more intrinsic about currency valuation than its mere exchange rate. In 1980, few years before the historic Structural Adjustment Programme (SAP), a dollar traded for 55 kobo while pound was a little above the green pack.
Naira, indeed, gallantly held its own against benchmark currencies to the admiration of Nigerians. While naira enjoyed strong exchange rate, it was cheap for teething industries to take off since importation of machines and raw materials was done at little cost. Little wonder that a gargantuan company like the Delta Steel Company (DSC), conceived in the late 1970s, was designed to rely on ore from Brazil when it could source the same from near-by Itakpe, Kogi State.
Importation, for any company or individual, was not more expensive than buying from a downtown shop. But lo and behold, those days have gone forever. What very few people could barely hallucinate about just about 30 years ago is holding the entire economy tight in fist. Today, a dollar trades for N160 officially, just as the odds against the currency are stronger than any factor that could potentially stop the free fall or reverse the tide.
The Central Bank of Nigeria (CBN) has, in the past few months, ducked the pressure to devalue the naira, albeit officially, the currency rarely trades within its band in the past years. As the pressure and speculation that it would yield to the surging demand continued last year, Ugochukwu Okoroafor, the apex bank's spokesman, said: "We have the resources to meet demand."
Okoroafor's defence exposes the inherent weakness in the campaign for stable exchange rate. The spokeman's usage of "resources" points to the country's reserve that has been used to synthetically defend the value of naira, historically.
Still in the heat of debate on what constitutes the smartest choice, Sanusi Lamido Sanusi insisted: "As far as naira is concerned, we have always said we are committed to its stability... My view and that of the CBN is that if we need to tighten money, use some of our reserves to support the economy, we will. No central bank governor will say he will support the currency at all cost.
"But we want to be very clear that there is no country that allows its currency to be determined by the market. We are not looking for a stronger currency neither are we looking at a weaker one. People want to pay fees and investors want to know if they will have returns on investments. We will use the reserves; we will use interest rates... Hopefully, the next few months will not be difficult. We will not allow naira to be weakened and we are committed to that."
Sanusi's argument is not far from the truth - no country leaves its currency to the mercy of market claws. The United States, the United Kingdom and even China do not. Indeed, China has faced much stiffer pressure to unbound renminbi. The Chinese currency manipulation has developed into a scholarly subject at global market.
But while Nigeria spends its reserve to strengthen naira, the Peoples Republic of China makes it a national target to suppress its currency from attaining its market value. China's desire to keep weak renmini is neither here or there. But the United States and others threatened by China's rise allege that the Asian giant manipulates the currency to boost export and undercut American workers, especially those in the manufacturing sector.
Nigeria also faces a groundswell of blackmail over currency valuation reminiscent of that of Chinese, which will continue for as long as the world second biggest economy continues to hold trade advantage. In the run-up to 2011 elections, the global community led by the overbearing International Monetary Fund (IMF) mounted pressure on Nigeria to devalue the naira. Sanusi did say there was no logic in the IMF recommendation, but capitulated some months later. He yielded and set a new band at N150 to N160. The hitherto malleable naira has since become softer, trading as high as N175 to a dollar at the parallel market.
The Financial Times of London suggested that "Nigeria devalued the naira... as
falling reserves, caused by weak oil revenues, forced its hand." While the move against weak renminbi is motivated by the need to catch up with China or, at least, trim down its monopolistic influence on world trade, the blackmail against stable naira cannot be straightly deciphered. What is clear is that those who want a flagging naira know when to launch their attack - when the reserves are tumbling.
Last year, oil theft hit the country's production. As a result, a report says the country may not meet its 2014 target. In December 2013, the foreign reserve dropped to $44.519 billion, its lowest in the year. It was not surprising that the CBN reiterated the end of the year its readiness to resist external pressure to devalue the currency, promising to adopt the trite and hard methods the country has relied on for years.
Dr Godwin Owoh, an analytical economist, said the smae approach adopted by the apex bank to shield naira portends more danger to the economy than it seeks to gain. He added that corruption and low technical capacity of those managing the foreign exchange market also adds to the woes that bestrides the local currency for years.
With the gap between the official rate and that of the parallel market stretching to about N15, Owoh also acknowledged that the unwholesome movement of bills between official and 'black' market fuels the pressure on naira. He noted that the gap is artificially designed to create opportunities for individuals to make fortune at the expense of the wellbeing of the economy.
Dollar and pound accounts have gained popularity in the last few years as a result of increasing desire to keep cash in foreign denominations. Owoh said the cashless policy has further increased the preference for hard currencies to naira. He explained that since those who transact in foreign currencies do not pay the penalties imposed on large cash transactions, businessmen are finding domiciliary accounts increasingly meaningful.
"You should also take note of the fact that foreign currencies are easily convertible. Today, you cannot withdraw above N500, 000 across the counter without paying penalty, which is high. Meanwhile, you can withdraw any amount from dollar account and covert it at 'black' market almost immediately to pay for your order. That makes huge difference," he noted.
As elections approach, more of political transactions will be done in naira. This will come with surpluse on the two axes - supply and demand. A number of office seekers will flood the market with imported dollars while others will go with plenty of naira in their hands looking for dollars to mope up. That has been the tradition; it happened in 2003 during the People Democratic Party (PDP) presidential nomination in Abuja.
Dollar went through the roof at popular Wuse Zone Four where most of the FCT bureau de change operators do their businesses. So much money was distributed to the delegates a night before the nomination, which was weekend, that the only sensible option was to shrink the spoils for easy shipment. And dollarisation of the currency became irresistible option. With the pluralization of political options, Owoh said there would be more pressure on naira in the next one year.
Sanusi could not have been more honest when he said no country leaves its currency to the vagaries of demand and supply without invoking some artificial measures to strike balance. But what many people are not comfortable with is the consistent and near predictable interventionist approaches of the apex bank. Owoh sad the regimented interventions give room for insider trading and information merchandise.
"We should have regulated processes where the amount of intervention per quarter is known and insisted upon. After that is established, the regulator should make sure that what determines intervention is the quantum of genuine requirements needed for normal transactions. This is better than using supply mechanism to manipulate results to give advantage to those who have access to privileged information. Intervention is not bad but it should be regulated. When you tell some students that there will be unscheduled test, the results you get will be different from when you walk into a class and set impromptu test; the results will also be different when all the students are aware.
"So, all the economic agents should have pre-knowledge that there will be intervention so that bidding will make more sense. What is currently obtained is that some people will bid very high to qualify while some, based on more accurate information they have, will bid very low and still get offer. Some other days, the innocent people will bid low but those who have information that the amount coming from CBN is small will bid high. Eventually, they will sweep everything and begin to sell at profits to those who lose out," he noted.
Last October, the apex bank reintroduced the Retail Dutch Auction System (RDAS) in place of the previous Wholesale Dutch Auction System (WDAS). Owoh said RDAS should not have been contemplated by CBN, which he said, does not have the capacity to correctly review all bids. He noted that WDAS, which transfers retail bid review risk and responsibility to banks, offers better merits in a highly politicised and fraudulent environment like Nigeria
Many might not like the hard stance of Sanusi in the defence of the naira in the past four years. But in fairness, his measures have kept the home currency relatively stable. Whether the current N160 to a dollar is false or otherwise is a different question altogether. The market, of course, is not strange to the 'Sanusi manipulation'. What remains a mystery today is the tactics whoever leads the CBN from June introduces, wherein lies the heart of foreign exchange volatility.
Within African market, naira has not also fared well in relation to other currencies in recent years and in the context of its robust economic growth. Though a country's currency has little or nothing to do with the size or strength of its economy. Otherwise, the British economy should have been considered stronger than that of the United States. Yet, when an economy grows its productive capacity, the value of its economy consistently adds more bargaining power.
Owoh observed that naira lags behind because the country engages in lots of non-productive expenditures on account of political and social peculiarities. "And most of the hardwares have foreign exchange implications. Many other African countries are not facing similar challenges. The Ghanaians, for instance, are not investing in military equipment the way we do. The bomb detectors and telephone tracking devices we use to combat crimes are imported and paid for with foreign currencies.
"The corruption issue also adds to the pressure. There is so much spending to sustain corrupt activities. The actual economic component of what makes the foreign exchange spending is very small; it may be less than 30 per cent. The rests are political, social and ego-oriented spending."
Perhaps, the biggest test facing naira today is the dollarization of the economy. Uptown shops in major cities quote their prices in dollar. Contracts at both public and private sectors are valued in dollar. Leasing of properties in prime districts of Lagos, Abuja and Port Harcourt are negotiated and paid in dollars while expatriate staff of multinational companies earn dollars.
The next phase of dollar mania will see companies dollarizing all their operations from gardening to core areas; this is said to have commenced in earnest with some schools in Abuja where all inflow and outflow transactions are discussed and executed in dollar without any recourse to the naira equivalent.
This grew to national prominence some years ago when the late Gani Fawehinmi sued the Obasanjo administration for paying 'expatriate' ministers in dollars. Still, in what look like more validating stamp, the Nigerian Sovereign Wealth Fund (NSWF) is fully dollarised. Like foreign reserve, savings and investment are made in the prime currency. Its act as dully passed by the parliament specifically puts the seed investment at $1 billion, an act many people considers derogatory to the local currency.
To reverse the odds and enhance the dignity of the naira, Owoh suggested expatriate quota, foreign trainings and other areas that expose the country to substantial foreign exchange costs should be more regulated.
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