EXCHANGE RATE: A SYMPTOM OF A FAILING NIGERIAN ECONOMY
I understand that every concerned Nigerian right now would find the rate at which the Naira is exchanged for major currencies (USD, GBP, EUR, etc) to be a nightmare. The Naira has traded poorly against these currencies at both the official forex window that is managed or fixed by the Central Bank of Nigeria (CBN), and the parallel (black) market in the past days, but with the recent upsurge in exchange rate, it has become even more dreadful, despite interventions from the CBN.
One of the key drivers of stability for a country's currency is the amount it has in its vault as foreign reserve. Although, data provided by the CBN showed that the external reserve closed at $39.16 billion in June 2022, which is an addition of approximately 6 billion from $33.32 billion as of June 2021(year-on-year). However, this has not in the slightest way helped to keep the Naira stable, as investors' sentiments and expectations of the Nigerian economy are stronger forces to determine the trajectory of the Naira.
A country's currency value could go to show how prudent the managers of the economy are thriving. Obviously, in the case of Nigeria, we have fallen short of being tipped for prudence. The bad news is, Naira may continue its downward trend in the coming trading days because of the negative outlook.
How important is the outlook or expectation for Naira?
When investors begin to feel that an economy is risky to leave their investment, whether because of a security threat or overheating of the economy, capital flight becomes the order of things. This action would mop up the forex liquidity in the system by a greater margin, which would cause a depreciation of the currency due to limited availability. Also, when people lose faith in the value imbued in a currency, they would desire less of that currency and begin to save in a foreign-denominated currency because of perceived risk and the need to hedge, which equally results in the depreciation of that currency. The CBN has a lot to do to rebuild the confidence of foreign investors in our financial markets and revive the faith of the locals in Naira.
The foreign exchange policy of the CBN has been widely and heavily criticized by professionals and multilateral organizations such as the International Monetary Fund. The CBN's forex policy has been ascribed as a managed-floating exchange regime. The system of managing the forex has amplified the activities of the arbitrageurs, who buy from one market where the price is pegged at a fixed or controlled rate and sell at another market at a premium, thereby profiting from the same system. Although CBN has tried to use its regulatory powers, it has however proven to yield no significant results, activities are reportedly ongoing through over-invoicing.
On the streets of Lagos and Abuja where you mostly find peer-to-peer traders and BDC operators, the price of Naira to dollar increases by the second, from one seller to another, with talks on lack of forex liquidity. This pushes the price by a nudge and may continue in days ahead. The CBN seem to be toothless at this point, as the major implementation of structure towards attracting hot money investment, remittances and capital investment into the country is considered stillborn, with the rate at which the Naira continuously nosedives - suggestive of a currency crisis.
A currency crisis has a contagion risk, especially in the case of Nigeria, where we still have to depend heavily on the importation of food and non-food products, as part of the systemic failure of the government to diversify the economic structure through initiatives and interventions, rather than the political undertone that accompanied it for a long over due time. The multiple-fold problems that CBN as a monetary authority has to deal with in stabilizing prices, from exchange rate to inflationary pressure become complex by the day. These two are like the siamese twins because a higher exchange rate for Naira would mean higher import prices for products widely consumed by average Nigerians.
On the fiscal side, the issue of debt restructuring and management remains a huge monster to defeat, as Nigeria's debt service to revenue ratio stands at 118.9%, which means our revenue is not enough to service our debts, despite the price of crude oil which is the major source of government revenue stands at a $100 corridor per barrel. The Economists Intelligence Unit (EIU) has referred to Nigeria's debt service-to-revenue ratio as the highest in the world.
Nigeria's economy is truly failing, the earlier we stopped partying and swing into action to put a ceasefire to the currency crisis that is looming, the better the signals we send to the market to keep Naira stable. This is because the depreciation of the currency is not a disease but a symptom of how badly shaped Nigeria's economy is at the moment. The more Naira continues to plummet, the scarier it becomes for international investors who will begin to consider repatriating their investments, which will further plunge the Naira.
May we not become the "New Zimbabwe".
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