Depreciation: Between the naira and cedi

The naira took an ignominious and reprehensible pounding in the parallel market last week. It cowered and traded at a record N502 to the dollar before staging a counter attack that took it to N495.

The forces against the Nigerian currency are too numerous and treacherous to allow it any breathing space.

CBN is the primary enemy of the naira. Its corrupt multiple exchange rate policy has enriched an infinitesimal minority of the population with strong connections to top politicians and impoverished Nigeria’s inconsequential majority.

The federal government is perhaps the greatest enemy of the naira. It has over the years exposed the naira to untold dangers in the foreign exchange market through its fiscal rascality.

The federal government persistently pounds the system with excess liquidity that is only useful to the infinitesimal minority who use it to buy up the dwindling stock of forex in the market and create an artificial scarcity that compels thousands of genuine forex users to bid high in the parallel market thus throwing the naira into a disorderly retreat in the forex market. 

The naira has been under such assault in the last 30 years. That explains its persistent depreciation since the market reform by Ibrahim Babangida’s cruel dictatorship took the exchange rate of the naira from N2 to N8 to the dollar.

In this column last week, I drew an extensive analogy between the purchasing power of the naira and that of the Ghanaian cedi in the last 13 years.

A gentleman who did not mention his name complained that I deliberately edited out the fact that Ghana re-denominated the cedi in July 1, 2007 thus giving it stronger purchasing power than the naira.  

He contended that I kept the information from readers just to strengthen my argument against the persistent depreciation of the naira. 

My position on that argument is that I considered the issue of the re-denomination of the cedi in 2007 irrelevant because the performance of the naira in the last 13 years does not support the hypothesis that if the naira was re-denominated like the cedi, it would fare better today.

At the point of the re-denomination, the cedi was trading at 10, 000 to the dollar. The Bank of Ghana chopped off the four zeros and issued a new cedi that exchange at one to the dollar.

More than 13 years after the re-denomination, the cedi has only recorded minimal depreciation that takes it to 5.7 to the dollar. The naira was trading at N112 to the dollar when Ghana re-denominated the cedi. The new rate is N412.

If the CBN had taken a similar step at that moment and placed the naira at par with the dollar, the naira at the current rate would have depreciated to at least N300 to the dollar at the official window rather than N5.7 to the dollar recorded by the cedi.

I considered those factors and decided not to bore readers with the story of the re-denomination of the cedi as the basis of its strength because that analogy is deceitful and absolutely irrelevant.

The strength of the cedi is predicated on good governance and conducive investment environment. The ignominious depreciation of the naira is the product of government fiscal rascality, corruption and multiple exchange rate policy of the CBN.

The naira is a very strong currency. If the cedi is subjected to the pressure mounted on the naira it would be trading at 20, 000 to the dollar at the moment. Ghana’s economic environment attracts investments that buoys the exchange rate of the cedi.

Nigeria’s uninhibited corruption, insecurity and infrastructure decay repel investments and put the naira under pressure.

The naira is suffering the consequences of the ineptitude that sees government importing what it has and exporting what it does not have. Nigeria has crude oil in abundance, but it imports refined petroleum products that it could easily produce.

Nigeria is encumbered with a dangerous unemployment rate of 33.3 per cent. Ironically Nigeria exports the jobs it does not have by exporting crude oil and importing refined petroleum products along with plastic resins and other petrochemical products that could be produced locally.  

Nigeria spends close to $5 billion annually on those imports and inadvertently depletes jobs in the process. If Nigeria was refining the petroleum products it consumes, the money saved from that in one year could build the east-west rail line and create hundreds of thousands of jobs in addition.

Besides, the federal government worsens the plight of the naira in the foreign exchange market by inadvertently subjecting it to inauspicious speculations. Everyone knows that the naira would always depreciate. That morbid fear of depreciation causes even more depreciation.

Consequently, those at the upper end of Nigeria’s middle income bracket now save in dollars because of that fear. At the end of every month, high ranking bankers and oil industry officials change a huge chunk of their monthly income into dollars for safe keeping.  

Besides, the yawning margin between the parallel market and official rates is an incentive for speculative biddings that piles undue pressure on the naira and forces it to depreciate.

There are 2, 991 bureau de change (BDCs) in Nigeria. Scores of them are owned by corrupt government officials. Some elite with strong connections to top politicians have 50 BDCs each. Every week, CBN allocates $50, 000 to each of the BDCs. Those with 50 BDCs sell at a margin of at least N80 per dollar and earn N200 million without lifting a pin.

Even CBN officials benefit from the multiple exchange rate of the naira by paying some beneficiaries of forex-denominated grants in naira at the official exchange rate and channeling the dollars to the parallel market where they rake in huge profit from the yawning gap between the two rates.  

The federal government creates the environment for saving in dollars by making the naira depreciate precipitously. The insecurity in the land which has inadvertently put the country on civil war footing, grossly inhibits forex inflow and pounds enormous pressure on the naira.The despicable infrastructure decay in the land escalates the cost of production, fuels inflation and compels the CBN to make a hard choice between taming inflation and stabilizing the exchange rate of the naira. No currency faces such incredible array of foes without compromising its purchasing power. That is the incongruity that promotes the disorderly retreat of the naira.