The collapse of Naira: Nigeria's strategic blunder
3/31/2009 12:01:36 PM -
Nigeria has so far achieved theoretical quantitative macroeconomic fundamentals, but a lot needs to be done particularly on stabilizing her bearish Naira currency. Although Naira is relatively stable, it is weak and soft when you compare it to other major currencies like dollar and euro. Presently Nigeria is having one of the lowest debts to GDP ratio in the world. This is attributed to her recent payment of foreign debt and the reasonably macro-economic stability she achieved through economic reform measures with a huge foreign reserve. Yet the value of Naira continues to be depressed.
Nigeria's financial and economic community is quick to point out that the fate of Nigeria's currency Naira - the gyrations, floundering and nose-diving is the ramification of global economic meltdown. This is not entire the case, we can recollect couple of months ago that Nigeria was celebrating because Merrill Lynch, an international investment banker rated Nigeria as one of the top ten nations that were safe for investment. The rating may be incredible - "at least to anyone living in Australia, much of Europe and U.S. -- because it ranks Nigeria (where the per capita GDP happens to be a paltry $2027 a year) as the safest economy in the world, which certainly seems like a stretch given it's the 38th-largest economy in the world and 137th when based on per capita GDP -- not to mention it suffers from social unrest."
So with this highly publicized rating one can extrapolate that the Naira is out of harm's way, from the tumbling of the global economic downturn. The subsequent dramatic falling of Naira cannot be justified for Nigeria's economy is not wholly exposed to floundering of world market.
Nigeria may be perceived to be safe because she has not really submerged in the mainstream of financial and economic globalism. Nigeria has not met the criteria to be fully vigorous and integrated player in the world trade theatre; Nigerian economic indicators and metrics including statistics, benchmarks and indices on the economy is the testament of the country's inactivity on international stage. Again Nigeria does not have a credit based economy and lacks the serious capitalists and capital to be among the chief players in the global trade.
So, why is Naira falling? The currency Naira is falling due to both tactical and strategic blunder.
Nigeria's economy is fragile and weak because Nigeria operates one commodity based economy, which is oil, a major source of her foreign currency.
In the short range, Nigeria is obsessed with easy money of oil trading and out rightly rejects the growing diversifications of her economy she initiated. A great nation like Nigeria has refused to grow her economy with all the natural and human capital at her disposal. Nigeria exports the crude oil to developed nations who refines the oil and Nigeria will in turn buy back the refined oil from the outside and subsidize the gasoline for local consumption. The oil refineries are not performing at an appreciable and optimum level, instead they are abandoned to waste away for Nigeria lacks maintenance culture.
This logic, mindset and modus operandi towards wealth creation forges and set the stage for the scarcity of dollars.
Forces of Demand and Supply
The Naira demand and supply is determined by the market forces because Naira is allowed to float without any fixed exchange rate. The relative weakness of Nigeria's entire economy does not seem favorable to the status quo. The GDP is relatively small compared to industrialized nations and this negates the stability and international purchasing power of Naira The amount of importation overwhelms the economy and a low return of foreign exchange due to lack of exportation to generate foreign exchange.
The crux of the matter is the demand for dollars are extremely high among Nigerian banks. Nigeria does not generate enough foreign exchange to satiate local consumption. Therefore the demand for dollar drives the value of Naira that is ubiquitous and weak. Nigerian source of dollars and foreign exchange comes only from the export of oil and its overdependence for foreign exchange from oil.
The psychology of the melt down
The psychologicalimpact of the global economic downturn must be appreciated. With global access to the international news networks including CNN, BBC and others remote corners of the earth become nominal partakers in the global village. Therefore pseudo feeling of the bad news might creep into Nigeria's mindset and usher in a psychology that may trigger the fall of naira in the real world.
What Nigeria must do
As the value of Naira nosedives, Nigeria has another alternative to prop up the Naira by withdrawing her huge war chest - her enormous foreign reserve and liquefy the financial and banking market. This is a delicate tactical action because drawing down of the reserve can lower Nigeria's credit worthiness and financial rating.
Nigeria's financial actors cannot fold their hands and blame this whole sorry episode on the global economic meltdown. Naira as currency is not readily convertible which becomes a barrier in the active participation in global trade especially in currency transaction.
The governor of central bank deserves some credit for his early vision. Professor Soludo has called for pegging of Naira by making it convertible but Nigeria's gatekeepers failed to heed to his recommendation. But it is never too late to act, for there must be a consensus on this matter via enlightenment of the Nigerian public and elites on the merit of readily convertibility of Naira. Convertibility is akin to setting up a wall in the defense of Naira from hostile local and international currency traders that hoard dollars in Nigeria thus creating artificial demand and scarcity of dollar.
Nigeria must make foreign exchange available to its local banks. The banks need the dollar for its customers who are engaging in foreign transactions. At the moment Nigeria need to withdraw some money from her foreign reserve, which will be pump into the market which will definitely reduce the scarcity of dollars. This will in turn enable Naira to regain some of its value and withhold the trashing from dollar. But all this is a temporary measure and not the panacea to a healthy and sustainable currency.
Nigeria has become responsive to the diversification of her economy, not minding she has a long way to go. The country knows what to do, but procrastination and intellectual lethargy have always retarded her progress. Oil cannot continue to be her only high yielding sector; agriculture must be expanded and retooled. Investment must be made in research and development.
A paradigm shift
There must be strategic planning by the responsible parties in Nigeria: The politicians, business community and bureaucrats must stop talking and launch operation economic diversification. The economic reforms must be practical and pragmatic to the marketers and citizens.
Fiscal and monetary policies can be applied to regulate and appreciate naira but it is not doable and workable, for although the fundamentals of the economy may be sound but it lacks the stability and zest to leverage against the dominant dollar.
Emeka Chiakwelu is the Principal Policy Strategist at Afripol Organization. http://www.afripol.org/
Africa Political and Economic Strategic Center (Afripol) is foremost a public policy center whose fundamental objective is to broaden the parameters of public policy debates in Africa. To advocate, promote and encourage free enterprise, democracy, sustainable green environment, human rights, conflict resolutions, transparency and probity in Africa.