HOW TO FIX THE PROBLEM OF CONTINUED DECLINE IN NAIRA VALUE

The Nigeria Naira (NGN) has lost 0ver 137% of its value between 2015 to 2020. The official exchange rate of the NGN against the United States Dollars (USD) has declined from NGN 160 =USD 1 down to NGN 380 = USD 1 over this period. This is the experience in the official foreign exchange market where only few users of the USD obtain the “Greenback”- i.e USD.

In the parallel market or black market where most users of the Greenback buy the currency, the situation has been more dire. The NGN value has declined from the strong position of NGN 180 = USD 1 to a very weak position of NGN 480 = USD 1. This represents 167% loss in the value of the NGN over the same period.

The effects of this decline in NGN include rising inflation, abrupt shut down of companies and businesses, loss of Nigeria’s international competitiveness as investment destination to neighbouring countries with stable currencies, further impoverishment of Nigerians, and rising unemployment.

The latest casualties of the NGN continued devaluation is ShopRite, the biggest retail company in Africa, which has been operating in Nigeria for the past 15 years. Shop Board and shareholders have resolved to discontinue operations in Nigeria. Apart from Shoprite, Africa’s richest man, Aliko Dangote has watched his wealth plummeted from USD 25 Billion in 2015 down to USD 8.5 Billion in 2020.

The continued decline in the value of the Naira has escalated itself to a Global shame on ALL Nigerians, regardless of their status- its impacts permeate through the financial lives of ALL Nigerians who earn their incomes in Naira. Because of the severity of this economic whipsaw and the obvious incapacitations of the Central Bank of Nigeria (CBN) to solve it, I have put together in this piece, practical ways that can help the government fix the Naira to improve the financial condition of her citizens.

PRACTICAL WAYS TO INCREASE THE VALUE OF THE NAIRA

·        Cut Down on Public Debts: One of the sources that enables the supply of foreign currencies such as USD, Euros, British Pounds, etc, into a country is Foreign Direct Investment. Foreign investors bring investment into a country in Dollars, therefore, increasing the supply of dollars in that country. When the amount of dollars in circulation a country increases, the value of the country’s currency begins to increase. However, one thing that scares away foreign investors is rising public debt beyond sustainable level. They fear that the government is headed to a debt crisis and if they bring in investments, their monies would be trapped, and they would not be able to take their monies back to their countries.

Nigeria’s public debt has risen astronomically for the past 6 years: rising from USD 11.0 Billion in 2015 to USD 29 Billion in 2020. The current public debt level is apparently unsustainable, even as the Federal Government of Nigeria used about 90% of its revenue to service debts in the first quarter of 2020. While the public debt has been rising, the amount of foreign direct investment into Nigeria has been decreasing steadily. If Nigeria cuts down on public debts to reasonable level, foreign investors confidence in our economy will improve and they will bring in the Dollars.

·        Reduce Inflation: The USD is the global currency that every currency is this World is competing against. Every country would want its currency to stand tall against the Dollar. And Economists have established that if you place two countries side by side, and one country has high inflation rate while the other has low inflation rate. The value of the currency of the country with high inflation rate will continue to fall while the value of the currency of the country with low inflation rate will keep rising.

The current inflation rate in Nigeria is 12.59% while the current inflation rate in the US is 0.6%. Therefore, the Nigeria Naira would continuously decline against the USD until the Central Bank of Nigeria and the Finance Ministry employ appropriate monetary and fiscal policy tools to reduce the inflationary gap of 11.99% between the NGN and the USD.

·        Sell Foreign Assets and Bring in More Dollars to Nigeria: Nigeria Government has been fortunate to have earned so much foreign currencies from the sell of crude oil. Unfortunately, the lack of deep thinking by people in government deprived the country of making good use of those foreign currencies. Strategically, if you know that your currency is competing against the Dollar and you intend to defend your currency well, then you should have bought large amount of foreign assets that are denominated in the Dollar. Armed with large amount of foreign assets denominated in the right foreign currency, in this case Dollar, a country can sell off a portion of these foreign currencies and bring in more dollars into circulation, whenever the demand for dollar is rising and its own local currency is falling.

China has invested over USD 3.1 Trillion in US Bonds and foreign assets. So, any time China wants to strengthen its currency, Yuan against the USD, she simply sells her foreign assets and circulate Dollars around to boost the Yuan. But China has deliberately kept the Yuan devalued to increase her export competitiveness against the US.

Nigeria’s foreign assets are commonly called foreign reserves. Unfortunately, Nigeria has failed to build up investment in foreign assets when things were rosy and petro- dollars were flowing. So, there is little they can do in this regard. The current foreign reserves in CBN is USD 36.5 Billion which is not much war chest to fight the war against the “American Greenback”. But the government should strategically ramp up investment in foreign assets/reserves whenever oil prices improves bearing in mind that Nigeria is at economic war to defend the Naira against the Dollar. This war is unending and if Nigeria does nothing, the Naira will become like the Zimbabwe Dollars, which is now worthless.

·        Scrap All Multiple Exchange Rates and Harmonize to Market Rates: The Central Bank of Nigeria has been running a multiple exchange rate policies which have harmed the Naira instead of helping it. This system of running multiple rates across different markets have made many foreign investors who could have planned predictably and brought foreign currencies-USD to Nigeria to invest to run away from Nigeria. Although the CBN has defended its actions and attempted to justify it, CBN excuses are simply flimsy and can not hold water. A simple cost -Benefit analysis would show that Nigeria and Nigerians stand to gain more if the CBN harmonizes exchanges rates to single rate and allow the market to transparently determine and drive the true value of Niara.

·        Long Term Supply Side Growth Policies: Perhaps, this is the most fundamental policy suggestion among all those I have discussed here. The government needs to step back from direct involvement in business, especially in the Oil and gas industry, whereit does so through NNPC, and privatize everything. Strong legal and economic reforms such as the Petroleum Industry bill should be through researched, worked on and passed into law. The Downstream sector of oil industry should be fully deregulated to allow markets to determine the prices of all petroleum products, including fuel/PMS.

 The Nigeria government should sincerely invest in infrastructure- reform the power industry and make laws that will allow private investment into the power sector. Scrap the National grid system of electricity distribution and allow cluster based distribution of electiricty which will aim at providing constant power to industrial clusters. This will drive local industrialization and reduce importation of many goods.

The Nigeria government should invest in agriculture by setting up plantation farms in partnership with private investor. Where private investors are afraid due to high risk, government should first de-risk such agro projects by investing public funds and wooing in private investors gradually. Produce from agricultural production should be processed, at least a single to double step processing can add more value to the produce and create local employment for the communities. Such produce should be exported to create more supplies of foreign currencies to Nigeria. The government should launch a program of One State- One Produce where every state is challenged and supported to produce a key agro produce for export.

The transport sector must be fixed to remove the friction that inhibit the movement of goods and services across state and sea Ports. Nigeria should diligently invest in rail way projects to connects the 36 states with railway system. This can be done through Project Financing as soon as foreign and local investors see that the government is sincere and now committed to good governance and economic development. It will amze you that the government does not need its own money to do most of these projects; all the government need to do is to be sincere and speed up the process of legal and economic reforms and investors would be trooping into Nigeria.

Finally, there is hope for the Nigeria Naira; there is hope for Nigerian economy; and there is hope for Nigerians, if the Nigeria government is willing and ready to be commit to good economic governance.