Nigeria’s current financial and economic community is quick to point out the realities of her currency, the gyrations, floundering and nose-diving in all ramifications of suggesting an economic meltdown.The nation’s legal tender, the naira, has been on a free-fall against the United States dollar and it seems to have reached its apex. Despite the Central Bank of Nigeria (CBN) directive that foreign currencies shouldn’t be spent on services rendered in the country, thedollarisation of the nation’s economy has continued unabated.
Many factors have been adjudged for naira’s free-fall against the US dollar, but one fact remains and that is that Nigeria is one of the biggest exporters of crude oil that also imports refined petroleum products. Hence, the revenue that accrues from rising oil price isliquidated by expenditure on importing refined products.
An economist and a retired director, Alhaji R. A. O. Oyetunji, said the dollar is one of the currencies that rule the world, and that if the dollar sneezes, other currencies shiver. He explained in a concept called multiplier effect, which he described as “how an injection into an economy, such as an increase in government spending can create a ripple effect which increases employment and the output goods and service in the economy.”
According to him, if there is an increase in price of dollar “which has been the major currency in most of our business transactions, the resultant effect will be an increase in prices of virtually every commodity in Nigeria.”
Economic Confidential also gathered that due to the fact that Nigeria is involved in mono-economic product oil and the fact that the Organisation Petroleum Exporting Countries (OPEC) uses the dollar as its currency, if there is an increase or decrease in the price, it will definitely affect the naira.
This logic, as well as the mindset and modus operandi of the people often set the stage for scarcity of the dollar.
Demand and supply forces
The naira demand and supply is determined by the market forces because naira is allowed to float without any fixed exchange rate. The relative weakness of the nation’s entire economy does not seem to favour the status quo.
The GDP is relatively small compared to those of the industrialised nations and this negates the stability and international purchasing power of the naira. Also, the amount of importation overwhelms the economy and a low return of foreign exchange due to lack ofexportation to generate foreign exchange.
The crux of the matter is the demand for the dollar is extremely high among Nigerian banks. Nigeria does not generate enough foreign exchange to satiate local consumption; therefore, the demand for dollar drives the value of the naira that is ubiquitous and weak. Nigerian source of dollars and foreign exchange comes only from the export of oil and its overdependence for foreign exchange from oil.
Psychology of the meltdown
The psychological impact of the global economic downturn must be appreciated. With global access to the international news networks, including Cable News Network (CNN), the British Broadcasting Corporation (BBC) and others, remote corners of the earth becomenominal partakers in the global village. Therefore, pseudo-feeling of the bad news might creep into Nigeria’s mind-set and usher in a psychology that might trigger the fall of the naira in the real world.
What Nigeria must do
As the value of the naira nosedives, Nigeria has another alternative to prop it up by withdrawing her huge war chest; her enormous foreign reserves and liquefy the financial and banking market. This is a delicate tactic because drawing down the reserve can lower the country’s credit worthiness and financial rating.
Nigeria’s financial actors cannot fold their hands and blame the whole sorry episode on the global economic meltdown. Naira, as a currency, is not readily convertible, and thus becomes a barrier in the active participation in global trade, especially in currency transactions.
A former governor of the Central Bank of Nigeria (CBN), Prof. Charles Chukwuma Soludo, deserves some credit for his early vision when he called for the pegging of the naira by making it convertible, even as the nation’s gatekeepers failed to heed his recommendation.
The naira demand and supply is determined by the market forces because naira is allowed to float without any fixed exchange rate. The relative weakness of the nation’s entire economy does not seem to favour the status quo.
The GDP is relatively small compared to those of the industrialised nations and this negates the stability and international purchasing power of the naira. Also, the amount of importation overwhelms the economy and a low return of foreign exchange due to lack ofexportation to generate foreign exchange.
The crux of the matter is the demand for the dollar is extremely high among Nigerian banks. Nigeria does not generate enough foreign exchange to satiate local consumption; therefore, the demand for dollar drives the value of the naira that is ubiquitous and weak. Nigerian source of dollars and foreign exchange comes only from the export of oil and its overdependence for foreign exchange from oil.
Psychology of the meltdown
The psychological impact of the global economic downturn must be appreciated. With global access to the international news networks, including Cable News Network (CNN), the British Broadcasting Corporation (BBC) and others, remote corners of the earth becomenominal partakers in the global village. Therefore, pseudo-feeling of the bad news might creep into Nigeria’s mind-set and usher in a psychology that might trigger the fall of the naira in the real world.
What Nigeria must do
As the value of the naira nosedives, Nigeria has another alternative to prop it up by withdrawing her huge war chest; her enormous foreign reserves and liquefy the financial and banking market. This is a delicate tactic because drawing down the reserve can lower the country’s credit worthiness and financial rating.
Nigeria’s financial actors cannot fold their hands and blame the whole sorry episode on the global economic meltdown. Naira, as a currency, is not readily convertible, and thus becomes a barrier in the active participation in global trade, especially in currency transactions.
A former governor of the Central Bank of Nigeria (CBN), Prof. Charles Chukwuma Soludo, deserves some credit for his early vision when he called for the pegging of the naira by making it convertible, even as the nation’s gatekeepers failed to heed his recommendation.
All the same, it is never too late to act, for there must be a consensus on this matter via enlightenment of the Nigerian public and the elite on the merits of the convertibility of the naira; that is setting up a wall in the defence of the naira from hostile local and international currency traders that hoard dollars; thus creating artificial demand and scarcity for it.
Furthermore, Nigeria must make foreign exchange available to its local banks. The banks need the dollar for its customers who engage in foreign transactions. At the moment, Nigeria needs to withdraw some money from her foreign reserves, which should be pumped into the market to reduce the scarcity of dollars. This, will in turn, will enable the naira to regain some of its values and withhold the trashing from the dollar. This is, of course, a temporary measure and not the panacea for a healthy and sustainable currency.
More so, the economic reforms must be practical and pragmatic to the marketers and the citizens. Fiscal and monetary policies can also be applied to regulate and appreciate the naira. Although the fundamentals of the economy may be sound, they lack the stability andzest to leverage against the dominant dollar.
Nigeria has become responsive to the diversification of her economy, not minding that she has a long way to go. The country knows what to do, but procrastination and intellectual lethargy have always retarded her progress. Oil cannot continue to be her only high yielding sector; agriculture must be expanded and retooled. Investments must be made in research and development.
Furthermore, Nigeria must make foreign exchange available to its local banks. The banks need the dollar for its customers who engage in foreign transactions. At the moment, Nigeria needs to withdraw some money from her foreign reserves, which should be pumped into the market to reduce the scarcity of dollars. This, will in turn, will enable the naira to regain some of its values and withhold the trashing from the dollar. This is, of course, a temporary measure and not the panacea for a healthy and sustainable currency.
More so, the economic reforms must be practical and pragmatic to the marketers and the citizens. Fiscal and monetary policies can also be applied to regulate and appreciate the naira. Although the fundamentals of the economy may be sound, they lack the stability andzest to leverage against the dominant dollar.
Nigeria has become responsive to the diversification of her economy, not minding that she has a long way to go. The country knows what to do, but procrastination and intellectual lethargy have always retarded her progress. Oil cannot continue to be her only high yielding sector; agriculture must be expanded and retooled. Investments must be made in research and development.
