When The Naira Is On A Free-fall, By Kazeem Akintunde
One of the basic principles of economics that was ingrained in my brain 40 years ago at Boys Academy, Simpson, Lagos Island, is the law of demand and supply as espoused by Adam Smith. It simply states that consumer demand for a good or service decreases as the price increases. The higher the demand for any particular good or service that supply cannot meet up to, there is bound to be an increase in the price of that good or service.
That principle, which has been in existence for decades, is not about to change. In a free market economy, the equilibrium price is the price at which the supply exactly matches the demand.
Smith, an 18th-century Scottish economist, philosopher and author who is considered the father of modern economics, in one of his impactful books, ‘An Inquiry into the Nature and Causes of the Wealth of Nations’, dwelled on the principle of demand and supply. Again, in his first book, ‘The Theory of Moral Sentiments, Smith proposed the idea of an invisible hand – the tendency of free markets to regulate themselves using competition, supply and demand, and self-interest.
In the last few weeks, the Naira, Nigeria’s currency, has been on a free-fall. When the present government came to power on May 29, the Naira exchanged for the Dollar at N762 at the black market. It was around N450 to a dollar at the Investors and Exporters Window, managed by the Central Bank of Nigeria (CBN).
However, series of unforced errors, poorly thought-out economic policies and gra-gra mentality of many of those at the top, has forced the Naira to an all-time low of N1,152/$.
It is quite sad that many Nigerians are daily being pushed into the poverty quagmire. This is because as the value of the Naira continues its free-fall, the price of basic items, most especially food keeps galloping out of the reach of many Nigerians and those in charge seem at a loss as to what to do.
The twin-policy of fuel subsidy removal and the unification of the dual exchange rate implemented by the present regime, have been identified as the cause of the ugly situation. On paper, both policies have considerable benefits that could be derived from them if well-thought out and systematically implemented. But at the May 29 inauguration ceremony, where President Bola Tinubu flippantly announced that fuel subsidy is gone without any plan in place to manage its consequences will remain a bloat on his administration for a long time to come. In spite of the fact that he was warned to stick to his prepared speech, Tinubu went ahead to create problem for his own government, and Nigeria is yet to recover from that misstep.
Presently, the dollar is almost becoming the currency through which we trade as some hotels, schools and supermarkets now demand for payment in dollar although it is illegal to do so. The fall in the standard of education and the frequent, needless strikes by the Academic Staff Union of Universities (ASUU), have ensured that nearly all families now have a child or two outside the shore of the country acquiring foreign education. Their parents have to source for dollars to pay their school fees and monthly maintenance allowance.
Manufacturers also have to source for dollars to buy raw materials and other essentials for their factories to run. Many Nigerians have lost confidence in the Naira and now keep extra cash in dollars. Coupled with the antics of speculators and other rent seekers, there is always a high demand for dollars in the country. This is because even the tomato farmer has to buy bread, in which the main ingredient, wheat, is imported from the United States of America. He now has to pay thrice the amount for that bread than he would have few months ago. A man whose income was N150,000 in early 2015 was earning the equivalent of $1,000. However, his income must have substantially increased to N1,150,000 for him to earn the same $1,000 as of today. How many Nigerians earn that much? All these translates to a higher demand for the dollar.
Conversely, the supply side for dollars into the country has been on the decline in the last couple of years. Sale of crude oil in the international market, which is one of the major sources of dollars for Nigeria, has been badly impacted in volume due to the activities of militants in the Niger Delta, and outright monumental theft of crude by ‘big boys’ in the country. It is only of recent that militants’ activities are on the decline due to increased surveillance, but even at that, we are yet to meet our daily target of the volume of crude allocated to Nigeria by the Organisation of Petroleum Exporting Countries, (OPEC).
The little foreign exchange that came into the country through oil export is again used to buy refined petroleum products back into the country. It is so sad that we are the only fuel exporting country in the world that still import refined produce back home. At the end of the day, we get little or no dollar from our crude oil export.
Apart from that, we are not a manufacturing hub, as we are not producing anything of substance that could earn the nation the much-needed foreign exchange. We manufacture little or nothing as a nation. Our agricultural produce cannot also earn us any significant amount of dollars as we cannot properly package and add value to them to earn foreign exchange.
In the midst of all these is the decision by our economic management team to float the Naira. A floating exchange rate is where the currency price of a nation is set by the forex market based on supply and demand relative to other currencies. Remember our discussion on Adam Smith’s Demand and Supply? This is in contrast to a fixed exchange rate, in which the Government, through the CBN, entirely or predominantly determines the rate.
In essence, if supply outstrips demand, that currency will fall, and if demand outstrips supply, that currency will rise. Our Naira has been on a free-fall since the floating, keeping the Demand and Supply theory in mind.
This is where the challenges pile up for Nigeria and the Nigerian economy. As a country, Nigeria has been largely import-dependent; a large proportion of the citizenry having preference for foreign goods and services; factories importing machineries and raw materials; high number of Nigerians going for foreign degrees and certifications and paying in hard currencies abroad etc. This reality and preferences exist side-by-side with the scarcity of dollar and other foreign currencies in the country over the years. The country has largely been a mono-product economy, depending almost entirely on earnings from crude oil export alone, with no substantial foreign exchange inflow from the export of non-oil items.
Indeed, successive administrations have only paid lip service to ‘effective diversification’ of the national economy. Year-in-year-out, the national budget is couched on the assumptions of the volume, value and price of crude oil in the international market. Yet, as a member of OPEC since 1971, Nigeria neither fixes the price at which to sell her oil, nor determines the volume of oil to bring to the market.
And to finally bury the Naira, the Federal Government, through the Central Bank of Nigeria (CBN), has again declared that importers of 43 items previously restricted from accessing foreign exchange (FX) at the official window are now allowed to purchase FX in the Nigerian foreign exchange market going forward.
The apex bank said it would intervene in the foreign exchange market occasionally to boost liquidity, after ending the eight-year ban on the 43 items that were restricted from accessing dollars on the official market. The apex bank in June 2015, had initially included 41 items to the list of commodities which were not valid to purchase FX from the market, citing the need to conserve the scarce forex and encourage domestic production for self-sufficiency and exports. The list was thereafter expanded to 43 items. Some of the items listed then as not-fit-for forex included rice, cement, margarine, palm kernel products and vegetable oil, meat and processed meat products, vegetables and processed vegetable products, poultry chicken, private airplanes, tinned fish in sauce, roofing sheets wheelbarrows, head pans, among others. We shall soon include the importation of toothpick into the mix. We are doing well as a country!
However, the CBN Director, Corporate Communications, Dr. Isa AbdulMumin, had said that the Central Bank would continue to promote orderliness and professional conduct by all participants in the FX market segment to ensure that market forces determine exchange rates on a Willing Buyer – Willing Seller principle. Fantastic. That will be good if we have enough dollars to shore up the supply side. But the answer to this is known to all of us.
Floating a weak currency ought not to have come by fiat like the fuel subsidy removal. The two critical economic policies should have come as integral parts of a wholesome full-scale economic development blueprint for Nigeria.
With the ways things are going, I hope that the Naira will not soon surpass the N2,000/$ exchange rate if drastic actions are not taken to defend it and work on how to get in more dollars into the economy. The $3m dollars soft loan from the Africa Development Bank (AfDB), if it is still on the cards, could go a long way in giving the Naira a lifeline while other measures should be considered to save the Naira from its present free-fall. We also need to increase our foreign reverse, think out of the box on how to move Nigeria from a consuming nation to a producing hub and curb the unbridled demand for dollars in the country. Foreign Direct Investment (FDI), is another means of shoring up our dollar supply but how many investors will be willing to come into an environment where insecurity is strife?
Importation of petroleum products into Nigeria is a shame and the high time we put a stop to it, the better for us all. We have been promised that Port Harcourt and Warri refineries should come on steam by the end of the year while Dangote refinery, should begin production of refined products by the first quarter of next year. If we get these done, fuel importation will reduce to the barest minimum and we can get enough dollars to defend the Naira.
With our economy heavily dollar-dependant, there is no question about it being time to diversify and think of various ways to attract the much sought-after dollar into the economy. Only when we do these will the Naira be able to breathe again, and eventually ‘gain weight’.
Remember our Demand and Supply theory.
See you next week.
