The CBN’s Naira 4 Dollar Scheme: A desperate move to redeem the Naira?

One of Nigeria’s most alarming economic indicators in the past half century is the latest freefall of its currency, the naira. In the past eight years, its dollar worth has dropped more than 200 per cent.

To redeem the currency’s value, the Central Bank of Nigeria earlier this month introduced a foreign exchange rate policy known as the “Naira 4 Dollar Scheme.” According to the apex bank, a rebate of 5 naira is paid to the remittance recipient for every $1 (or $13 for $1,000) remitted to Nigeria. The policy is scheduled to run for 60 days, with the sole goal to increase and ease the inflow of remittances, and ultimately, to improve the value of the naira. Like other sceptics, I’m dubious of the two-month deadline—it is likely that the central bank will wish to maintain the policy for as long as possible after first testing its performance.

One would assume that the original intention of the scheme, although not clearly spelt out by the central bank, is to raise and stabilise the value of the naira. However, this policy move may not pay off, let alone deliver the desperately needed relief. Before I explain my pessimism, let me provide some historical background on the naira.

First introduced in 1973 as a replacement of the Nigerian British Pound, the naira fluctuated in value between 1973 and 1985, but was, on average, stronger than the US dollar, with 1 naira worth roughly one and a half dollars. One of the reasons for this was that the Nigerian government at the time, through the central bank, oversaw fixing its value. There was only one exchange rate at that time.

In 1985, powered by the drive for reforms and to end restrictive control of the value of the naira, the government introduced a market for trading the currency with the demand for the currency determining its value—the exchange rate. This means if the demand for a dollar using naira is higher than the demand for the naira using the dollar, then the value of the dollar will go up and that of naira will go down.

In the immediate aftermath of liberalising the Forex market, the value of the naira dropped over 230 per cent and by January 2000, coinciding with the return to democratic rule while the value of the US dollar rose from less than one naira to more than 100 naira. For roughly 14 years, it maintained an average of approximately 143 in value. Then came the 2014 bust in world oil price which slashed Nigeria’s oil revenues and external reserves and set the value of the naira on the steepest downturn. After reaching a level not seen in half a century – peaking at close to 500 as of February 2017 – the currency’s average between the month of the oil price crash and September 2019 was 362.

Coming back to the “Scheme”, there is a strong positive connection between the exchange rate and volume of remittances. Based on estimates, if the dollar appreciates by one naira, Nigerians abroad are willing to send home an additional $73 million per year in remittances. Implication: if the central bank wants to attract more remittances into the country, it will have to raise the value of the dollar by devaluing the naira, which is counterproductive to the bank’s original goal of saving the naira.

What can be done

One option would be to reform or disband the Bureau de Change but not the service it is expected to render. Currently, most traders in the forex market operate under a cloak of darkness. They don’t work from offices, but on the busy streets of Zone 4 in Abuja, the nation’s capital, with pockets loaded with the foreign currencies they peddle. Their operations are not subject to the searchlight of financial regulators. As a result, there is no trace of how much foreign currency they have traded, to whom, where and when—nor is there a hint of the source of the total foreign currencies traded.

These concerns have confirmed the deeply held cynicism about the activities of the BDCs: they serve as avenues for two forms of illegal currency deals. First, currency speculative attacks – some people who were privileged to obtain foreign exchange at the official rate took quick profits in the black market. Second, political scapegraces who have looted public finances easily convert same through the Bureau de Change for onward transfer or laundering to foreign countries.

Nonetheless, with robust reforms, the illegal powers and schemes of the Bureau de Change can be held at bay – quashed or mitigated. This is achievable if powered by political will. But this “will” seems to be a scarce political capital in a country in desperate need of radical reforms, given that there are too many vested interests in favour of the status quo! Another option is to trade through commercial banks only where the buyers and sellers provide proof of their identities before any transaction is initiated and completed.

There is apparent misallocation in the use of Nigeria’s foreign exchange. Most of it is used to pay for the importation of non-capital goods and services. For instance, roughly 90 per cent of Nigeria’s 2016 earned foreign exchange from oil rent was gulped by items: food imports, debt servicing, and the importation of petroleum products.

Nonetheless, a couple of things can be done about these. First, Nigeria can leverage the current pandemic to push for debt forgiveness. Second, this is an opportunity for Nigeria to revive its agricultural production to substitute for food imports. Third, the government can fast track, in any way possible, the development of the Dangote refinery, which will be the world’s largest by the time it becomes operational. Until these are addressed, Nigeria may have to bite the bullet as the value of its currency continues to freefall.

Dr Z. Dapel, zdapel001@dundee. ac.uk