emefiele

…we find ourselves in a uniquely terrible position because we did not act quickly enough when we should have and the blames lies squarely at the table of the current CBN governor, the economically illiterate president and the lightweight economic team.

Unfortunately, the current leadership of the Central Bank also has to go because the required foreign funds will not come into the country as long as they do not have faith in the ability of the governor to manage the nation’s monetary policy and the external markets have completely lost faith in our dear governor as previously stated as ‘an incompetence tax’.

It’s too late to devalue the naira now. That’s merely a weak half measure. The horse has bolted the barn and it is time for more dramatic and drastic measures. In the space of two weeks, the naira has fallen at the parallel market from about N295 to about N380. In fact right now the naira is in a free fall right off a cliff and might be at N600 by month end!

To devalue or not to devalue the naira is a question Nigeria has been facing for at least the last 12 months. It’s also one that the layman does not clearly understand even though it has dramatically reduced his purchasing power, since most things in Nigeria are imported from outside our borders and also even the tomato seller in Kano has increased prices to reflect the fall of the naira despite not having anything to do with the dollar. Inflation has now started to inch up from about 9% to 9.62%, which I suspect doesn’t even reflect the real inflation rate.

I will try to explain why we are in this situation. Nigeria is a trading nation not a producing/manufacturing one. We import most things we consume, from ketchup to cars, wheat to whiskey, rice to cornflakes. Over 80% of all the things used in the country are imported. We manufacture just a small number of things. Now because we import so many things, there is always a high demand for foreign currency (dollars, pounds, euros, yuan etc). The highest demand amongst the currencies however is for dollars. Importers usually get their forex from either the Central bank of Nigeria or the private sector (private companies, private individuals and bureau de changes). CBN usually has dollars because the crude oil sales receipts of the country are paid in dollars and warehoused at the central bank. The CBN then sells some of these dollars through a number of mechanisms to banks, individuals and bureau de changes. In addition, private companies (mainly companies in the oil and gas and maritime industries) that receive payments in foreign currency do the same, thereby ensuring a stable supply of forex.

Nigeria clearly needs a long term economic plan to develop our manufacturing base and drive up production in the country so that equilibrium can be found again. This is what the team needs to provide or Mr. Buhari would have lost the chance to truly transform Nigeria.

Unfortunately, immediately the price of crude oil started failing in the international markets, the amount of dollars available to sell by the CBN and private companies reduced drastically, thereby creating a simple economic disequilibrium and showcasing the obvious economic principle that ‘whenever demand exceeds supply, prices will increase’. The demand for dollars which had always exceeded supply but never to this extent drove up prices dramatically and as supply kept falling, demand kept increasing. This is the real reason why the naira is falling. We buy more than we make and the CBN can no longer provide enough dollars to plug the hole to pay.

Also, I have heard CBN officials claim that speculators’ betting against the naira was part of the reason why its value nose-dived. This might have been true previously but it can’t be true anymore since the CBN has choked off most avenues for repatriating dollars. To speculate against the naira, you would have to engage in ‘short selling’. This is a process where a currency trader believing that a currency will fall in value borrows the currency and sells it at the current price, then when it falls, he/she buys it back. Let me illustrate: If trader A believes that the naira is overvalued, at N290 to a dollar ($), he can borrow and sell N100, 000,000 at N290. Then when the naira drops further to N330, he buys back the N100, 000,000 at a much lower value thereby making N40 on the trade, then returns the borrowed money. However, he still needs to sell the naira profit and buy dollars to return the borrowed money and since dollars aren’t readily available, he would have to pay a premium for it, thereby losing any profit he has made. So speculators are not the issue. It’s the mismanagement of our forex policy by our regulator that is the problem.

The aforementioned excess demand has created a wide gap between the dollars sold at the official rate of N197 (which most people cannot get) and the black market (parallel market) dollar sold as of yesterday at N380/$. The normal thing to do in this situation is to try and get the official market rate closer to the black market rate (through devaluation), however this might now be difficult because the CBN has left it too late and there is nowhere to get dollars to plug the demand gap. Thus we find ourselves in a uniquely terrible position because we did not act quickly enough when we should have and the blames lies squarely at the table of the current CBN governor, the economically illiterate president and the lightweight economic team.

The normal thing to do in this situation is to try and get the official market rate closer to the black market rate (through devaluation), however this might now be difficult because the CBN has left it too late and there is nowhere to get dollars to plug the demand gap.

The only option left for us now is to forget a controlled devaluation and simply remove all currency controls. The naira will fall to a range around N300 – N400 and align with the black market. If we do that quickly and transparently, foreign funds will come back into the country and help reduce the demand for dollars for importation. Unfortunately, the current leadership of the Central Bank also has to go because the required foreign funds will not come into the country as long as they do not have faith in the ability of the governor to manage the nation’s monetary policy and the external markets have completely lost faith in our dear governor as previously stated as ‘an incompetence tax’.

foraminifera

Finally, immediately currency controls are removed, the president’s economic team must sit down and start work on a framework to reduce the number of things we import and therefore reduce the demand for forex. Nigeria clearly needs a long term economic plan to develop our manufacturing base and drive up production in the country so that equilibrium can be found again. This is what the team needs to provide or Mr. Buhari would have lost the chance to truly transform Nigeria.

Femi Akinfolarin, a lawyer, writes from Lagos.