WHY THE NAIRA RATE REMAINS RESISTANT TO DEBT RELIEF AND HUGE RESERVE
By: Sir Henry Olujimi Boyo (Les Leba) first published in August 2005
Last week, this column republished “The Merits & Demerits of A Weak Naira in Spite of Increasing Dollar Reserves!”The article outlined the advantages and disadvantages of a weak Naira in order to portray a clear picture of how deepening inflation impacts Nigerians each day. This republication can be found using the below link.
(See www.betternaijanow.com for this series and more articles by the Late Sir Henry Boyo)
Today’s republication, like the previous article, was written as far back as the year 2005. The article begins by discussing the Naira rates of exchange relative to the Dollar, at the time it was written, which has evidently worsened significantly since. It should serve as an alarm to the leaders of the nation that the time to act is now, because things are certainly not improving. The article explains why debt relief and huge reserves do nothing to appreciate the Naira rate of exchange by drawing a historic comparison to illustrate the author’s arguments. It makes mention of the Dutch Auction System as a deliberate means of devaluing the Naira.
As you read through the below article taking note of previous events and rates, keep in mind its initial publication (2005).
The naira rate of exchange against the US$ has remained within the N132 – 3 = $ for over a year or so. For most of that time, it has stayed put at a rate of N132.8=$1; in this event, the Central Bank of Nigeria – CBN – has on various occasions lauded its own ability at keeping the naira rate stable. Indeed, the stakeholders in the real sector, including the Manufacturers Association, the Banks, Chambers of Commerce, and even members of the National Assembly and other eminent Nigerians have all agreed and commended the monetary authorities for keeping the naira rate stable. These stakeholders’ concept of stability is predicated against the backdrop of a systemic devaluation of the naira over the last two decades from a stronger than parity rate with the dollar to the current rate of about N133=$1.
The result of a substantial and arbitrary official devaluation of the naira particularly between 1986 and 1993 and later between 1999 and 2004 was a nightmare for the planning responsibility in all areas of commerce and industries with the attendant debilitating distortions and dislocation in the whole economy. It is no wonder therefore, that stakeholders have welcomed the CBN’s administrative fiat in enforcing a rate of naira which has remained almost the same for some time now. The profuse expression of gratitude by the stakeholders for this protection has made the equally important question of appropriate pricing of the naira to pale into insignificance! In other words, why complain about the low value of the naira when public expenditure, industrial and commercial planning and forecasting can be based on an enduring rate of exchange?
However, some analysts have ascribed the contradictory effects of monetary policy and the parlous state of Nigerians today to this regrettably lethargic attitude of stakeholders to confront the issue of appropriate pricing of the naira. These analysts have argued that the naira is grossly undervalued against the US$! The result of this gross undervaluation is that we, as a nation cheat ourselves from getting greater value for each dollar we earn from our exports, particularly crude oil which accounts for almost 90% of national revenue. The observation of these analysts is that Nigerians prospered in the late 70s and early 80s when the naira was stronger than the US dollar because each naira earned gave us control over more value; thus, a new Peugeot 505 with accessories cost less than N10,000; a kilo of chicken sold for less than N2, a bag of rice sold for less than N40; pump price of fuel was less than 50 kobo and so on and so forth – the list is endless; the net effect was that Nigerians were prosperous and warmly welcomed all over the world!
Today, the situation is a sharp and painful drop from our pedestal of prosperity in the 70s and 80s. Our people are condemned to use their equally hard-earned naira to purchase rejects and second-hand cars and equipment from abroad. Our industries have folded up or are comatose because they cannot afford the huge outlay, often times up to 500 times the naira cost of the same production machinery, which they purchased in the 70s and 80s. The yoke is now squarely on the neck of each Nigerian, all because, we get a microscopic local value for each dollar that we now earn from our exports as a result of the gross and arbitrary devaluation of our national currency against the dollar. Serious minded analysts maintain that the devaluation is arbitrary because the rate of the naira is not determined by the market forces that come into play in cross currency pricing. For example, the purchasing parity principle, which seeks to compare the local pricing of a similar basket of goods between two national trading partners as a factor of exchange rate determination, appears to have been ignored in the current pricing mechanism of the naira. Thus, while basic lunch will cost less than N150 = about a dollar, in most urban areas for the majority of Nigerians, a similar lunch in McDonalds or any very modest restaurant abroad will lessen the wad in your pocket by about $6 or N800; similar faithful price comparisons exist in all facets of employment, commerce and industries between Nigeria and Europe and America.
The arbitrariness in the fixing of the naira rate is further amplified by its solid resistance to any upward valuation as a result of our increasing accumulation of dollar reserve. In reality, the greater the dollar earning of a country, the greater the expectation that that country’s currency would appreciate in value vis-à-vis the dollar. In addition, a democratic dispensation should also favour foreign capital inflow and better integration in the world economy and consequently lead to an appreciation in the value of a nation’s currency. The Nigerian case, however, appears to be an anomaly to these universally basic economic and political principles and expectations. For example, the exchange rate remained at N80 = $ for almost four years during the despotic military regime of General Sanni Abacha and our pathetic condition as a pariah nation. Furthermore, the Nation’s dollar reserve was less than $5bn and the international price of crude was below $20/barrel.
On the contrary, today, we have a democratic dispensation that enjoys international popularity and we have great prospects of huge foreign direct inflow of dollars to compound an already bloated dollar reserve of over $30bn (reserve of $23bn + $9bn excess crude reserve). This handsome position is now embellished by the potential of a debt relief package which could save us over $18bn. In the event of all these current attributes, it should be a rational expectation that the naira value would appreciate against the dollar, more so, when the international price of crude oil continues to climb steadily above $55/barrel! (Compare with the $18/barrel during the Abacha years); add to all the above our currently increased crude oil production of about two million barrels per day compared to just over one million barrels per day of the Abacha years!
In the light of the above opportunities, the least one would expect is a sharp increase in the value of the naira; instead, our CBN and stakeholders celebrate the stability of the naira at about N133/$. An inquisitive mind will most likely describe the rate of the naira as resistant to those factors which would normally be expected to govern its value vis-à-vis the dollar! In other words, the current rate of the naira or better still the mechanism of the exchange rate determination in Nigeria is the function of forces yet unknown! The current contraption called the Dutch Auction System is really a mechanism for the continued abuse and devaluation of our national currency! In the first place, it is a market where the CBN maintains a monopolistic stranglehold on the foreign exchange market and arbitrarily imposes and maintains a naira rate that does not respect universal principles of exchange rate determination. The result, dear readers, is the acute state of poverty in the Nation! We recall that soon after the dissolution of apartheid in South Africa, the Rand fell to about 15 Rands=$; today, the rand trades for just over 6 Rands=$; i.e., almost 60% appreciation in value. Our naira on the other hand has followed a consistently downward spiral in value, in spite of positive economic and political attributes which should be expected to bring the naira rate to the dollar to less than N50=$, with the attendant salutary benefits for poverty alleviation and a significant improvement in gross domestic product.
Save the Naira, Save Nigeria!