The argument to float or manage the country’s currency has lingered for many years. Either position presents compelling reasons why a position should prevail in national interest or economic sense. Considering that Nigeria most times defies basic economic rules and theories, the argument mostly swings to national interest. For any keen observer, Nigeria’s FX stability has buckled under multiple rates, a challenge that has led to speculative trading, rent seeking and other market manipulations.
The Guardian had exclusively reported that market arbitrage (difference between the official and parallel market has widened in the past three years from N100 per dollar or about 30 per cent in 2020 to over N400 per dollar (above 100 per cent) sometime last year when the black market rate spiked to N880/$. From 2020 to 2022, the CBN spent about $42 billion intervening in the foreign exchange market to stabilise the naira. The amount was sold to the end-users, including students and tourists, at the official rates, which are way off the effective exchange rate of the naira. Today, the currency trades at about N740/$1 at the black market. Development institutions, including the International Monetary Fund (IMF), are wary of exchange rate differential in excess of five per cent and warn that such could trigger unhealthy manipulation that could negatively affect other efforts on market stabilisation.
The truism of the arbitrage was re-echoed by the former CBN Governor, Sanusi Lamido Sanusi, who stated: “With my background in the banking sector and now a royal father, I can sit in my garden and make billions through the forex market without a sweat. This is how most of those you call billionaires made their money.”
Historically, the CBN has adopted a gradual devaluation in attempts to close the market gap that has opened the space for all sorts of manipulations and rent-seeking behaviours. But each time naira is re-pegged, the black market exchange rate, which the apex bank has dismissed as not a reference value of the local currency, also adjusts. In 2014, when the CBN rate stood at N155/$, the black market was about N180/$ putting the premium on the alternative market at about N35/$. The monthly moving average (MA) of the differential had surpassed N45 per dollar at some point when the official rate was adjusted to N197/$. Today, the differential is within the N300 range with no end in sight.
Personal Travel Allowance (PTA) and Business Travel Allowance (BTA) window has become a lush business for thousands of Nigerians. At almost N300 per dollar market arbitrage, an individual realises as much N1.2 million ‘profit’ from either a real or phantom trip. Half of the kickback can cover return tickets to dozens of countries that qualify for BTA/PTA. And thousands of Nigerians, who are hard pressed to make extra income to survive the hard economy, are leveraging the opportunity weekly. As thousands file for BTA/PTA daily, banks are increasingly running out of supply and ability to fund the most genuine claims. The widening premium on the black market rate is often seen as a cause and effect of the inefficient FX management framework, dating back to the experimentation with the Structural Adjustment Programme (SAP) in the 1980s.
The naira has gone through a debilitating history and experimentations that have left it weaker, less of a store value but more of an article of financial speculation. Intertwined with the sore history is a litany of policy gambits that only mirrored more of the whims of external factors than they reflected the peculiarities of the local market. At best, the management prescriptions were half-implemented or abandoned at the realisation of their inherent flaws.
Through different approaches, which reflect individuals’ economic power and exposure, Nigerians are piling pressure on the naira, shorting it in expectation of a further fall in value. There is currently a worrisome tendency to short the currency (sell to buy it back when it slumps further) each time the dollar retreats slightly against the naira. At the top of the economic ladder is the increasing number of Nigerians fixing their money in foreign currencies locally and abroad. While the reserves have remained unstable, the demand for FX, both real and otherwise, has ballooned.
Nigeria’s foreign reserves closed out 2022 at $37.1 billion, having lost $3.43 billion during the year compared to the $40.52 billion recorded at the beginning of the year. This was mostly attributable to low oil income and the huge cost of defending the naira. With improved production, there has been an uptick in external reserves but sustainability concerns remain. Though the CBN removed 41 items (43 later) from the official FX funding list, which it claimed increased the pressure on the parallel market and also stopped weekly funding of bureaux de change (BDCs), dependence on oil continues to remain a blight on the country’s earnings.
Though the CBN has dismissed the parallel market as a reference point of the true value of naira, some experts see it (being the most accessible to end-users) as the closest to the true market. The truth in their assertion is premised on the fact that most businesses access forex for critical raw materials at the parallel market and price the product to reflect the exchange rate and hedge their losses. The pass-through inflation has continued to linger, even though the CBN’s MPR compounds the woes of many businesses.
Having allowed the situation to fester this long, the CBN is caught between the deep sea and the devil. Either way the pendulum swings, there is a price to pay and Nigerians do not appear to be ready to bear any more burdens going by the push back and unpopular decisions being taken by the President Muhammadu Buhari administration. With the current Naira debacle, the joke around town is that Nigerians are now paying a premium to buy the Naira. A naira exchange rate now exists! If the statement by Senior Special Assistant to President Buhari on Public Affairs, Ajuri Ngelale, that the CBN provided false intelligence to the President on the true state of naira redesign and swap is anything to go by, one can only imagine the quality of decisions that has brought Nigeria to its present position, especially in relation to monetary policies. In ideal contexts, the CBN Governor would have tendered his belated letter of resignation, considering his foray into politics. The CBN has two options— to let the Naira find its level in the market and refocus the economy towards exports rather than subsidising imports. After all, the costs of goods and services are already priced at the black market rate. Indeed, the opportunity costs of a stronger naira are huge and continue to sink Nigeria into a deeper poverty hole.
