Let us start with what Nigeria – its monetary authorities and government – must do immediately, in order to avert an even worse embarrassment. I mean the chaos of a total currency collapse! These things happen sometimes like magic. Bad magic.
1. The Central Bank of Nigeria (CBN) must immediately create a platform for the engagement of Nigerian citizens and businesses with the foreign exchange market. A semblance of seamless normalcy must be reenacted within limits. The reason for the current huge and unprecedented disparity between the so-called ‘official’ and ‘interbank/black market’ is because the CBN (under instruction I suppose) pulled the floor from underneath the feet of the average Nigerian in a most unceremonious manner, making poor citizens suffer for a problem they did not create.
2. The president of the Federal Republic of Nigeria, President Muhammadu Buhari, should give a listening ear to the re-creation of some sort of structure for the foreign exchange market – either through a handful of Bureau De Changes (BDCs) or banks, or both. He should not think he is merely disciplining Nigerians, or feign unconcern. This could lead to mass protest on the streets. Remember Argentina in 2005. A currency collapse is no child’s play. For when it all comes full course, it’s going to be bedlam. Let him imagine the effects of N1,000 to the dollar, or Zimbabwe, and remember that when these things start, they are impossible to control, like a tsunami.
3. The CBN should get out of the retail market. The CBN is the one currently fuelling that distortion in the market, by making dollar available directly to some people: government officials, importers of selected goods and so on. There is now too much discretion as to who gets what, when and how. The CBN should simply get out of the retail market and remain an occasional (not regular) wholesaler/buyer only to the banks and BDCs where every Nigerian should head to. In the interim, it may have to do a lot of wholesale selling at somewhere around N250-N280 to the dollar.
The CBN must be able to cause a revaluation of the naira – at least in the unofficial markets (or interbank), by subtly managing perceptions and expectations, and its occasional random interactions. If the CBN intervenes subtly and publicises its sell and buy rates (to banks and large BDCs) shortly afterwards, in a way that causes the naira to appreciate, many who are speculating that the naira will fall further, will think twice and start to sell dollar…
4. Subsequently, CBN’s interaction with the FX market should be silent, out of public glare, and through the banks. Its daily rates should be flexible and should move with the market. The public should only know about the rates in which it bought from, or sold to the market AFTER THE EVENT (say after two days). This takes the tension out of the market. The CBN should be able to then subtly assist in determining the exchange rate, but not as the sole determinant. Banks/well-established BDCs may still render returns as appropriate, for control and transparency purposes.
5. The CBN must be able to cause a revaluation of the naira – at least in the unofficial markets (or interbank), by subtly managing perceptions and expectations, and its occasional random interactions. If the CBN intervenes subtly and publicises its sell and buy rates (to banks and large BDCs) shortly afterwards, in a way that causes the naira to appreciate, many who are speculating that the naira will fall further, will think twice and start to sell dollar (or at least the demand pressure will ease). The point is that there is no reason to keep the dollar if there is a possibility that the value against the naira will diminish vis-à-vis currently levels. For now, nothing is being said or done, and the situation is getting worse. The naira is losing at least N5 to the dollar daily. In implementing this strategy, the CBN has a huge task with those from within who sometimes leak information to the banks. But predictability is not a strength in this business. The CBN Governor and Deputies should be charged with this role, and held responsible for insider trading where that occurs.
6. In every country, the way it is done is that a handful of BDCs will serve citizens and tourists. The CBN may consider state, regional and national licenses for BDCs. Nigeria does not need more than 100 brands. The enablement of BDCs is important, because they are also the receptacle for foreign exchange cash – for tourists coming into the country. The CBN can decide to checkmate the activities of the BDCs by also enabling banks to sell Business/Personal Travel Allowances subject to limits. Between its own interactions with the market, and the banks’ more transparent affairs, plus a publication of beneficiaries of FX on a weekly basis, the CBN can tame the market. The longer this extant policy (or non-policy) is allowed to stay, the more damaging it will be for the economy, the more backlogs will pile up, the naira will fall to ridiculous levels, distrust will ensue, panic will grow and it will be far more difficult to go back to normal.
The reason why the nation is in a fix is the perception problem created by the anger with which the naira has been managed. The CBN should be ready to spend $5billion stabilising the naira. If indeed looted funds are being recovered, these funds could also be deployed. The alternative is to watch the naira go to Hades, like the Zimbabwean currency. Those who talk of ‘real value’ don’t know what they are talking about. Zimbabwe was unable to find a real value for its currency and abandoned its dollar altogether.
7. The big issue is dollar availability as a result of the fall in crude oil prices. This has resulted into a drop in foreign reserves. The reason why the nation is in a fix is the perception problem created by the anger with which the naira has been managed. The CBN should be ready to spend $5billion stabilising the naira. If indeed looted funds are being recovered, these funds could also be deployed. The alternative is to watch the naira go to Hades, like the Zimbabwean currency. Those who talk of ‘real value’ don’t know what they are talking about. Zimbabwe was unable to find a real value for its currency and abandoned its dollar altogether. Nigeria stands a very slim chance in spite of current mismanagement. It is only confidence that can bring tourists and diaspora returnees back with their foreign currency cash. This is the only way which other countries get foreign currency cash. Nigeria is too far gone to be shut down without serious consequences. If government efforts on import substitution, and economic self-sustainability pays off, then the pressure will reduce, albeit gradually. Jack boot approach will lead to disaster; as we are seeing.
What Actually Happened?
The clamour for devaluation crept in on us stealthily (just for the heck of it). Prominent bankers and other financial market players, especially those to who everyone turns for opinion, started this campaign that the naira must be devalued several months ago. What started as mere whispers soon grew into an almost deafening din. Some foreign investors insisted that Nigeria MUST devalue its currency AND increase interest rates at the same time, to ensure their return to our financial markets. Our ‘sophisticated’ market watchers were on hand to amplify this wayward idea. The effect of a double-whammy of interest rate hike and devaluation on local industries, didn’t seem to matter to these financial market guys.
It was remarkable how the disciples of devaluation brooked no arguments. They were cocksure that that is the way forward, despite the fact that neither precedence, current realities, nor logic, was on their side. It is a frightening proposition that we would have some of our best support policies over the years, that put our economy in trouble, and all we get are mere apologies or buck-passing when everything goes wrong.
It was remarkable how the disciples of devaluation brooked no arguments. They were cocksure that that is the way forward, despite the fact that neither precedence, current realities, nor logic, was on their side. It is a frightening proposition that we would have some of our best support policies over the years, that put our economy in trouble, and all we get are mere apologies or buck-passing when everything goes wrong. For example, the SAP disaster has been put down to ‘Nigeria’s failure to implement it properly/ to the letter’ by some Nigerian top economists, even though the developing world got subtle apologies from the World Bank and IMF.
In this instance, may we remind the Apostles of Devaluation that contrary to what the textbooks say, in reality devaluation only works as a boost for countries with advanced value-added exports (like China) with a strong foot in the door in international markets. Even they don’t devalue like 30% at once. They manage it strategically, with the power to revalue when they desire. It never works for beginners. It has never worked for any African country. Ask Ghana. Whereas it is equally bad to maintain an overly strong currency with no fundamental backing, there is nothing wrong if we curb imports a bit, rather than lazily and mindlessly leaving our currency and economy to the vagaries of the so-called forces of demand and supply. Even the IMF is softening its position on some of these currency controls.
Resistance Without a Strategy
While the clamour was on, the Nigerian government resisted the devaluation. President Buhari swore that he would not ‘kill’ the naira. The CBN also came out with a few policies, notably the restriction of a certain group of 41 import items – including toothpicks, Indian incense, rice, enamelware, glass, and private jets – to name a few, from accessing ‘official’ foreign exchange. At the same time, the CBN changed the policy on domiciliary accounts, banning deposits into, and cash withdrawals from them. Also the laissez faire policy that allowed up to $10,000 daily, to be transferred from accounts, were removed. It was a mad idea ab initio. But the market froze. Confidence disappeared through the window. It was a case of swinging from one extreme (recklessness), to another (catatonia).
The government must know that what it set about doing is a very serious and dangerous task. Banning foreign exchange transactions, stopping the flow of international trade on those 41 items, considering that Nigeria is a very profitable market for many countries, and also grinding to a halt online purchases (e-Banking), is a direct blow to global financial markets…
Weeks later, there was a policy reversal. The CBN has now allowed deposits into Domiciliary Accounts, and withdrawals therefrom. Alas, after this ‘unbanning’, banks have said that Nigerians are afraid of bringing in their FX cash, in the fear that they may be unable to withdraw same when needed. Many customers who tested the policy claim that withdrawal is a serious problem. Therefore, everyone keeps their monies at home, fuelling crimes and insecurity.
The government must know that what it set about doing is a very serious and dangerous task. Banning foreign exchange transactions, stopping the flow of international trade on those 41 items, considering that Nigeria is a very profitable market for many countries, and also grinding to a halt online purchases (e-Banking), is a direct blow to global financial markets – and even the World Trade Organisation. All these while vowing never to devalue or raise interest rates! So these guys bided their time.
Have We Lost Control of the Naira?
With naira at 380 to $1 as I type this, and over 510 to the pound, has Nigeria’s authority finally lost control of the market? With this free-fall, accelerated by the recent news that even school fees for our children abroad, or healthcare for those seeking medical assistance abroad, will no longer be funded, are we staring at a bottomless pit? At what point will the naira stop to haemorrhage? The point to note, regarding stoppage of school fees payment, for example, is that some powerful government people and their wards – being sponsored by this country – are still able to obtain funds at the ‘official’ rate for the same purpose. Almost all our big men have children or wards studying abroad. This is why the CBN needs to stop selling retail to anyone. There are also government agencies giving scholarships abroad – a process that has been politically hijacked with children of politicians populating the scholarship list. These people have not only cheated the rest of us, but have access to official funds, while private individuals who struggle to get by are forced to patronise an illegal market and are thereby criminalised (whether for travel, education, health, subscriptions, books, softwares, and basic modern needs which can no longer be discountenanced and are not available in Nigeria).
This type of war must carry everyone along. What is it that we can immediately manufacture for our use in Nigeria today? What do we do until then? How do we change the mindsets? It cannot be only by inflicting pains. The government communications team should do more than propaganda. The work at hand is enormous.
In every situation where government officials have come out to complain of the addiction of Nigerians to imports, the hypocrisy is glaring. Nigeria remains the most profligate country on earth when it comes to the way politicians run around and spend money on convenience. Nigeria is the biggest market for luxury cars – and of course, for bulletproofing of those same cars – in the world! Our big men are very attached to their luxuries. And so are the rest of us lesser mortals to our little joys! This type of war must carry everyone along. What is it that we can immediately manufacture for our use in Nigeria today? What do we do until then? How do we change the mindsets? It cannot be only by inflicting pains. The government communications team should do more than propaganda. The work at hand is enormous.
De Facto Devaluation
The solution is not to ram Nigeria back into the Dark Ages, but to be more circumspect and strategic. The type of de facto devaluation that has already taken place on 95% of what Nigerians need has spun off serious inflation, no matter what the Bureau of Statistics says. The real issue is that because of our lack of strategy when we started resisting the devaluation mantra, now we are effectively devaluing even more than the best dreams of those guys who were trying to stuff Nigeria down a hatch! Already, people who have stockpiled dollar at N167, are already making a kill at N360. But they want even more! It seems a faith accomplish that we may hit a N500 or N1,000 mark for the dollar.
There is yet no attempt at reflating the economy. No incentives have been put in place for those Nigerians who would like to produce those 41 banned items locally.
This is the current scenario; we keep mouthing the need to industrialise, we constantly self-flagellate over our dependence on foreign imports, but no one has offered any way out. It doesn’t seem the government has had time to dream of exactly how this can be done, or how to start. Why alienate people from a most popular government? Why make children stranded abroad for no fault of theirs? Is there a need to manage the recovery time?
All we have heard is how the government is ready to support ‘foreign investors’ in solid minerals with a $1billion fund, and another such amount is being made available to Dangote Refinery! Imagine offering money to people who should be bringing some, and then depriving your locals of the same money while squeezing them into a corner. The government walked into a sucker punch!
This is the current scenario; we keep mouthing the need to industrialise, we constantly self-flagellate over our dependence on foreign imports, but no one has offered any way out. It doesn’t seem the government has had time to dream of exactly how this can be done, or how to start. Why alienate people from a most popular government? Why make children stranded abroad for no fault of theirs? Is there a need to manage the recovery time? Has any consideration been given to the fact that the best policies take time and the pains of the people must be managed? Why is the entire blame for mismanagement dumped on the people of Nigeria? Did poor Nigerians – in spite of their excesses – do anything near what our politicians did to empty our foreign reserves?
The ‘Four’ Generations of the Currency Crisis
In my mind, our academics and market players have been less than honest with us. Devaluation is never a silver bullet that solves all our problems. It has never been. It will never be. If Nigeria eventually devalues ‘officially’, say to N300 = $1, shortly, the ‘real’ market – interbank, BDC, and black market – will shoot up to N500 easily. But we watched (though some of us complained bitterly) as we were being led by our noses to our own perdition.
There are what they call Generations of Currency Crisis in International Finance. The First Generation speaks of where a country fixes its currency. By fixing your currency you set your country up for crisis, because speculators will move against that currency. Fixing a currency at a certain level is equivalent to staking your entire reserve, so speculators merely look at that foreign reserve and calculate how long it will take them to empty the reserve. The know that by the time they rapidly erode a country’s reserve, that country will shift position and devalue. George Soros did this against the UK in 1992. Who is Nigeria with $28billion in reserves? I suspect this is a strategy that financial market players who are clamouring for devaluation have already taken. They are still waiting for the big kill when Nigeria devalues ‘officially’, though those of them who can move in cash are already smiling to the bank; including many unknown beneficiaries of Jonathan’s reckless largesse. This strategy works all the time, when Central Bank Governors swear that they will ‘defend’ the currency!
Since almost ALL our top bankers and analysts have been saying ‘WE MUST DEVALUE’ repeatedly, THEY caused the naira to fall, not anyone or anything else. Since they know about this reality – as it is taught in every International Economics class – one can only conclude that they did this deliberately. It is all about profit-making and the money is rolling in for them at the moment.
But it doesn’t stop there. To ensure that their strategy is a reality, these same people used the Second Generation strategy against the naira. This Generation of Currency Crisis states that when it is oft-repeated that a currency will devalue, it sure does. This is because someone will make the first move, by ‘shorting’ the currency. This means that people will start buying dollar, and even borrow naira to buy dollar. Since almost ALL our top bankers and analysts have been saying ‘WE MUST DEVALUE’ repeatedly, THEY caused the naira to fall, not anyone or anything else. Since they know about this reality – as it is taught in every International Economics class – one can only conclude that they did this deliberately. It is all about profit-making and the money is rolling in for them at the moment. If the CBN saw this – and we told them – they should have subtly countered the rhetoric, not by stating that they ‘will defend the Naira’ – but by educating the public of the implications of what is called a ‘self-fulfilling prophecy’, or using third parties to explain this. They could even technically revalue the naira however slightly, to show their seriousness.
The third Generation of Currency Crisis cautions against a scenario where government guarantees debts owed by its banks. In our own case, sub-national debts (debts owed by our states), are also guaranteed by the FG with our reserves. A number of our state bonds are falling due soon and the Federal Government MUST pay. The ‘fourth’ generation, even though my own observation, is what happened with the Euro, where a currency union almost went totally awry. Nigeria’s naira nightmare combines the first three generation problems.
It will be interesting to see how Nigeria wriggles out of this. But let no one feign unconcern. We are in for our roughest ride in a while – inflation, job losses, business closures, increasing inequality, shut out from global markets, possibly a banking crisis, a full-blown recession. It’s a nightmare on Naira Street.
‘Tope Fasua, an economist and consultant, is CEO of Global Analytics Consulting.
