BY EMEKA EJERE
Nigeria’s currency, naira is fast losing its quality as a store of value as most of the financially enlightened Nigerians now prefer to accumulate foreign currencies.
According to a research paper in a journal published by the Central Bank of Nigeria (CBN), the preference for foreign currencies is driven by Nigerians’ anxiety to protect their wealth from naira volatility and surging inflation.
“Higher real exchange rate volatility is associated with an increased level of currency substitution,” economists at the CBN, including Isaiah Ajibola, Sylvanus Udoette, Rabia Muhammad and John Anigwe said in the paper published on the apex bank’s website.
There is a need to contain “exchange rate volatility and inflation as a way of curbing the spate of currency substitution in the country,” they said.
One measure of currency substitution, the ratio of foreign cash deposits to naira deposits on demand in the banks exceeded the International Monetary Fund’s 30% threshold from 2009 following the global financial crisis, the researchers said. It hit a peak of 98.2% in 2014 before declining to 83% in 2018.
A broader measure of foreign currency in banks to naira savings, demand and term deposits, stayed largely within the IMF limit over the study period from 1995 to 2018.
The naira was devalued twice last year after a crash in the oil price triggered by the coronavirus pandemic hampered revenues. While crude contributes less than 10% to the nation’s gross domestic product (GDP), it accounts for nearly all foreign-exchange earnings and half of its government revenue.
Findings show that Nigeria’s local currency has lost 66% of its value since 2009 when it exchanged at 149 naira to the dollar. The unit exchanged at 409.21 naira per dollar at the spot market as of 4:02 pm on Thursday.
Nigeria’s inflation quickened to the highest level in four years in March and is now more than double the 9% limit of the CBN’s target range. The CBN previously issued a warning to businessmen to stop offering local goods in foreign currency and also banned the practice of accessing the foreign-exchange market for settling domestic transactions.
“The key policy implication of currency substitution is that it reduces monetary policy effectiveness,” the researchers said. “Efforts to further diversify the economy should be of paramount interest to boost the base for foreign-exchange earnings.”
Upon assuming office for the second term as governor of CBN, Mr. Godwin Emefiele had declared that monetary policy measures embarked upon by the apex bank “in the next five years will be geared towards containing inflationary pressures and supporting improved productivity in the agricultural and manufacturing sectors of the economy.”
To achieve its single digits rate target, the CBN had planned to, among other things, work with other stakeholders in the economy to bring down the cost of food items, which it said, has considerable weight in the Consumer Price Index (CPI) basket.
President Muhammadu Buhari closed land borders with Benin, Niger, Chad and Cameroon in August 2019 to prevent food smuggling and encourage local agricultural production. But food inflation continued to climb with Nigerian farmers unable to keep up with domestic demand. The government partially reopened the borders in December 2020, but trade flows are yet to return to normal.
Also, since September 2020, the President’s order to restrict dollar access for food and fertilizer imports has driven traders to the parallel market for foreign exchange, where they pay a lot more.
The move aimed at boosting local production has raised costs for importers and added to upward pressure on food prices. Also a slew of attacks on Nigeria farmers by Fulani herdsmen and bandits have pushed down food reserves, raising the price of key staples, amid concerns about looming famine.
According to a December publication of the IMF, inflation rate could remain in double-digits unless authorities reform monetary policy to focus on price stability.
Speaking on the situation, development economist, Bar. Fred Nzeako, noted that while unifying the exchange rates will make a difference, it will not end the problem of falling naira value until Nigeria reduces her consumption of foreign exchange most of which, he regretted, goes into importation of petroleum products.
“The only way to save the naira and solve Nigeria’s problem is to reduce the consumption of foreign exchange”, Nzeako said.
“And the way to reduce consumption of foreign exchange is to reduce importation. Sadly, Nigeria spends the highest amount of foreign exchange on petroleum products. If you see the amount of money leaving Nigeria for the importation of petrol, you will weep for this country.”
On his part, Dr. Bongo Adi, associate professor at the Lagos Business School, told Business Hallmark that the efforts being made by the CBN to strengthen the naira will continue to be hampered by corruption if not tackled headlong. He advised that corruption in government and the private sector must be addressed to stimulate economic growth and in turn give birth to a strong naira.
“If we fix our economic problems by firstly producing what we eat, the naira will appreciate. When we can manage our economy such that when oil price goes down, we can produce what we consume that will make the naira stable,” Adi said.
He also reasoned that should the government address the issue of political uncertainty in the country, it would also go a long way in firming up the local currency.
He stressed the need to cut down the country’s spiraling debt, which currently stands at $79.5 billion as of March 31, 2020.
“The amount of the country’s loan shows that it may not be able to pay its loan in the future and that may affect the naira negatively,” he added.
Also, the chairman, SME Trade Group, Lagos Chamber of Commerce and Industry (LCCI), Mr. Abiodun Oladapo, noted that the value of any country’s currency is dependent on its level of productivity, regretting that Nigeria is not taking adequate advantage of the area where it has a competitive edge, which is agricultural production.
“For instance, a tonne of maize is about N100,000, but unfortunately the government is not encouraging its production by not supporting the production of fertilizer. If the naira must improve, the government must encourage real production,” he said.