Exchange rate measures the health of an economy. In the last few months when the naira exchange rate was subjected to serious speculative attacks with $1 exchanging for almost N2000, domestic prices jumped and we almost had hyperinflation. The cost of living rose, and consumption fell drastically, just as output declined and the poverty level worsened. God saved democracy.
One of the primary objectives in the Act setting up the Central Bank of Nigeria is that the institution must maintain a credible value of the domestic currency against key currencies. The CBN has failed in this area since Godwin Emefiele started manipulating the exchange rate in the process of monetisation of oil money to boost money in the federation account for sharing which the current economic managers seem to have adopted wholesale. The damage such manipulation does is extensive and destructive. It’s like committing political suicide.
The effects of the recent massive depreciation nearing N2000 to $1 are still instructively lingering today. The economy was going overboard and I was one of those who thought the democratic setting was about to be truncated. The CBN decisively intervened to arrest the situation but relaxed too soon after the exchange rate reached its predetermined level of $1 to N1,200. The naira is undervalued at this rate and it is now hovering around N1,450 indicating that the country is still very sick.
It is important for us to know the determinants of exchange rates and how we have disregarded some of them to cause chaos or regular instability in the value of the naira.
Ten economic variables have been identified to cause exchange rate movement. Albeit, there is what economists refer to as causality effects, which implies that variables that affect the exchange rate are also affected by exchange rate vicissitudes. The ten variables are inflation, government debts, current account deficits, interest rates, economic recession, speculative activities, government intervention, external reserves, stock market activities, and political instability.
A country with a high inflation rate would normally have a high cost of production, making its exports non-competitive. That is why some countries subsidise the production of exports to promote competitiveness. Nigeria’s main export for now is crude oil but it will do well if the government can bring down inflation or subsidise non-oil exports rather than tax them.
In the last few years, the CBN has been raising Monetary Policy Rate or simply raising interest rates, thereby compounding the high cost of production with resultant lower demand for our few non-oil exports.
The country has huge negative terms of trade with virtually all our trading partners. That is, we buy more than we sell to them or make more payments than receipts. The implications are that our current account balance is always in the negative. Except if amounts in items like services and remittances are greater than trade imbalance, we can have a positive current account balance. This has not been so for many years.
Government debts, both internal and external, are huge and debt servicing-to-GDP value remains very high. While this government has been trying to meet suffocating debt obligations from the Muhammadu Buhari administration, it is also contracting new debts. Current data from the Debt Management Office shows this. Must we always borrow? It affects the exchange rate badly.
The country’s foreign exchange reserves have been quite low and unpredictable. The low outputs in virtually all sectors, including oil, have telling effects on our reserves. The counter-trade activity engaged in by the Nigerian National Petroleum Company Limited cannot help matters. These are coupled with high food imports for a country with naturally fertile arable land! The low outputs of exports do not bring in the needed forex to improve reserves. The high imports also deplete the reserves. So, the exchange rate has no anchor from the external reserves angle and consequently limits the government’s intervention ability in the market mechanism.
Economic recession set in, in the second half of President Goodluck Jonathan’s administration and we have not recovered since then. That was what truncated the second-term ambition of the Jonathan administration and the testing of the efficacy of the medicinal power of the All Progressives Congress. Since then, the APC has taken the form of opium which Nigeria is now hooked. Many times under Buhari, Nigeria visited the economic Intensive Care Unit and was delivered to Tinubu at the gate of the hospital. Applying the World Bank/IMF advice in the form of immediate oil subsidy removal and merging of multiple exchange rates without preparatory short-term solutions returned the economy to the ICU where it has been in the last 13 months!
The possibility of ignoring the role of stock market activities as an exchange rate determinant is not unusual. This is because the market is often not seen as an integral part of the financial system. It is a major source of portfolio investments in the economy. So, the foreign capital inflows represent part of the external reserves, and rapid capital outflow is deleterious primarily to the reserves and eventually to exchange rate movements.
The speculative activities from the online ghosts like the bitcoin, and cryptocurrency activities almost turned the naira into a tissue paper, useful only for cleaning hands. Through brainstorming with various stakeholders, the CBN was able to take care of the nefarious activities. But the other side of the speculation, if we can call it that, is the role of legislators and governors in converting their “excess” money into foreign currencies. This is where the issue of corruption comes in and plays a major role in economic destabilisation.
The third angle is where the fiscal authority believes in using a weakened exchange rate to monetise oil money as a booster for federal allocation. It is a dangerous practice.
By now, the danger of not protecting and preserving the value of the domestic currency and promoting low domestic prices cannot be underestimated. The essence of going through the determinants above is for the economic managers to see the linkages and interactions among the economic variables they deal with every day so the Nigerian economy can be better managed. The government needs to deliver a better economy quickly to reduce social malaise, including insecurities. Improving the exchange rate has a major role to play in the process of economic healing.
