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THE FALLACY OF A STABLE NAIRA RATE
BY: LES LEBA
0805 220 1997
It may not be an overstatement to observe that possibly over 99% of Nigerians currently hold the
view that the rate of the naira has remained stable against the dollar over the last two years or
so! So, the 1% or less of Nigerians who may hold a contrary view on the stability of the naira,
must be on the far wrong side of the divide, that is, if we accept the Biblical injunction that
majority is the voice of God or even the democratic culture of majority carries the vote!
Thus, it would require a certain degree of courage to fly against the wind of popular opinion and
declare that the naira has not truly been stable as perceived by an overwhelming majority.
However, my observation on the stability or otherwise of the naira is not borne out of any unusual
level of courage but the result of the uninhibited exercise of the human endowment of
commonsense!
I will not even ascribe my confidence on this matter to any specialist knowledge of the subject of
exchange rates and monetary economics per se, because these disciplines derive first and
foremost from the bedrock of rational thinking or simply commonsense in plain language.
But, let us first examine why over 99% of Nigerians maintain that the naira has been stable lately.
The records show that the naira rate of exchange against the dollar has hovered around N117N120/$1 in the last few years. This is in contrast to an all time high official rate of about N135
and a black market rate which approached N150=$1 previously. Indeed, the disparity between
the official and the black market rates induced the widespread financial malfeasance of round
tripping; a process whereby bankers bought foreign exchange speculatively at an official rate
from the Central Bank, and resold the same dollars at premiums which oftentimes approached
N20/$1 in the parallel market! Indeed the profitability of most commercial banks at that time
depended largely on the proceeds of forex round tripping. Today, thankfully, the huge margins
are gone and, the difference between the official and black market rates has fallen to around
N3/$1, while bank profitability is now largely derived from the constant generosity of the CBN in
providing excess cash to the banking sector every month and subsequently borrowing back tens
of billions of these same funds from the commercial banks at a cost of about 10% interest per
annum!
But that is another story; let us return to the rate of the naira to the dollar! So, if the naira under
the current dispensation has remained between N116 – N120 steadily, why should we maintain
in this column that the naira rate is only stable optically but in actual fact remains in a state of
disequilibrium? An object or situation may generally be regarded as stable when the forces
which induce stability do not change or indeed, if they do change, the rate of change of the
component forces cancels out each other so that the object, situation or indeed rate remains
steadfast and the same. If, however, a disparate change exists among the component forces but
the subject remains the same as before, then it would be reasonable to conclude that any optical
stability that may be apparent can only be artificially contrived! In other words, the word ‘stability’
may be a misnomer as the expected change in form or rate as a result of changes in the catalytic
components has failed to manifest. So it is with our rate of the naira against the dollar.
Fundamentally, the exchange rate of a currency is a function of demand and supply in a free
market. Generally, the more dollars, for example, that we earn, the stronger will be our naira
rate against the dollar. Thus, if our dollar earnings double over time, and yet the naira rate only
improves marginally by say 5%, or less, then, of course, we cannot correctly say that the naira
rate is in equilibrium even if it remains optically stable. If the rate continues to be resistant to
change and remains the same in spite of increasing or decreasing dollar earnings, then it must
be obvious that the prevailing optical rate is contrived and any attempt to ascribe the lack of
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change of the rate to a liberalized foreign exchange market must be an open attempt to deceive
the people!
The records show that the naira exchanged for between N116 – N120/$1 when our foreign
reserves was just about $30bn about two years ago. Apart from the fact that Nigeria’s
international credit ratings was expected to improve after exiting the controversial Paris Club
debt, our foreign reserves have also since doubled to about $60bn, representing a net imports
cover of over 36 months against the erstwhile 15 or so months two years ago! These
fundamentals clearly portend a stronger naira but alas, the naira rate has regrettably and
unexpectedly remained ‘stable’ at the old rate of about N120=$1! This contrived stability has
remained more worrisome when a dollar depreciation of upto 50% against major currencies such
as the Euro and the Sterling are factored into our analysis. In this event, although the N/$ rate
may remain stable, but the net effect on the direction of costs of raw materials and machinery
supplies from our major trading partners in Europe is an upward rising curve.
Thus, in spite of the naira’s optical stability, our domestic manufacturing costs have increased by
as high as 50% in most cases, with the inevitability of additional borrowing at a cost of over 20%
just to remain on the same spot!
Furthermore, the naira rate’s resistance to change in the face of a weakening dollar, also has
negative implications for the international purchasing value of our current $60bn dollar reserves.
Thus, where $30bn reserves would have purchased goods worth Eu30bn from the Euro zone 3 –
4 years ago, we would now require close to $50bn to buy the same basket of goods from the
Euro and Sterling zones today. So, although our monetary policy makers continue to applaud
our increasing dollar reserves from the rooftops, the reality is that our ‘stable naira’ is
shortchanging the Nigerian economy by almost 60% of lost value!
Fellow Nigerians, consider the folly of going in search of foreign investment to uplift our economy
at a high cost to our nation, while we continue to worship our increasing reserves which may
have lost upto $20bn of purchasing value in the last three years due to a downward spiraling
dollar! I will close this week’s article with a graphic illustration. I recall that in 1996, under the
despotic tyranny of Abacha and our country’s pariah status for foreign direct investment, our
naira exchanged for N80=$1 at a time also when our foreign reserves of only $4bn could only
cover our import needs for 4 – 5 months. Today, in spite of favourable international goodwill and
reserves of over $60bn with over 30 month imports cover, our exchange rate hovers around
N120=$1. The forex ‘mallams’ on Martins Street and Allen Avenue may have no formal
education in Economics, but they certainly have enough commonsense to know that something
is very, very wrong with this arithmetic!
Save the Naira, Save Nigeria!!
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