Omodele Adigun
Last week, one of the presidential candidates promised to float the naira to boost investment if elected in next month’s presidential election.
The Central Bank of Nigeria (CBN) currently tightens capital controls and closely safeguards the value of the currency to protect it from speculators.
According to its Governor, Godwin Emefiele, this is the best way to go in curbing inflation and boosting manufacturing by discouraging imports.
In place of freely floating the naira, the apex bank has sanctioned multiple exchange rates, which include the N305-N306 official rate, the BDCs and the Investors and Exporters (I&E) window.
What does floating the naira actually mean?
Floating the naira or any other currency for that matter means the government is no longer controlling the value of the naira compared to other currencies. For years, it had been pegged to the US dollar, which meant that its value would only go up or down in tandem with the relatively stable dollar. But if floated, its value would fluctuate freely, so it can rise or fall on a daily basis.
During the recession, the apex bank was under intense pressure to allow the vagaries of the market determine the naira value. But it resisted resistance to float the currency. Its spokesman, Mr. Isaac Okoroafor, said this saved the currency from depreciating significantly.
Speaking at the Capital Chapter Congress/Dinner of the Nigerian Institute of Public Relations (NIPR), FCT chapter, in Abuja, last year, Okoroafor said the currency would have fallen to N3000/$ if it had succumbed to pressures on it to float the currency.
A floating exchange rate is a regime where the currency price is set by the forex market based on supply and demand compared with other currencies.
Okoroafor noted that the bank was pressured both locally and internationally, but it resisted because it was convinced that floating the currency would adversely affect the economy.
“We believed that floating the currency would have destroyed our economy because from our own calculations, if we had floated the naira when it was N525, the next thing would have been N700, N1,200, maybe N3,000 and it goes; it would go to haywire.
“We resisted the option because we felt it was a wrong option and dangerous to the economy and we are very happy we proved them wrong,” he said.
Recall that Venezuela’s economy is in turmoil today due to uncontrollable free fall of the currency, which triggered hyperinflation, power cuts and shortages of food and medicine.
The currency lost its value and prices soared.
Like Nigeria, Venezuela depends entirely on mono product, oil. So when oil prices crashed in 2014, so did the country’s ability to import items, causing costs to rise.
But unlike in Venezuela, rather than allow the naira to assume a free fall, the apex bank continued to inject enough foreign exchange (forex) into the forex market in a bid to boost its liquidity level and stabilise the currency.
To achieve this, the bank mandated all Bureau de Change (BDC) operators to purchase dollars at least three times in a week to avoid their licenses being reviewed. It also directed all Deposit Money Banks (DMBs) to buy and sell foreign currency to travellers, both customers and non-customers, upon presentation of relevant valid travel documents such as visa and tickets over the counter.
These efforts have begun to yield good results as the currency continues to appreciate gainst the dollar at the parallel market.
There was assurance from CBN that the value of the currency would increase and it could fall below N360 as the economy continues to improve.
Emefiele alluded to this in his speech recetly at the Bankers’ Nite in Lagos when he said, “the country’s overdependence on crude oil for forex revenue meant that shocks in the oil market were transmitted entirely to the economy via the forex markets as manufacturers and traders who required forex to purchase their inputs as well as goods, were faced with a depleting supply of foreign exchange in the country.
“The impact of this decline on our reserves was evident in the rise in the value of the US dollar relative to the naira; and a rise in the Consumer Price Index (CPI) due to the increase in the cost of imported inputs and goods. In a bid to contain rising inflation and to cushion the impact of the drop in forex supply on the Nigerian economy, the bank took three bold steps;
“First, CBN tightened money supply in order to contain inflation while improving yields in local bonds, which attracted the attention of foreign investors. Second, we analysed our import bill and encouraged manufacturers to consider local options in sourcing their raw materials, by restricting access to foreign exchange on 41 items. Third, the Investors and Exporters (I&E) forex window was introduced, which allowed investors and exporters to purchase and sell foreign exchange at the prevailing market rate.
“Following a period of rising inflationary pressure, which peaked at 18.7 per cent in January 2017, the Nigerian economy witnessed 18 straight months of disinflation, as inflation dropped to 11.1 per cent in July 2018. A slight uptick to 11.25 per cent was, however, recorded in October 2018 due to rising food prices. With regard to our overdependence of imports, the economic recession was triggered mainly by the drop in crude oil prices.
“Any attempt to reverse the course of these actions may have untold consequences on the growth trajectory of our economy.”