CBN in the battle to save the Naira

THE Naira exchange rate has suffered severe battering in recent times and fallen from about N160 to the present N197=$; even when our national experience suggests a close correlation between deepening poverty and weakening Naira exchange rates.
Evidently, the unyielding youth exodus and the mass migration of skilled professionals to more prosperous economies, certainly took root as Naira exchange rate plummeted from 50kobo to N200=$, even when we celebrate bountiful export dollar reserves; furthermore, over 100 million Nigerians, reportedly, now also live below the poverty benchmark of $2/day (N12,000/month), while, regrettably our rapidly expanding industrial landscape has shrunk significantly and become more challenging and uncompetitive, as production costs have skyrocketed with serial Naira devaluations!

Interestingly, the gradual collapse of the manufacturing subsector and the consequent explosion in unemployment, clearly do not support the popular belief that weaker Naira exchange rates would support economic diversification and also promote exports of Made-in-Nigeria goods.

Consequently, Nigerians must be wary of any persuasion that prescribes further Naira devaluation as the antidote to our beleaguered economy.

Historically, the CBN, compulsively, devalued Naira rate to bridge the increasingly widening gap between official and parallel exchange rates, even when these gaps were caused by the contrived monopolistic market dynamics of demand and supply.

Arguably, it would undoubtedly create much discomfort for CBN Management, if unrestrained dollar demand, further, pushes parallel market rates well above N300=$1; in such event, CBN may again, unwittingly, jerk up the official rate above N300 and remove the embedded ‘subsidy’ from the prevailing arbitrarily fixed official Naira exchange rate to raise dollar price and discourage demand pressure to minimise the opportunities for rent seeking. Regrettably, nonetheless, a 50% devaluation to N300=$1 would severely deplete all Naira income values and induce panic amongst Naira income holders, who would seek to protect their income from another round of devaluation; sadly such response would simply instigate more dollar demand.

Ultimately, if CBN cannot restore public confidence in Naira as a store of value, another widening gap, between official and parallel market Naira exchange rates will again evolve and make serial Naira devaluations inevitable.

Incidentally, the Ghanaian currency, the CEDI followed a similar trajectory from 1Cedi=$1 to eventually exchange for 10,000 Cedis before the 4 decimal redenomination of the currency in 2007; instructively, however, the Ghanaian authorities still failed, abysmally, to control excess supply of CEDI liquidity and the New Ghana Cedi, inevitably, traded above 4 New Ghana Cedis i.e. 40,000 old Cedis, to a dollar a decade or so thereafter. Consequently in 2015, the IMF provides over $900m emergency loan, so that Ghana’s market dollar deficit would shrink and protect the Cedi exchange rate; regrettably, however, the end of the travails of the Ghanaian currency remains out of sight.