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Naira faces worst currency depreciation risk since SAP experience

Beneath the veneer of reforms is a growing fear that the steep fall in the Nigerian currency against its pairs could complicate the endemic inflationary pressure

About a month ago, the Central Bank of Nigeria (CBN) de-pegged the naira. The decision, which promises to starve off entrenched distortions, speculative trading and round-trip transactions, came three years after it was initiated but jettisoned.

But beneath the veneer of reforms is a growing fear that the steep fall in the local currency against its pairs could complicate the endemic inflationary pressure, which the Nigeria Development Update (NDU) 2023 said has pushed four million additional people into poverty from January to May alone.

Devaluation raises more inflation worry  

Naira devaluation is one of the many drivers of Nigeria’s inflation, which include supply-side challenges and excess money supply. But according to expert analysis, over 70 per cent of the country’s inflation is driven by FX rate (depreciation of the naira).

Some weeks ago, the customs FX rate of duties on imported goods was raised by 40 per cent – from N422.3/$ to N589.45/$ in line with the new official FX rate. Already, there are worries that this will raise the prices of cars out of the reach of ordinary people and derail mass transit vehicle procurement plans by governments/private sector operators and workers most of whose salaries have stagnated for over five years.  The country’s current minimum wage came into effect in 2019. At N30, 000 ($40), the minimum monthly wage of civil servants could barely fill a fuel tank of a saloon car.

Inflation data have not been published since the fuel subsidy was removed. But Yemi Kale, a former head of the National Bureau of Statistics (NBS) and statistician general of the country, said subsidy removal would push the headline inflation to 30 per cent this month. Kale’s projection came before the harmonisation of the multiple FX exchange rates, which is now seen as the new fuel on the country’s runaway inflation rate, Inflation has risen by over fourfold in the past eight years.

A compromised regulatory autonomy 

There had been a historical tussle between the country’s monetary authority and the international development partners, especially the International Monetary Fund (IMF), over the fair value of naira with the latter calling for devaluation. The suspended and currently investigated CBN Governor, Godwin Emefiele, had resisted the push for devaluation until he left office.

Emefiele’s suspension and subsequent arrest by the Department of State Service (DSS) came some days after the new president, Bola Tinubu, directed the CBN to work towards rates convergence – a statement that raises questions about the fate of the autonomy of the Bank as spelled out by its enabling act.

If the current president dictates the pace and pattern of the country’s monetary direction, he would be toeing the path of recent traditions. Emefiele’s pushed back on naira devaluation at the onset of Buhari’s presidency was believed to stem from the ‘stronger naira’ philosophy of the ex-president.

A new troubling era begins 

Folashodun Shonubi, the acting governor of the bank was Emefiele’s deputy in charge of operations and stood with his former boss through his confrontation with the international financial institutions over naira devaluation. But less than a week in the office and two weeks after the President’s famous inaugural speech that ordered FX rates convergence (harmonisation of the different exchange rates), the monetary authority pulled the plug on the market, announcing the commencement of rates harmonisation anchored on willing-buyer-willing-seller philosophy. The sudden change in the FX management template also raises concerns about institutional independence.

Indeed, there has been a spiral since the switch to market-led FX trading. Last week, for instance, the currency traded at N815 against the greenback at the Investors’ and Exporters’ (I&E) window. Yet, a deputy governor of the apex bank, told Bloomberg recently that the troubled currency could not be said to have bottomed out, suggesting more debauchery ahead.

When financial imperialists hail   

While the bleeding continues, the immediate past World Bank president, David Malpass, in a tweet, commended President Tinubu for “the sweeping reforms” in the FX market, saying the action would enhance currency stability, tackle corruption and rein in inflation (the very opposite of the current reality).

The IMF has also backed the CBN’s new move, saying the bold decision would stabilise the market and unlock capital inflow into critical sectors of the economy. The IMF, in its recent engagements with the country’s authorities, remains unwavering in its belief that a pro-market approach is the answer to the historical currency crisis. It says the naira is overvalued but stops short of giving an idea of what it considers its effective price (exchange rate).

The majority of Nigerian senior citizens think of the 1970s and early 1980s in nostalgia at the mention of the naira. Nigerians neither needed visas to visit Britain, nor were they motivated to see the former colonial masters’ homeland as the economy, in its heydays, was self-sufficient.

With thriving local manufacturing, globally-competitive centres of learning and low incentives to ‘japa’ came a local currency that held its head high in the global market. According to historical facts, one naira traded between $0.55 and $0.9 from 1974 to 1985 – over 10 years.

But the global oil shock of the 1980s would mark a sour point in the history of the economy as many countries that were hard hit by the oil glut and the associated structural risks gambled with sundry options. In 1986, the petrodollar economy had fallen flat and Nigeria, just as it is today, was in the middle of mounting debts amid drying foreign exchange reserves.

Structural Adjustment Programme (SAP) had kicked off in earnest before the citizens, who later trooped out with not-SAP protests, realised the programme touted as a silver bullet was nothing short of another self-destructive policy.

In the wake of renewed calls by the World Bank and IMF on the CBN to adopt a pro-market reform to allow the local currency, which they believed was overvalued, to find its true worth, ex-President Muhammadu Buhari, a few years ago, traced the perpetual race to the bottom of the currency to SAP implementation, stressing that  “it was SAP that killed naira” – a view held tenaciously by much older generation Nigerians who witnessed the SAP experience. The ex-President, whose regime as a military head of state was truncated by the administration that adopted SAP, resisted the urge to support the devolution of the naira in any guise.

But the World Bank and IMF have pushed back on the negative narrative about SAP, arguing that the country was hurt by the half-implementation of its policy prescriptions.

Today, Nigerians can only give the historical exchange rate of the naira a supposed store of value, but they are not certain what it is at the moment as the value swings widely each trading session like a meme stock.

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