The global oil glut has posed both economic and fiscal threats to exporting countries. Specifically, it has left in its trail job losses, currency devaluation, depleted foreign reserves, etc. Nigeria has had her fair share of these challenges. Within this period of plummeting oil price, the country’s currency has had almost a near freefall in value, from about 160 to a dollar to over 280 to a dollar within months. As expected, most of the debates on the falling Naira have been influenced by the politics of the moment. That is, people tend to concentrate on the political implications/significance of the devaluation rather than the economics of it.
On its face value, the collapse of global oil prices, from which Nigeria derives the bulk of its revenue, and the reduction in external reserves, which has constrained the ability of the Central Bank of Nigeria to continually defend the Naira and sustain the exchange rate, are hard facts that the apex bank must respond to. Nevertheless, Nigerians had expected the CBN to design measures to enhance the resilience and stability of the banking system in such situations.
Over the last decade, Nigeria’s currency has been battered and assaulted by speculators, rent-seekers, fraudulent importers, corrupt government officials and rogue bankers. There is clearly enough blame to go around, but a chunk of the blame has to lie firmly on the doorsteps of the Central Bank of Nigeria, as the institution that is legally empowered to be the nation’s monetary policy manager and the custodian of our Naira and foreign currency reserves.
So what exactly is wrong with the Naira currency? Well, for starters, its value has been dropping like scattered raindrops from the sky. People seem to have lost confidence in the currency, and foreign investors neither have any respect nor regard for the Naira. Even within the Nigerian economy, the Naira has itself become a second-rate currency as a means of exchange and a measure of value.
This however has led to debates on devaluation of the Naira, which has sparked different opinion and suggestions in the system. However, in spite of this, the decision on devaluation seems somewhat justifiable. But it should be noted that devaluation causes a country’s exports to become less expensive, making them more competitive on the global market. This in turn means that imports are more expensive, making domestic consumers less likely to purchase them. Hence, while devaluating a currency can seem like an attractive option, it can have negative consequences. By making imports more expensive, it protects domestic industries which may then become less efficient without the pressure of competition. Higher exports relative to imports can also increase aggregate demand, which can lead to inflation.
Some factors which contributed to the Naira crash which include:
Liberalism in Foreign Transfers; the foreign exchange regime in Nigeria was exceedingly lax. It did not pay attention to rules or not caring enough about quality or safety until recently. A retired director and now an Economic Consultant, Alhaji R.A.O Oyetunji, shed little light on the issue of “Round-trip”. He express the belief that too much money in circulation can make people ready to round-trip hard currency because they believe value of the hard currency is greater than that of the Naira, so they rather keep it as a collateral so as to the buy Naira at any cost and keep for a long time. This practice was made easy because of the relaxing nature of CBN policy such that citizens can carry more the $10,000 dollars.
Most of the round tripping done in Nigeria, as the CBN well knows, is not done via bank notes but via transfers from international oil companies, Embassies and other large international conglomerates by the form M (Monetary policy) the CBN now wishes to impose. Form M cannot stop round tripping. The issue of Naira stabilisation is a market problem which the CBN knows how to handle and has been doing so for a long time.
Another instance was during the last elections which witnessed an unprecedented flow of foreign currency. The circulation of large amount of foreign currency may affect the value of the Naira but that cannot be stopped merely by banning foreign bank notes. This has also contributed to the crash of the Naira even though that is being curbed with new policy actions at the moment.
E-Banking is also another way in which the Naira crashed such as the unlimited consequences that it made money move freely and difficult to detect, including proceeds of corruption and other illegal activities. There are also several internal forces, which can make electronic transaction fraud more likely to prevail in organisations such as poor internal control, poor personnel policies and practices and lack of honesty at the top levels of management. Money laundering is also associated with e-transaction, which is still a growing concern on money laundering in the country as it is often associated with drug trafficking, bank savings abuses, real estate funds through tax evasion.
Furthermore, incursion of online purchase and foreign malls also means that every Nigerian can now buy anything freely online and get it delivered. Hence, foreign shops and organisations have now done proper risk assessment for Nigerians and realised that they will gain more than they lose. But the ‘click’ and ‘buy’ era only increases pressure on the Naira.
With the Naira further devalued amidst a real fear of an inflation spike, the prices of goods are in for it. First, because Nigeria imports many of its goods, and importation cost is paid in dollars, importers will now have to pay more Naira because of the local currency’s lower value. That means the extra cost will of course be shifted, through the retailer, to the final consumer. So, if for example you go to buy a dress and the seller tells you the price has increased from N1800 to N2000, remember it is imported from United States. There is also the inflationary impact, which the cost of dress may not escape, even if it survives the impact of the devaluation. If the predicted two percent rise in inflation occurs, then you’re looking at a similar increase in the cost of goods. Either ways of paying through credit cards it will however cost more due to fall of Naira. More so, infusion of money from the top rather than below is an avenue by which politicians assist their rich friends without focusing on the down-trodden.
Percentages of deposits in Nigeria are now in Domiciliary Accounts. Domiciliary account is simply a foreign currency denominated account which accounts in currencies other than the Naira. Domiciliary Account is designed to help in conveniently carry out foreign currency transactions from the comfort of our home, office or abroad. The account can be funded in dollars, pounds or euro through traveler’s cheques, foreign currency cheque lodgments, cash inflows and deposits. This shows a lack of confidence in the Naira whether by foreigners, local companies, households or individuals. Nigerians have expressed opinion, albeit tacitly that the Naira can only continue to go down and so they hedge their bets with the dollar. This however is also a growing concern in the nation whereby some reports say the domiciliary account balance forms almost 50% of the total deposits in Nigerian banks.
It is therefore, important for government and the Central Bank of Nigeria to put policies on ground which would sever as guidelines. This must be active and maintained. The issue of liberal foreign transfer should be tackled whereby businesses, schools and individual who conduct their activities in dollars would now revert to the local currency. Also banks should monitor transactions in order to reduce the issue of money laundering and promotion of our goods, that is, reduce importation of goods and services while encouraging more exports.