May 29, 2023

CBN and Naira Devaluation: Between Markets Forces and Harmonization Pundits

Godwin Emefiele

 By Adefolarin A. Olamilekan

It is no longer news that the pandemic Covid19 effect is beyond health crises. The global economy is once again confronted with another crisis. Like the 2008/2009 economic meltdown, that almost eroded the world economic system, the pandemic is also threatening to bellowed efforts earlier made to protect the global economy.

Nigeria, like many other countries, needed to braze up for the challenges. Currently, the entire world economic system, predicated on capitalism is struggling to avert another economic crisis and global financial turmoil similar to that of 2008. What we are seeing this day’s is a multitude of different approaches to withstand economic crunch, living government around the world coming to terms with the unprecedented impact of the pandemic on economic conditions that have beset their nation. Regulators have been challenged, reforms is expected and options to explore, and austerity measures, are introduced by the government to create a more effective framework in which citizens are taken care of and to also gain trust and confidence in each country’s economy.

For instance, in Nigeria, the naira had come under intense pressure in recent months during the coronavirus pandemic and the undercurrent slump in global oil prices. Nigeria as an OPEC member relies on crude oil sales for 90 percent of its foreign exchange earnings and 70 percent of government revenue, making it particularly vulnerable to global shocks.

The Central Bank of Nigeria has made moves to strengthen the naira currency to boost domestic manufacturing and lift the economy out of what could spell into recession. The Central Bank has ‘technically devalued’ the naira to exchange to the dollar at N380. The apex bank took this decision after all interventions in the market, such as imposing sanctions on errant operators and use of moral suasion to curb illegal forex operations did not sustain the exchange rate of N360 failed.

But market forces analysts as argued that the measures do not go far enough and foreign investment would only return to Africa’s most populous nation once the market determines the currency’s true value. The naira has lost value against the US dollar, as Nigeria saw revenues from international oil sales dwindle because of the worldwide slump in crude prices.

Price shock on primary commodities and stalled investment has also led to a shortage of foreign currency, making it harder for local businesses to source enough dollars to pay for imported raw materials and machinery. It has also caused a yawning gulf between the official rate and that on the illegal but tolerated, black market. Before then, the CBN had maintained the exchange rate at about N360 for more than three years.

The Breaking news of the Central Bank of Nigeria officially devaluation of naira to exchange to the dollar at N381/$ broke on the Importer & Exporter window. The data obtained on FMDQ OTC Securities Exchange on the CBN official website showed a 5.54% rate at the Secondary Market Intervention Sales (SMIS) – a window where importers access foreign currencies – from N360/$1 to N380/$1 with an instruction to bidders to comply accordingly.

While, economy watcher, especially those in the school of thought and supporter of harmonization of multiple-exchange rate regime, believe the apex bank was moving towards ending the multiple-rate regime cycle. On the other hand, those in favour of market forces determinant, view the latest adjustment has unclear and that the Central Bank of Nigeria (CBN) bowed to pressure. We may have stated here that the country’s fiscal state faces tougher times as the monetary policies as not fare well either.

To this end adjustment of the exchange rate at the busiest window is coming three months after the local currency was similarly devalued by 24.6 per cent, a decision that has worsened the inflationary pressure and interest rate. The naira traded at N385 on the official market and N455/$1 at the parallel market and this not static.

The harmonization, however, is a subject of debate among famous and infamous market operators, as well as and leading economists in all ramification made up the market forces determinant supporters and the harmonization pundits. For instance, the market forces determinist has raised the alarm that it’s “implementation would fuel speculation and worsen the fortune of the naira”.

But the harmonization pundits counter this by asserting that “rate unification” would provide the “level playing field” required for inclusive growth. They accused the market forces determinist of round-tripping “the market has always asked for the elimination of parallel and discriminatory prices”. They give kudos to the CBN for methodically pursuing “streamlined market and escape the usual blame and opprobrium of market forces determinant that long believe in the perfect market should be checkmate”.

Furthermore, the harmonization pundits strongly “ hold high the CBN action has to safeguard the weaker and less subsidized naira for the immediate and near future, a reality which supports the general weakness of the economy”, as in the face of several buffers such as COVID-19 and general economic slowdown.

It also hinges on the indication of CBN recent move to eliminate multiple rate regime as “a move will give the naira some stability in the immediate term. But warn that the CBN should be wary of the activity of currency speculators who are the foot soldiers of market forces determinants.

In contrary to the harmonization pundit’s argument, the market forces determinist said rate “unification and devaluation are rooted in the corrupt practices and market manipulation that have brought the naira to its knees”. They are of the view, that what is needed right now is detailed “structural audit of the management of the market, and this is more important than rate harmonization”.

Accordingly, the naira is challenged by external/moral factors than it is by market forces. “The problems of the naira are not market triggered; they have manipulated,” The market forces ask the critical questions: “Where is the pressure on the naira coming from? Who is buying up the dollars? Who has what? What are the sources of the money individuals hold? How legitimate are the sources? What is responsible for the high buyback in the few months when the economy has been on hold? They queried the CBN action as not convincing enough as measures to manage the challenges unless we clean up the books.

“They also advised that the way out is to “conduct a census on both local and foreign currencies. There is a need for a physical audit of the currency in circulation. As this will help you to know the distribution. Also, this will further help us to establish what the local currency is pursuing dollars are genuine.

If the currencies were coming from legitimate business activities, there would be no serious distortion as we have”. They added more, “we have also come to a stage when a lifestyle audit is necessary. We should audit the lifestyle of individuals with a huge volume of currencies, to be sure of where the distortion is coming from. India, as large as its population is, conducts a currency census every seven years”.

Moreso to further their position against the elimination of multiple rate regimes, the market forces in their usual characteristic have pegged the current economic environment as “Precarious situation” and expressed concern about whether the policy was sustainable. They differ by asking “how far can the CBN go in making dollars readily available to industries and importers?” They call on the CBN to further “liberalise the FX market to allow for other inflows of forex.

They cap this with a warning that if the current supply source dries up, we may be back to zero,” To them, the latest devaluation from a harmonization angle, would certainly trigger a higher inflation rate”. The new rate they put between N400 and N410/$1, is below market expectation in their view. Likewise, the market forces determinist accused the CBN thus “a situation where the central bank is the sole supplier of forex is not healthy.

For them “It is creating an air of uncertainty for investors. They blame the CBN for artificially funding the market to punish speculators and hoarders.” Of particular concern was the use of foreign reserves to shore up the naira” that is their lamentation. They went at length to accuse the CBN of using up in six weeks what we ought to use for six months. This in their opinion is not sustainable,” they urge the CBN “to move towards a market-driven”

Nigeria’s President Muhammadu Buhari has stated he does not want the market to determine the value of the naira and argued devaluation would “kill” the currency. Also, there are concern over how the rate unification would address currency profiteering and black market dealing – the twin troubles dictating the historical woes of the naira since the implementation of the Structural Adjustment Programme (SAP) in the 1980s.

However, the CBN had said it was working with the fiscal authorities to properly ease the impact of the coronavirus and ensure a sound and stable financial system. The Bank’s strategy must be dynamic so that the naira does not spiral. There are fears that the continuous devaluation of the naira would worsen the living standards of Nigerians through a high rate of inflation and unbearable interest rates.

So, what is driving the demand for foreign currencies? To buy what? In June 2015, the CBN prohibited 41 items, including toothpicks and luxury jets, from the official forex window. The apex bank argument has been to maintain the monetary policy to “rejuvenated domestic production”, providing “an opportunity to change the economy’s structure, resuscitate local manufacturing” and create jobs. Any move to strengthen the naira was “a positive development”.

Some manufacturers, especially the small-scale firms and those affected by the ban of the 41 items, source their dollars from the bureaus de change and the black market,”  Since mid-February, 2020 the CBN has been pumping dollars into the market to strengthen the naira and bridge the gap between official and black-market rates. Official data show some $2.5 billion have been sold to end users, causing the local currency and still rising and huge demand. Monetary policy in recent months has been aimed at encouraging local production of what has previously been imported at huge cost.

Financial analysts, industry operators and the International Monetary Fund, however, said the apex bank needed to go further and harmonise all of Nigeria’s forex market rates. There is the boom and crisis sickness of the market forces that would not let it win the trusted of it opposition, and the harmonization rate is not a misplacement, however, it suspicion on the part of market force supporter ready to hijack, muscles out and denial market to thrive the “invincible hand” derive from demand and supply phenomenon.

In a logical conclusion, both of them are a product of a neoliberal capitalist economy. One represents the currency opportunist speculator at the mercy of the Nigerian state institution with licence, the other is the miser manipulator of currency, looking out for a loophole in apex bank monetary policy to maximize profit and gains.

A.A Olamilekan is a Political Economist and Development Researcher


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