How Naira depreciation affects Nigerian economy

When the Central Bank of Nigeria (CBN) restricted the sale of foreign exchange to BDCs, many thought that continuous slide of the country’s currency against the Dollar would cease, but alas, it is not to be as the slide has continued. In this piece, BENJAMIN UMUTEME looks at the implication of a weakened Naira on the nation’s economy.

Alarm bells rang all over Nigeria last week when it was reported that the Naira traded at the parallel market at N570 to a Dollar. Many wondered why Nigerians would spend so much naira to get the dollar, just as many others called out the Central Bank of Nigeria (CBN) accusing it of not doing enough to defend the nation’s currency.

Unknown to many, the apex bank’s good works seem to be reflecting on the market because of various interests who are bent on exploiting the market for their personal benefit.

Naira-Dollar history

Analysts say the issue of naira depreciation to the Dollar since 1986 has been unpredictable. They say the differentials in the official rate and the parallel market have made many people very rich.

During the Goodluck Jonathan administration, the Naira exchanged for between N170 and N190 to a Dollar. However, when the present administration of the All Progressives Congress (APC) assumed power, it started at N268/$, rose to over N400 and at a time (2017), before it hit about N550, and later it fell again to less than N500.

While some financial experts have posited that Nigeria should de-value the Naira, others say it is not about devaluation, but allowing market forces to fix the exchange rate.

For a former deputy governor of the CBN, Dr. Kingsley Moghalu, the issue of Naira depreciation has always been there.

According to him, “We’ve never benefited from the devaluation of the Naira.”

Earlier, in July, the Central Bank of Nigeria (CBN) stopped the sales of foreign exchange to operators of Bureau De Change (BDCs) across the country.

The Central Bank stated that it had evidence that showed that the BDCs were engaging in rent-seeking with regard to sale of dollars.

The CBN governor said the apex bank “will deal ruthlessly” with commercial banks that are colluding with the BDCs who sell dollars at the black market.

“It’s a huge haemorrhage on our scarce resources,” Emefiele said, adding that, “BDCs have turned themselves into agents that facilitate graft.

“You should now go to your bank to get your dollar. Indeed, it will be transferred to you electronically. Go to your bank. We are so disappointed and we cannot continue with them. They now engage in corruption.”

In spite of the ban, the problem can’t seem to go away as the Naira continued it’s free fall against the dollar. And two weeks ago, the accused Abokifx, a website that collates the black market exchange rates of the Naira, of carrying out an “illegal activity that undermines the economy.”

According to the apex bank, the publisher of the platform, owner of the website, Oniwinde Adedotun, was engaging in illegal forex trading.

The value of the currency fell to 570 on Friday from less than 520 to a Dollar it traded before the ban. Most local newspapers rely on Abokifx for the parallel market rates.

The CBN governor, Godwin Emefiele, said having studied the activities of the platform for over two years, it was left with no option than to act.

“It is completely illegal and unacceptable. Mr. Oniwinde is an illegal fx dealer that has in-flowed and sold tens of millions of fx to several Nigerian companies in contravention of the fx law, he directly benefits from the rates he quotes daily on his website.”

In a bid to strengthen the Naira over the years, the CBN has been looking to the process of the unification of forex rates. But whether it would address the current situation, analysts say it is difficult to project.

The implication is that the prices of goods and services continue to dance upward with no stop in sight as most businesses would readily tell you that exchange rate is the cause of the increase.

In the same vein, a political economist and development researcher, Olamilekan Adefolarin, told Blueprint Weekend that the illegal activity of black marketers and currency speculators is a big challenge to the FX market.

“Although the CBN is taking a very strong stance, we must all support them. Moreover, we hope that sustained tempo against people who look round for loopholes to capitalise on,” noting that “their gain is the misfortune of the Naira.”

Experts’ views

For Moghalu, the political class continues to access the FX market while the many Nigerians who need forex are unable to access it. According to him, accessing it at the official rate is very difficult.

“A few companies may be able to and those in the big ticket items. The gap between the official and the parallel market should not be more than N20. But here you are: it’s about N150 to N160, that is what drives the issue,” he said.

On his part, Adefolarin told this reporter that the forex crisis Nigeria is facing is due to the lack of a manufacturing sector that supports exportation. According to the development researcher, it would be difficult to have a strong naira when the country’s real sector is virtually non-existent.

He noted that with the country continuing to be import dependent, it affects the balance of trade.

The foundational challenge comes from the structural deficit of our economy, especially our low industry performance in terms of innovation and engineering productivity, import-dependent economy and disregard for local goods and services. The bottom line is that we don’t have any substantial means to strengthen our balance of payments deficit.