News Analysis: Blame Game Won’t Stop Naira’s Free Fall

Obinna Chima

When last week, in its bid to stem the slide in the value of the naira exchange rate, the Central Bank of Nigeria (CBN) in one day released three  circulars on foreign exchange (FX) and the market was unfazed as the nation’s currency continued its free fall, it was clear that the central bank has a lot more to do beyond the blame game to save the naira.

Specifically, despite the fire-fighting measures, the official naira exchange rate to the dollar closed at N1,537.96/$, while at the parallel FX market it closed at an all-time low of N1650 to a dollar last Friday.
That is why instead of shifting  blame of the current FX crisis on banks, the central bank should be bold to accept  responsibility and seek ways to address supply gap in the market.

Without a shadow of doubt, liquidity remains a major challenge in the FX market. No matter the number of regulatory interventions, by way of circulars, nothing would change if the the CBN  cannot wet the market with forex. The forces of demand and supply will naturally play out as has been the case since the country found itself in the current situation.

The increasing tension and the depreciation of naira is worsened by inflationary pressure  as the consumer price index (CPI), which is used to gauge inflation climbed to a 28-year high of 29.9 per cent in January, compared to 28.92 percent in the preceding month, the National Bureau of Statistics (NBS) disclosed. Year-on-year headline inflation was 8.08 per cent higher, compared to 21.82 percent in January 2023.
The CPI report for the month under review indicated that the food inflation rate increased by 11.10 percent year-on-year to 35.41 percent, compared to 24.32 percent in January 2023.

The rise in the food index was attributed to increases in prices of bread and cereals, potatoes, yam and other tubers, oil and fat, fish, meat, fruit, coffee, tea, and cocoa.
The country’s high import dependence explains why the exchange rate is often the bellwether for Nigeria’s economic health, and why there is a swift pass-through of exchange rate movements to inflation, which has contributed to the economic hardship in the land.

The development presages further troubles for the growth of the Nigeria economy as the country does not have such strong buffers to withstand such shocks.
What is clear to the CBN Governor, Mr. Olayemi Cardoso and his colleagues at the apex bank at this moment, is that this is not the time for blame game, but time for them to roll up their sleeves and up their game.

One of the three circulars released by the regulator last week stated that going forward, International Oil Companies (IOCs) would only be allowed to repatriate a maximum of 50 per cent of export proceeds in the first instance. The balance of 50 per cent of the export proceeds might be repatriated after 90 days from the date of inflow of the proceeds.

In the second circular, the regulator prohibited the payment of Personal Travel Allowance (PTA) and Business Travel Allowance (BTA) by cash, going forward, stating that PTAs and BTAs must, henceforth, be disbursed through electronic channels only, including debit or credit cards, to curb abuses and boost transparency in FX transactions.

In the third circular, the CBN announced the review of the allowable limit of price deviation for exports and imports to -15 per cent and +15 per cent of the global average prices, respectively, under the Price Verification System (PVS).

Prior to these, the central bank had lifted restriction placed on access to FX for the 43 items that were previously prohibited from accessing FX from the official market, which a lot of commentators had blamed for the Naira’s depreciation. Also, the CBN had in the past cleared the country’s FX liabilities across various sectors, which was estimated at about $7 billion; it also directed banks to limit the Net Open Position (NOP) of their overall foreign currency assets as well as the removal of allowable limit of exchange rate quoted by the International Money Transfer Operators (IMTOs).
Indeed, one of the major pressure point for Nigeria’s FX market is the demand for education and healthcare by Nigerians which in 10 years was put at $40 billion, according to Cardoso.

According to him, FX demand for education and healthcare in the past decade significantly eroded the strength of the Naira.
Cardoso, in his presentation at a recent plenary of the House of Representatives, disclosed that a growing number of Nigerian students studying abroad. In the 1980s and 1990s, the need for US dollars for their living expenses was minimal.
He disclosed that “recent data shows a significant change. According to UNESCO’s Institute of Statistics, the number of Nigerian students abroad increased from less than 15,000 in 1998 to over 71,000 in 2015.

“By 2018, this figure had reached 96,702 students, as per the World Bank. Another report projects the number of Nigerian students studying abroad to exceed 100,000 by 2022.

“Additionally, the UK’s higher education statistic agency noted a 64 per cent increase in Nigerian students studying in the country, rising from 13,020 in the 2019/2020 academic session to 21,305 by the 2020/2021 session.”

According to Cardoso, “given this data, it is crucial to highlight that between 2010 and 2020, foreign educational expenses amounted to a substantial $28.65 billion, according to the CBN publicly available balance of payment statistics.

“Similarly, medical treatment abroad has entered around $11 billion in costs during the same period. Consequently, over the past decade, foreign exchange demand for education and healthcare has totalled nearly $40 billion.

“Notably, this amount surpasses the total foreign exchange reserves of the country. Mitigating a significant portion of this demand could have resulted in a considerably stronger Naira today.”
 Further breakdown of the figure showed that personal travel allowances accounted for a total of $58.7 billion during the same period, with the CBN disbursing $9.01 billion to Nigerians for personal foreign travel between January and September 2019.

The CBN’s governor also revealed that the nation’s annual imports, which require dollars for payment, amounted to $16.65 billion in 1980, but by 2014, the figure had risen to $67.05 billion, although it gradually decreased to $54.71 billion as of 2023.
Can anyone really blame banks for the staggering amount spent on foreign education and medical expenses abroad? Can anyone blame banks for our crazy appetite for anything foreign? Can anyone really blame banks for our import-dependent economy? Can anyone really  blame  banks for Nigeria importing 100 percent of its petroleum products needs? All these have drained the country of its forex reserves. It is diversionary to lay the blame of the current currency crisis solely at the doorsteps of the banks without looking at the historical structural imbalance of the economy..

Cardoso noted in the presentation to the National Assembly  that in 1980, more than 75 per cent of the vehicles used in Nigeria were domestically produced by companies like Volkswagen in Lagos, and Peugeot in Kaduna, among others, however, presently, over 99 per cent of the cars driven are imported, necessitating dollar payments.

“Similarly, in 1980, the majority of the clothing worn was sourced from Nigerian textile mills in Funtua, Asaba, Kano, Lagos, and various other towns and cities. Today, nearly all the clothing worn is made from imported fabrics,” he said.

The above statement by Cardoso has, once more, brought to the fore the need to take actions that would wean the economy from excessive reliance on crude oil earnings for survival as well as address the structural imbalances in the country.

It is clear that Nigeria’s heavy import dependence is majorly responsible for the high forex outflow and the perennial weakness suffered by the Naira.

There are four sources through which Nigeria earns FX. These are proceeds from oil exports, proceeds from non-oil exports, diaspora remittances, and Foreign Direct/Portfolio Investments (capital flows).

The CBN issues the legal tender in Nigeria in Naira and Kobo and does not print dollar. While the pressure on the Naira has both local and global perspectives, the Nigerian economy is also suffering from the knock-on effects of the petrol subsidy removal and the floating of the Naira exchange rates.

These two policies are mainly responsible for the surge in inflation as well as the growing economic hardship being experienced by the citizens.

In addition, the deteriorating security situation in the country has also battered investor confidence and affected FX inflows into Nigeria. Also, a fraction of the FX earned is channeled towards debt service.  With these, there is need to drastically block all avenues of fiscal leakages.

Nigeria’s perennial exchange rate crisis can also be resolved with the adoption of export promotion strategies and genuinely implemented economic diversification policies.

The fiscal authorities must also do more to improve the country’s balance of trade because the pressure on the FX market would continue since Nigeria does not earn enough FX and has not done enough to control its citizens appetite for the dollar.

Therefore , it has become imperative that the Monetary Policy Committee meeting, which holds next week, should come up with policies that would send the right signals to the market,  correct the volatility in the FX market and help attract dollar liquidity.