IN his response, exactly a year ago, to the relentless depreciation of the naira and the calls for its devaluation, President Muhammadu Buhari said he was not persuaded that any official devaluation would improve the dollar supply in the economy. He had argued that a previous devaluation under the same economic conditions did not improve the fortunes of the local currency. He accused some top officials of the Central Bank of selling the bulk of the available foreign exchange to Bureaux De Change, allegedly owned by them.
Since the president’s comments in February 2016, the value of the naira has continued to tumble. Early last week, the currency lost significant ground, dropping to N500/dollar at the parallel market. Even though it reversed the loss at the end of intra-day trading on January 27, to exchange at N498/dollar, it had crossed the critical threshold that analysts had predicted. The value of the naira has since then oscillated around the N500/dollar threshold.
Foreign exchange traders have attributed the depreciation of the local currency to demand pressure on the dollar and the relative scarcity of the currency in the forex market. However, at the official market, naira still trades at N305.25/dollar, even as the External Reserve has improved, currently standing at US$28.9bn.
But, indications are that the naira may continue to hover around 500/dollar at the parallel market, as the CBN continues the sale of the dollar to Bureau De Change operators. The implication of this is that the gap between the official and the “black market” rates now stands at about N195/$. This is despite several attempts by the apex bank and the federal government to close the gap between both rates.
Economic and financial analysts are divided over the fate of the naira. But, there is a consensus that its value could go even much lower in the course of the year, if urgent monetary and fiscal measures are not put in place to halt the drift.
This unending depreciation of the local currency is worrisome. The management of the forex market needs reformation, constant vigilance and stability. The high cost of forex has shot up the prices of goods and services, especially those that are dependent on dollar-denominated imports.
This raises legitimate concerns about a possible devaluation. Besides, it is clear that the hope that government will tackle the exchange rate crisis with the gains from rising oil prices in the international market, which is the basis for the optimism of international financial institutions, is faltering.
With the failure of the recent increases in crude oil prices to check the depreciation of the naira against major foreign currencies, it appears that something more fundamental is forcing down the value of the naira.
More than before, the currency market in the country needs key reforms. Beyond the growth of the Foreign Reserve, its application is critical to the performance of the naira against major currencies, and the general management of the forex market. It is obvious now that the Reserve is growing, but it is not clear how it is being applied to ease the nation’s forex woes and boost productivity.
One immediate measure could be an urgent meeting of the monetary and fiscal authorities and other key actors in the economy to find the way forward. This has become expedient because the real reasons for the depreciation of the naira could be deeper than imagined.
Last year, one of the reasons given for the drop in naira value was the speculation that the CBN planned to include overseas school fees and medical bills on the list of items for which forex could not be accessed at the official forex market. This heightened the calls for devaluation of the naira. Since the wide gap between the official and black market rates is likely to persist, the CBN should find other monetary policy tools to close it.
Let the CBN address the dollar supply side of the market by allowing oil firms and banks to sell dollars to Bureau De change operators to ease the pressure on the forex market and halt the free fall of the naira. There is, clearly, a currency crisis in the country which the CBN and the federal government must fix.
We still strongly hold on to the view expressed in our editorial of February 22, 2016, that devaluation may not be the solution to Nigeria’s economic problems.
We have not shifted from that position. These tough times call for introspection, openness of mind, creativity and courage to take difficult decisions, to put these forex challenges behind the nation.