THE VALUE OF NAIRA IN PERSPECTIVE
THE VALUE OF NAIRA IN PERSPECTIVE
By:
Nurudeen Dauda
November 2, 2022
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The recent announcement by the CBN to redesign the Naira come 15th December, 2022 has triggered a demand spike for Dollars against the Naira in what looks like a desperate move by local currency hoarders to exchange Naira. This move has further weakened the Naira in the parallel market. The further depreciation of the Naira could also be due to a possible hoarding by traders. Will the rise continue? Only time will tell!
In my observation, some people erroneously think that the "value" of "Naira" or any other country's "currency" is kept strong against other currencies by an executive"fiat", but far from that, It is apt to state that, the "value" of any country's "currency" is a "function" of its "productivity" and not what the country wants it to be.In an import dependent economy like ours demand and supply for foreign exchange (FX) determines the "strength" or "weakness" of the our currency. In other words, the value of "Naira" or any other country's currency is essentially determined by its productive capacity.
There are "twin" misfortunes of our national economy; one, it is largely an import-dependent one and two, it largely depends on a single FX earnings source. Almost ninety percentage (90%) of our sources of FX which represents the "supply"source of Dollars is through the sales of crude oil whose price has fallen and it production lowered due to oil theft . It is sad to note that we are unable to diversify our sources of FX and stop oil theft. This is sad!
It worries me to note that, our hard earned FX are often given for medical, and educational tourists at official rate instead of strictly for importers of raw materials. Giving FX at official rate for the said category of demands equal to a subsidy for the rich. Most of the people sending their children school abroad or going for medicals abroad are the rich and the powerful. Why should we allocate forex for school fees ,medicals, tourists and mortgage abroad? Ordinarily we should not operate a multiple FX rates regime , but the reality is that we have both official and the parallel markets rates.
Serious nations only use their "hard-earned" FX for the importation of "raw materials" for local production of "finished goods". This often facilitates local production of finished goods. In our own case, the managers of our economy have been using our own "hard-earned "Dollars" for the importation of finished products which could be produced locally with even more comparative advantages. It is an open secret that any country that uses it hard earned "FX" to import finished products is just exporting jobs meant for its citizens to "foreigners".
It is important note that, as long as our "demand" for Dollars in the economy exceeds its "supply" the "Naira" will never appreciate against the "Dollars". The free for all fall of the value of "Naira" against the "Dollars" is a question of "demand" and "supply for Dollars. There is a shortage of Dollars supply in the economy which needed to be addressed as a short term measure.
In my observation, from late the 2014 when price of crude oil which is our main sources of Dollars supply felt below hundred Dollars per barrel the Naira began to depreciate to its worst level. The CBN has had series of Dollars demand management approaches to the scarcity with little or no success. The CBN has done very little on the supply management side with little or no impact on value of Naira.
So long as our economy continues to be largely an import dependent with largely a single source of FX there will be a continuous pressure on the Naira which will have negative impact on prices of goods. For us to get it right, we need the synchronization of our monetary and fiscal policies. Our fiscal and monetary policies authorities must be on the same page rather than antagonising each other.
In both the short and medium terms , the managers of our economy must continue to put more effort towards diversifying the economy away from its dependence on "Crude oil" as it main sources of FX earnings. We must come out with policies that will bring about multiple sources of FX in order to boosts it supply. In the longer term, we must support massive local productivity in agriculture and manufacturing in order to reduce our reliance on importation which will definitely reduce demand for Dollars. Let us prioritize our hard earned FX strictly for the importation of raw materials for our local industries and not finished products.
May God bless Nigeria!