CBN AND DEVALUATION OF THE NAIRA
Felix Oladeji argues for diversification of the country’s economic base
Economists commonly agree that macroeconomic fundamentals, which manifest in the productivity and overall output level in an economy, are the ultimate determinants of the value of the country’s currency, relative to other countries. These underlying economic factors, such as the level of international trade and tourism, inflation outlook, interest rates differentials, capital flows, have been detailed in the various theoretical models of exchange rate determination, and particularly summarized in the various classical concepts of Purchasing Power Parity (PPP), Fischer’s Interest Rate, and Market Fundamentals theories, among others. Of a particular bearing is the international financial environment, whereby portfolio investments and the capital movements across countries and the associated exchange rate regimes become critical considerations in the behavior of exchange rate.
Devaluation of a currency globally is the end product of declining the nation’s currency in relation to major currencies of the world. Since 1986, the Nigerian naira’s relationship with the U.S. dollar (and other foreign currencies) has been erratic, predictable and unpredictable, violent and of course full of tears and heartbreaks to the citizens, government and the economy as a whole. The devaluation of naira can be compared to its most compared currency, dollar. Dollar has an effect on many nation’s currencies due to the economy and many citizens of different nations tend to exchange, import goods from the U.S. and as well look up to the currency. The U.S. dollar played a significant role in the colonization of most African nations and some other nations around the globe. As such, the currency of the United States is regarded as the giant currency. This shows that when the dollar sneezes, most nation’s currency is affected due to other nation’s dependency, and especially the naira.
The currency of any nation represents more than its function as legal tender and denominator for exchange of goods and services. The measure of the price of a currency in terms of another is known as exchange rate. It measures the underlying strength of performance of an economy against another and the intensity of international transaction between residents of a country and those of another country. It carries with it the image and pride of a nation and also the totality of value created or destroyed in a period of time. Accordingly, a healthy currency is directly related to a healthy nation and vice versa, and it is a legitimate priority of governments to fashion out policies that seek to sustain the health of this important piece of national asset. In Nigeria, the mandate to manage both internal and external value of the Naira was given to the Central Bank of Nigeria under the Central Bank of Nigeria Act No. 24 of 1991.
Achievement of internal and external stability of a currency would appear to be a pre-condition for increase in investment, production, trade, employment and hence national welfare and happiness. It is therefore not surprising that exchange rate of a currency is one of the most watched and manipulated variables as modern governments try to achieve their macro-economic objectives. Since 1958 when the Central Bank of Nigeria was established to, among others, take up the mandate of managing the nation’s exchange rate, the country has been experimenting with different rate regimes in what would seem like a never ending chase for equilibrium exchange rate. Exchange rates appeared to be consistently inconsistent with economic realities that prevailed.
Moreover, the government of the day relies on foreign exchange reserve generated from crude oil to manage excessive volatility in exchange rate that exerts severe strain on the foreign exchange earnings. It is evident that the demand for foreign exchange has continuously been on the rise in the past few years as a result of factors like dependence on imported finished products, reversal of capital flow by investor and high speculative demand which has caused uncertainty in the foreign exchange market which also is caused by increased demand for foreign exchange in the face of unstable supply. The increasingly adverse balance of payment position and the inflationary pressures which the economy found itself in also affects the Real Gross Domestic Product (RGDP) of the economy.
Governor of the Central Bank of Nigeria (CBN), Olayemi Cardoso, said Deloitte audit revealed that $2.4 billion out of the reported $7 billion of outstanding foreign exchange liabilities of the federal government are not valid for settlement. Cardoso made this revelation in an interview with Arise Television on Monday. He disclosed that the bank had settled verified FX requests, which amounted to $2.3 billion. The CBN governor added that the current total outstanding FX obligations stood at $2.2 billion. Cardoso further indicated that part of the $7 billion in outstanding FX claims was fraudulent, citing the outcome of a forensic audit by Deloitte Management Consultant, which was commissioned by the apex bank. The CBN governor said he was confident that the outstanding FX liabilities would be addressed shortly.
Hence, the Nigeria government should diversify her economic base, create an enabling environment for export-oriented manufacturing to grow instead of devaluation, trade restriction, and ban on some selected imports. Other monetary measures should be introduced to address the country’s balance of payment position. The monetary authorities should do what they can to reduce the temporary increase in prices. The government should consider devaluation of currency as the last resort to the economic imbalance.
It will be gainful to say that the government should regulate and maintain the stability in the exchange rate, also from the revenue generated from crude oil. The government should try to give loans to domestic industries so as take-off grant in producing their goods and services. Also, the government should try as much as possible to come up with policies (fiscal and monetary) so as to combat the deus ex machine of exchange rate era.
Lastly, the government (state and federal) should have some decent and conducive infrastructure that attracts the foreign investors around the globe. These solutions can also be achieved by diversifying the economy.
Oladeji writes from Lagos
