, from the IMF to the Central Bank of Nigeria, economics is “science” played by the people. And science operates on principles. He explained that in the natural philosophy domains like engineering, those principles are self-evident: “You cannot throw a beam during construction without supporting systems.” In social science like economics, Ekekwe noted that a Central Bank cannot float a currency without first ensuring that it can create parity on demand and supply. He believes that this is Economics 101, adding that every WAEC Economics textbook always begins with Professor Lord Robbins definition of economics where he posited on the relationship between the ‘end and scarce means,’
“In the past, we credited people with cheap US Dollars and they could divert the funds to other things. If we change to a rebate system, we would remove that loophole as before payment, we would reconcile data from customs, banks and the company, making sure cheap US dollars were going to productive things over expanding mindless consumerism. “From basic economics, removing fractions to attain market transaction equilibrium faster does not mean price can radically improve if demand and supply positions remain misaligned. That is fundamental and cannot be disintermediated,” he said. “If 90 people each wants to buy $100 with Naira, and you have only two people selling each $100 for Naira, whether you use mobile app, bank hall, bureau de change, etc, the price of Naira will go up, because there is no parity between demand and supply here. The impact is clear: lack of stability in the exchange rate makes long-term investments impossible, pushing the nation into a trading and rent-seeking ground.” In his recommendation, he stated that the government can ideally do this floating later once it gets a good picture on how to have access to US dollars via any means possible that excludes borrowing.