The naira is doing a futile, last-ditch battle for its soul in the foreign exchange market. It has lost so much ground already and would continue to lose. The situation would worsen in the next 12 months when 49 per cent of the dollar-denominated loans amounting to $7 billion advanced by banks mature.
At the close of business on Wednesday, July 29 for the long holidays, the naira was trudging along in the parallel market at a derisive rate of N470 to the dollar. Market watchers expect the naira to drop to N500 to the dollar.
The fall in oil price has conjured an acute shortage of hard currencies in Nigeria’s foreign exchange market. Some corporate bodies that obtained dollar-denominated loans at the I&E window rate are now forced by the Central Bank of Nigeria (CBN) to pay back their loans at parallel market rate.
Nigeria is running low on forex and the CBN can only manipulate the demand side of the market as it has no way of beefing up supplies. CBN manages the bad situation by putting artificial obstacles on the path of demand thus forcing down demand to give the dwindling supply some breathing space.
Besides the long list of items that cannot be imported with forex from the official window, CBN uses the debiting of banks for cash reserve ratio (CRR) which was hiked by five per cent to 27.5 per cent in January to reduce banks’ liquidity and consequently their ability to bid for big ticket forex. Since January, CBN debit on CRR has mopped up N900 billion from banks accounts.
The predicament of the naira in the foreign exchange market is caused by speculators. The purchasing power of the naira is not as low as it is being portrayed in the parallel market.
The purchasing power parity (PPP) of the naira is approximated N420 to the dollar. Basically, the naira is weak because Nigeria is an import-dependent country. At home the naira still commands considerable purchasing power. For instance, hair cut in the cheapest barbing salon in the American state of Indiana is $6. The same service in Nigeria at the best salon costs N500 or even N200 in some communities. At the parallel market rate of N470 to the dollar, the cheapest hair cut in the U.S. amounts to the equivalent of N2, 820. The same service in Nigeria costs just N200 in some communities. That is how much the naira can purchase when compared to the strength of a competing currency in another country.
The naira is not as weak as the speculators want the whole world to believe.
The fate of the naira is sealed by endemic corruption in Nigeria. Most of the billions of naira chasing the few dollars in the foreign exchange market and forcing unprecedented depreciation of the naira is largely stolen money not meant for importing raw materials. The hard currency purchased at N470 to the dollar is basically “buy-and-hold”.
The treasury looters cannot deposit their loots in their bank accounts because the prying eyes of the Economic and Financial Crimes Commission (EFCC) are everywhere. Even if recovered loots are being re-looted, there are fears that one could be caught and embarrassed. Besides, bank verification number (BVN) has ended the era when treasury looters used to lodge their loots in bank accounts with phony names. These days every account is linked to an individual with explicit bio data. That makes it extremely difficult to hide loots in banks.
Unfortunately, what the CBN is gaining in BVN is lost in the foreign exchange market. The looters pound the parallel market with billions of naira, convert them to dollars and store in unholy places at home. One hundred million naira (N100 million) is very bulky to store at home. Domestic servants could stumble on the Ghana-must-go sacks housing them and take their share of the loot. Such amount converted to dollars is less than $145, 000 and could be tucked away under a well-structured bed. That is the predicament of the naira in the foreign exchange market. Looters now save in dollars.
A former finance minister once lamented that most of the governors fly abroad the day after they get their state allocation from the federation account. She claimed that the governors convert part of their state allocation to dollars and fly abroad to buy choice property with their loots.
The consequence of that action is that the states are impoverished while massive conversions mount tremendous pressure on the lean stock of dollars in the market and force the naira to depreciate.
That explains why the naira is always depreciating. The naira depreciated from N116 to N150 to the dollar in 2009 even as oil was selling above $100 per barrel.
Not much has changed from the picture painted by the former minister more than a decade ago. The looters are still plaguing the foreign exchange market with their loots and putting undue pressure on the naira. That is partially responsible for the futile battle of the naira in the foreign exchange market at the moment.
Besides, fears that recent spike in COVID-19 in the U.S., India and Brazil (three leading consumers of crude oil) might lead to fresh lockdown and consequent drop in oil demand has forced investors to dump the naira and save in dollars.
The CBN itself is not helping matters with its weird management of the lean stock of foreign exchange. The CBN has stubbornly resisted calls for merger of the exchange rates of the naira. At the moment there are at least three exchange rates with the parallel market rate being the most operational rate.
The only people gaining from CBN’s insidious multiple exchange rates are cronies of top politicians who get hundreds of thousands of dollars weekly at the official rate and sell at the parallel market at N470. With the endemic corruption in the land, the futile battle of the naira in the foreign exchange market might just have started.
Corruption has taken a catastrophic toll on the exchange rate of the naira. The naira traded at N81 to the dollar in 1999 when oil price was less than $30 per barrel. It tumbled to N380 in 2019 with oil price at $65.Nigeria might have to learn exchange rate management from Kenya. Even with a weaker economy, the Kenyan shilling trades at 110 to the dollar.