The presidential election has been won and lost. But the calamity inflicted on the economy by the political uncertainty that preceded the elections will take a pretty long time to heal. The naira probably suffered the heaviest blow from the political uncertainty in the months leading to the elections.
The official exchange rate of the naira was N156 to the dollar when the campaigns were flagged off. At the parallel market, which shows a clearer picture of the strength of the Nigerian currency, the naira was trading at N184 to the dollar.
The fate of the naira was worsened by an odd combination of political uncertainty and dwindling foreign exchange inflow engendered by tumbling oil prices. However, it is difficult to pin-point which of the two evils inflicted the most devastating blow on the value of the naira.
Many economy watchers believe that the political uncertainty and the dollarization of campaign funding by the two major political parties, contributed more in pushing the naira down the precipice.
As the margin between the official and parallel market rates of the naira widened, the Central Bank of Nigeria (CBN) officially devalued the naira to N168 to the dollar in the closing days of November 2014.
The devaluation only signaled a free-fall of the Nigerian currency. By February, the naira was trading at N215 to the dollar in the parallel market. That development left an intolerable incentive for round tripping as traders could rake in N50 for every dollar smuggled into the parallel market.
The CBN responded to the worsening trend by devaluing the naira through the back door. The apex bank closed its official exchange windows, inadvertently making the inter-bank rate the official exchange rate of the naira.
At the time the CBN shut its official window and opted to fund the market from the inter-bank window, the naira was trading at the inter-bank market at N202 to the dollar. That automatically became the official rate of the naira until it managed to gain some insignificant grounds against the dollar. On the eve of the presidential election, the official exchange rate of the naira was N197 to the dollar.
Judging from the official exchange rate of N160 to the dollar when campaigns commenced, the naira has so far lost N37 against the dollar.
Two major factors are blamed for the poor showing of the naira during the campaigns. The first is capital flight. Investors, especially foreign portfolio investors, apparently apprehensive of the outcome of the general elections, downloaded their holdings in the Nigerian Stock Exchange (NSE) and pounded the forex market for dollars to flee the economy. The massive capital flight was worsened by the tumbling value of the naira. Investors saw the value of their holdings tumbling daily as the naira depreciated.
They decided to cut their losses by dumping the naira and fleeing the economy. The capital flight from the NSE was a major source of demand for dollars in the forex market. However, what is generally viewed as the major cause of the free-fall of the naira, is the so-called dollarization of the campaigns by the two leading political parties.
The two leading parties were believed to have thrown caution to the wind and openly canvassed for votes by showering dollars on opinion leaders, traditional rulers and clerics. With its depreciating value, the naira was considered too unwieldy for ease of haulage in surreptitious bargains.
The dollar-for-votes phenomenon mounted so much pressure on the lean reserves of the CBN. The apex bank could no longer meet the demand for dollars. The naira fell.
Even after the elections, no one expects a fast recovery of the naira especially as the price of oil, the nation’s main source of forex, remains scrawny.
The capital market is another casualty of the political uncertainty that pervaded the land during the campaigns. At the close of trading on October 13, 2014, the market capitalization of the NSE stood at N13.22 trillion.
On Friday, March 27, 2015, the capitalization of the NSE only managed to cross the N10 trillion mark after five days of bullish trading. The NSE has lost more than N3 trillion to the thick cloud of political uncertainty leading to the elections. Like in the forex market where the naira took unprecedented pounding, the bearish run on the NSE worsened when the presidential election was shifted from February 14 to March 28.
The postponement was interpreted in the investment community as a sign that the election might no longer hold. That uncertainty escalated the bearish trend in the NSE as investors scrambled to quit before the tumbling value of the naira eroded their investment. The NSE went through weeks of bearish runs that wiped away investors’ money.
The presidential election might have cleared the coast for investors to take positions in the capital market. Such decisions would engender the return of the bulls and firm up share prices. But the naira has taken a calamitous plunge.
Besides dwindling oil income, the naira is bedeviled by unfettered corruption which had been institutionalized in the last five years. The days ahead would be pretty arduous for the tacticians in the naira exchange rate war room of the CBN.
