From Reuters: “ABUJA, Dec 1 (Reuters) – Nigeria’s naira dropped to a record low against the dollar on Friday on the official market, close to the rate at which it trades on the unofficial parallel market. The currency of Africa’s biggest economy fell as low as 1,160 naira to the dollar, LSEG data showed, before recovering to around 800 naira.
“The naira’s official exchange rate has been drifting towards the parallel market level as the central bank is yet to clear outstanding foreign-currency amounts owed in forward deals.
“Last week, central bank Governor Olayemi Cardoso said he would allow market forces to determine exchange rates while setting clear, transparent and harmonised rules governing market operations. The currency sold at around 1,165 naira on the parallel market on Friday.”
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My Comment:
The strength of Naira does not come from the Central Bank of Nigeria (CBN) but from warehouses and factories (the modern and the old). Until Nigeria leaves financial engineering and focuses on what anchors Naira, Naira will continue to fade. Every apex bank has two core missions: strengthen currency by managing inflation and boost employment through interest rates management.
For Nigeria, to strengthen Naira, you need to reduce inflation and that can come by boosting Supply through production. Our challenge today is that our manufacturing index is dropping, triggering an avalanche on the inflationary pull. As that happens, the CBN loses control on employment because rates are raised to curtail that inflation, creating a double whammy where corporations cannot borrow cheaply, and that results in reduction in Supply. Ceteris paribus, if Supply drops when Demand stays constant, inflation rises.
Nigeria should not leave its currency to FLOAT because Nigeria does not have life jackets to support Naira if it begins to drift. Rather, Nigeria should float companies and if that happens, Naira will improve. Why? The Demand of USD is more than supply of USD and if that remains, allowing a float will keep weakening the Naira. If two people each have $100 to sell, and ten people want to each buy $100, you have a massive imbalance, and there is no policy regime that will stabilize that currency unless you inject more USD in the system.
The minister and CBN governor know these things, but Nigeria is a place where smart people are not given the freedom to do the right things in government. The assumption is that Naira will continue to fade until Nigeria changes the path. My position is based on looking at data across economies; I have written many briefs for the World Bank, African Union, etc on currencies.
Nigeria will be fine; it has great people. But we must adjust quickly. Yes, we must focus on the root cause which is Production and not the stylist method of how to buy and sell USD dollars. What we’re doing will work in America because it is the only country which can print USD dollars; for Nigeria, we can only have USD by earning it, and that means we have to offer something in the global market for someone to buy. If we do not do that, nothing will work. (Of course, we can even avoid the need of USD by substituting things we need USD to buy, making them locally in Nigeria).
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From Reuters: "Nigeria's naira dropped to a record low against the dollar on Friday…The currency sold at around 1,165 naira on the parallel market on Friday." My Comment: The strength of Naira does not come from the Central Bank of Nigeria (CBN) but from warehouses and… pic.twitter.com/YFhv3yaJU0
— Ndubuisi Ekekwe (@ndekekwe) December 3, 2023
Comment 1: Currently, Nigeria is not producing to boost supply, neither is it importing to fill up the gap created by a lack of local production of a several commodities. The ports are empty, due to a greatly reduced importation. I know this because I am in the ocean logistics industry. The current policies of this government which has adversely affected both production and importation is dangerous.
It is not surprising that that there is a tight squeeze on the economy. They should, as a matter of urgency, free up the path to importation as an immediate measure so that commodities will swarm the economy and drive down prices, while on the long run, concentrate on a gradual but consistent regime of import substitution.
The economy is currently frozen up and it tells on about all the facets of the Nigerian space.
Comment 2: The problem with left leaning liberal policies especially in Nigeria, trying to control fundamentals against the flow of natural principles is that it creates room for corruption like happened when there was a wide difference between official and black market exchange rates in the past.
My Response: The Central Bank of Nigeria was established in 1958 and managing the stability of the old pounds and later Naira was never a problem because Nigeria produced most of the things it needed. During the war, both the Biafran pounds and Nigerian pounds strengthened because despite the vagaries of war, things were still made locally. But from 1986-1989, Nigeria began a financialization policy, as the IMF, etc tasked IBB to essentially de-industrialize, via the SAP policy. SAP brought emphasis on exchange rate control, credit control, and devaluation of naira. The implication was making things in Nigeria became harder compared to other competitors!
Immediately that happened, the Financial Sector became the easiest way to become rich over making things. Between 1989-1992, IBB licensed dozens of finance houses and the leading new generation banks in Nigeria were born within that window (GTB, Zenith, UBA’s STB, Diamond/Access, etc) . As that was happening, SAP sapped Nigeria and rewired the economy to be finance-first, instead of manufacturing-first. From that 1989, the Naira started losing value to USD because our balance of payment and balance of trade began to deteriorate.
Unlike in the past, today, finance drives the agenda of the government. In the past, it was manufacturing. Visit Aba to see what Okpara did with Aba Ceramics, Aba Glass Industry, etc. Visit Kano to see the brilliance of Ahmadu Bello. Awolowo had a stamp everywhere. MAN (manufacturers association of Nigeria) was very powerful and the minister of science and tech (honestly, I do not know the current one unless I google) was a key cabinet post. The most influential people in Nigeria were industrialists: Nnanna Kalu, one of the men who built Aba, was a household name. In the north, there were the legends in Kano. The Abeokuta men have their history. In all dimensions, they built stuff.
So, no one should blame APC, PDP, etc for the recent slides in Naira; we should blame everyone that we forgot what worked for Naira in that past. One day, we will have a sankofa moment, return to the past to learn, and then push for the future.
Comment 3: We all are in a vehement agreement that sustained economic development is only achieved by deliberate action by the government and people. We have not had very good government of late.
The private sector, especially manufacturing, needs a leg up. We are far too many in Nigeria to depend on the service sector, and we are not renowned for excellent service.
So, we need to highgrade agriculture and related manufacturing. Everywhere I fly to in Europe and America, as we approach to land, I see well set up and cultivated fields. We need to feed the nation first and then grow enough to sell to the rest of the world in order to improve our balance of trade.
Next, we need to tap into the manufacturing centres in Aba, Nnewi, Ibadan, Agbara, Kano…targetting products for export and local consumption.
My Response: I agree that we need visionary leaders including in that agriculture. Part of the reason we’re having high food inflation is that Nigeria’s agro policy is geared towards export-oriented crops, not things people need in Nigeria, because we want to earn US dollars. So, you will see sesame seeds, etc and all kinds of things we do not need in Nigeria, but are needed abroad. But the cassava, yam, etc we need do not get a lot of help. In other words, our agriculture policy for decades now have been dollarized, with focus on export, instead of feeding the people.
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No economy grows bigger than the capacity of those managing it, but we keep believing in fake miracles. We are always disappointed, because we refuse to view things correctly, our disastrous biases remain a handicap.
What is critical to making Nigeria economy work, do we even know? You don’t solve economic problems by being all over the place, and the only thing we do here is being all over the place.
If we all agree that production is key, what sort of production exactly and what is our current knowledge base and capabilities? The way we try to solve problems in Nigeria is such that we end up creating more problems, without actually improving anything. Not long ago they announced a certain $10B that would help ‘stabilize’ naira, has the $10B still yet to be injected or the stubborn naira has swallowed it too? We are talking about future earnings here, not like we had the billions as reserve.
Whenever you set out to do everything, you end up accomplishing nothing. What one or two sectors can we identify as most strategic to powering the economy, and then going ahead to assess our knowledge base and capacity therein, and go all in to do something big there?
It’s a waste of time discussing serious issues with a confused bunch.
Ndubuisi, I admire your intellect. Really top notch