The Naira’s Struggle and the Call for Economic Reform
In 2015, a series of articles explored the complexities surrounding Nigeria’s currency devaluation and its impact on the economy. These discussions highlighted how policies such as currency devaluation, forex restrictions, and multiple exchange rates have contributed to inflation, discouraged investment, and deepened economic instability. Despite expert-backed reform proposals, key issues like excess liquidity and lack of transparency remained unaddressed.
The pressure from international investors and Nigerian banking leaders in 2015 was significant. They urged the Central Bank of Nigeria (CBN) to devalue the Naira to restore liquidity in the foreign exchange market. Analysts argued that restrictions and fixed rates discouraged investment and worsened instability, while critics and global media questioned the CBN’s leadership and called for higher interest rates. However, past devaluations had triggered inflation, wage erosion, and economic decline. The underlying issue may be excess Naira liquidity rather than dollar scarcity, and further devaluation risks worsening economic and social hardship.
International Pressure and Domestic Concerns
In July 2015, an Agency report titled “CBN has no option but to devalue Naira” noted that Ravi Bhatia, a Director at Standard and Poors, observed that another devaluation, possibly by more than 15 percent, was inevitable to satisfy overseas investors. The report also mentioned that JP Morgan had warned in June 2015 that it could eject Nigeria from its benchmark index by year-end unless it restored liquidity to currency markets.
Another report titled “CBN may fail hedge fund speculators’ betting on Naira devaluation” highlighted concerns from financial analysts. Sewa Wusa, Head of Research and Development at Sterling Capital, stated that the onus lies on the CBN to devalue the Naira before it is too late. According to Wusa, the banning of 41 items from the forex market was pushing the Naira southward.
Banking Industry’s Stance
Research analysts at FBN Capital Plc also counseled that devaluation fears were discouraging offshore communities from re-entering the market. In a report titled “Bank CEOs call for further Naira devaluation,” First Bank Plc’s Group Managing Director, Bisi Onasanya, warned that banks could not support the Naira at the present artificial level of less than N200 in the official market. He called for further devaluation of the currency, emphasizing that the rate was not sustainable.
Onasanya insisted that the longer the country continued to hold onto this rate, the more it sent signals to the international market that Nigeria was not serious as a country. He added that the economy would be at a standstill unless there was some adjustment to the present level of the Naira.
Criticism of the CBN
Some financial interest groups engaged in an open smear campaign to discredit the CBN’s efforts to maintain sanity in the forex market. For instance, “The Economist,” a long-established and respected international financial media house, questioned the competence of Godwin Emefiele as CBN Governor. In an article titled “Nigeria’s Currency: Toothpick alert,” it ridiculed his attempt to control forex demand.
The overriding message from these groups is clear: speculative overseas investors and their media organs are in agreement with the movers and shakers in Nigeria’s banking industry to demand further reduction in the Naira’s exchange rate beyond N199=$1. Additionally, these interest groups want the CBN to instigate higher rates of interest within the Nigerian economy to promote the profitability of speculative foreign investors.
Potential Sectoral Impact of Further Devaluation
Further Naira devaluation could have severe consequences for Nigeria’s economy and social welfare. The migration from a potential industrial powerhouse to a subdued and stumbling economy began with the adoption of the IMF’s Structural Adjustment Programme during Babangida’s regime. The chorus from international agencies at that time was that falling oil prices with an unserviced debt burden and the consequent restriction of trade credit to Nigeria were the products of an allegedly overvalued Naira exchange rate.
Ultimately, the overwhelming pressure from international finance agencies, with the government’s craving for international support for another illegal military junta, precipitated serial Naira devaluations from less than N2 to over N22=$1 by 1993. This rash decapitation of the Naira exchange rate pauperized Nigerians, including university professors and technocrats, and tragically triggered the brain drain to more stable economies in Europe and America.
Economic and Social Consequences
Wages and salaries soon became decimated by the unyielding devaluation, making it necessary for most Nigerians, particularly civil servants, to make awkward adjustments and engage in ‘extra-curricular’ activities to supplement their paltry incomes. Although the impact of Naira devaluation may not have been the origin of corruption in Nigeria, it certainly contributed to its spread as well as public apathy to the disease.
Babangida’s decision to drastically devalue the Naira did not recognize its impact on fuel prices. The notion of fuel subsidy apparently became inevitable with Naira devaluation. Regrettably, successive administrations have remained in denial of this relationship, and the most recent devaluations from N155 to N199=$1 within four months also triggered another 20 percent rise in fuel prices despite the irony of prevailing lower crude oil prices.
The Cost of Devaluation
An additional 20 percent devaluation would reduce the minimum monthly wage to about $75, down from almost $120 less than five years ago. With inflation consistently near 10 percent, the current minimum wage undeniably buys much less than was earlier possible, leading to a collateral reduction in consumer demand and new investment decisions.
If the CBN now yields to the current pressure to promote higher interest rates, the cost of government borrowings will inch closer to 20 percent to impress overseas investors. In this event, the cost of funds to the real sector may also approach 30 percent, further discouraging investments, reducing capacity utilization, and employment opportunities, and turning the possibility of diversifying the economy into a mirage.
The Need for a New Approach
Nonetheless, some analysts still suggest that weaker Naira exchange rates will promote Nigerian exports. Regrettably, Nigeria’s non-oil exports have continued to dwindle as the Naira exchange rate collapsed over time from stronger than N1=$1 to N200=$1. The strategies to rescue the Naira exchange rate have consistently related to the reduction of dollar demand. However, in view of the apparent failures, it may now be time to recognize the unceasing systemic excess supply of Naira as the actual villain.
A market with surplus Naira constantly chasing rations of dollar supply will always constrain Naira appreciation. It is time to take a different approach and address the root causes of the problem rather than continue with ineffective measures.
SAVE THE NAIRA, SAVE NIGERIANS!!!
