How to save the Naira
Once again, the call for the Nigerian currency to float was brought to bear as Egypt’s foreign reserves overtook Nigeria for the first time in seven years. Egypt, whose currency has been suffering losses against the dollar decided to float its currency some two years ago and it now stands at 18 Egyptian pound to a dollar, while Nigeria is struggling to keep the Naira at 315 to a dollar. It does this by dipping into its foreign reserves to offset its balance of payments.
Nigeria’s monitory policy focuses on two main objectives of price and exchange rate stabilisation. In recent times, there has been a surge in the demand for forex for the purchase of imported goods and services. This demand, coupled with the falling price of crude oil, which is the country`s major source of foreign exchange, has affected the exchange rate of the Naira against the dollar.
The government, through the Central Bank of Nigeria (CBN), is forced to intervene by making available forex to operators in key sectors of the economy by dipping into the foreign reserves, causing a depletion of the foreign reserves.
The CBN intervention gave the Naira a peculiar character, three exchange rates in the three market segments: the official window (wDAS), the interbank (IFEM) and the parallel market. Yes, the government argues that there is a correlation of oil price shocks and Real Exchange Rate Movement in Nigeria, but there are no signs that oil prices will rise from the US$43.84. According to the energy outlook index, oil prices are likely to remain low till 2019.
My point: rather than having the Naira appreciate during the windfalls of oil, let’s make it dependent on some economic variables, say a factor of production. For example, in December, 2008, during the global economic and financial crisis that started in the US and spread to other parts of the world, global productive capacity was at its lowest level, also, oil prices crashed. The Naira exchange rate in all segments of the market depreciated with the BDC rate moving from N119 to N182. IFEM and wDAS moved from N117.75 to N150.04 and N117.79, to N147.36 respectively. The CBN allowed the naira exchange rate to depreciate in order to protect external reserves.
The big question now is: Why the reverse? I think the best way out is: let’s not peg the Naira, let it be like the global forex market, where pricing is determined over the counter transactions.