The Naira and Economic Prospects

Nigeria must rein in its foreign exchange management policy to incentivise foreign investors and boost recovery of the economy, writes James Emejo

The local currency to a large extent measures the health of an economy and provides critical guide for both foreign and local investors on where to plough their resources for optimal benefits.

Nigeria, which is currently in an economic recession – the second in a row – needs massive capital flows to return the economy on the path of growth amidst vulnerability in the oil market as well as urgent need to diversify its economic base, particularly in the face of the COVID-19 pandemic.

But, a handful of adverse factors currently tend to slow progress – insecurity, lack of infrastructure, policy inconsistency, bureaucracy and liquidity challenges in foreign exchange and exchange rate among others. If anything, the country’s inability to attract foreign capital in recent times had partly been blamed on insecurity and unsatisfactory forex regime.

In recent past, many analysts and rating agencies believed the Naira is overvalued and called on the Central Bank of Nigeria (CBN) to float the currency in order to find its true value.

Many had also opposed the operation of multiple windows in forex management preferring a single window and that the market be left to the forces of demand and supply.

Ideally, analysts are of divergent views that the Naira needed to be weakened at the present instance for the country to woo investors and target growth while others are of the opinion that the currency should be strengthened at the moment.

According to the National Bureau of Statistics, the total value of capital importation into the country fell drastically to $1.29 billion in the second quarter of the year (Q2 2020), compared to $5.85 billion in the preceding quarter, representing a contraction of 78 per cent compared to Q1 and 79 per cent compared to Q2 2019.

Amidst the need to reflate the economy, analysts believed introducing some flexibility in the forex regime is critical.

Global Chief Economist, Renaissance Capital, Mr. Charles Robertson believes the Naira is overvalued had pushed for cheaper currency amidst high fertility rate in the country.

Robertson, who delivered a keynote address at a web conference on “The Naira in 2021: Optimising Choices for Growth” which was organised by Arbiterz Media Limited, in partnership with Cordros Capital, had argued that Nigeria is currently faced with dearth of savings which is a critical tool for investment.

He linked this to her growing population which is made possible by high fertility rate and absence of birth control mechanisms.

According to him, “The more children you have, the fewer saving you have. Lower fertility countries such as Morocco, where it is an average of two kids per woman have lots of savings, big banking systems, and low interest rates. However, high fertility countries such as Nigeria, Congo, Angola and Burundi, are where you have high interest rates, not too much birth controls and many unorthodox policies.”

He said with the current exchange rate, “It is hard to see what could trigger interest from foreign investors at Nigeria”.

Chief Executive, Financial Derivatives Company, Mr. Bismarck Rewane, however supported a competitive devaluation of the currency by allowing it to float and find its value adding though that a stronger currency will not necessarily guarantee strong economy.

He said, “Economic patriotism means a strong Naira means a strong economy – false, fallacy as a matter of fact, competitive devaluation helps you put yourself stronger.

“The first and which government has accepted is that a strong Naira does not mean a strong economy but a strong economy will lead to a strong Naira. Therefore, we’re going to see a shift towards a more market-determined Naira.

“With policies that are not predictable you are going to be to paying N475-N480/$ and if that continues moving in that direction.”

Rewane said implementing relevant market reforms will lead to convergence and flexibility in rates, “where the rates move upwards and downwards and everybody can build on to the accepted mentality that the exchange rate is not fixed.

“Let’s adjust the rate and accept flexible rates rather than rationing foreign exchange.”

Also, speaking during the webinar Head, SSA Equity Sales, Stanbic IBTC, Mr. Akinbamidele Akintola, said foreign investors were still worried about their ability to repatriate their funds adding that “frankly either people are staying in the queues to get their monies out or exploring other avenues like new gold to take their money out.

He added that for fixed stock…”but we are not seeing fresh capital”.

Also speaking in separate interviews with THISDAY, analysts further outlines the merits and demerits of currency devaluation at this particular point in time.

Former Director General, Abuja Chamber of Commerce and Industry (ACCI), Dr. Chijioke Ekechukwu, a weak Naira will lead to high inflation and poor standard of living, a situation that could further compound poverty level and aid criminality.

He said, “It therefore depends on what government wants to achieve, either being people-oriented or government-oriented.”

Ekechukwu, on the other hand, pointed out that, “Much as a weak local currency always shows an indication of weak economy, a weak Naira over other currencies has its own merits and benefits to the country.

“Firstly, it provides and makes available more revenue for government as it gets higher Naira value for crude oil sold or other revenues denominated in foreign currency. So, more funds will be available to fund the budget.

“Secondly, there will emerge more exporters than importers and this leads to a more favourable balance of trade and payment. Thirdly, foreign direct investment figures will rise and more jobs will be created.”

On his part, Managing Director/Chief Executive, Credent Investment Managers Limited, Mr. Ibrahim Shelleng, said a cheaper currency would have benefited the country, if it were to be a net exporter.

“Unfortunately, we don’t produce enough in Nigeria for the cheaper Naira to encourage more international trade,” he said.

According to him, a cheaper Naira would only be good for the economy if we were net exporters. “It would encourage more foreign trade. This is similar to what China does. They deliberately ensure the Yuan stays devalued in order to encourage more foreign trade.

“If anything, a cheaper Naira allows foreign investors to pick up depressed Nigerian assets for cheaper and this is not necessarily good for the economy. It crowds out local investors from being competitive.”

Shelleng further explained that, “A weaker Naira also means the cost of importing goods and materials also increases. This invariably leads to cost-push inflation as higher production costs are passed on to the consumer. In the long run however, it may discourage importation and encourage more local production.

“A stronger Naira would certainly be a good indication that the economy is getting better. Local investors would be able to compete better against foreign capital. This would undoubtedly lead to greater development and reduce volatility from capital flight during economic downturns.

“Ultimately, the focus by the CBN has to be on stabilisation of the Naira. The volatile nature of the naira and the constant threat of devaluation is more damaging to the economy. A unification of the various exchange rates and an adjustment of the rate to reflect market realities may provide short-term inconveniences, but would certainly be better in the longer term.”

Similarly, President, Capital Market Academics of Nigeria, Prof. Uche Uwaleke, said a weak naira potentially worsens the inflationary pressure given the import-dependent nature of our economy adding that “This is also capable of adversely affecting output and rolling back efforts at economic recovery.”

He pointed out that argument that a weak naira will make exports cheaper and so boost exports as well as attract foreign direct investments and improve balance of payments holds true under certain conditions that are not yet present in the country.

“The first is that the country’s export base is still shallow coupled with structural and administrative issues which continue to hinder exports.

“The second point to note is that FDI inflow is not just a function of the exchange rate, but also depends on a number of factors such as the ease of doing business, state of infrastructure, enabling laws, security and so on.”

Uwaleke said, “Virtually every sector of the economy is blaming the exchange rate for high cost of goods and services. Only recently, the government announced waiver of VAT on airline tickets as a means of reducing air fares, but the operators are saying the major cause of exorbitant fares is the exchange rate.

“You can imagine the impact of a high exchange rate on the prices of petroleum products which are mostly imported as well as essential raw materials needed for production by firms.

“Don’t forget also that this year’s budget of federal and state governments have been based on an exchange rate of N379 per dollar. A weakened naira relative to the dollar will increase the cost of executing capital projects most of which have dollar components.”

Uwaleke stated that, “against this backdrop, both the fiscal and monetary authorities should join hands in 2021 to ensure that the export base is diversified, the PIB is passed into law and becomes operational to attract investments especially in the downstream petroleum sector so the country stops importing fuel, insecurity is tackled and the infrastructure component of the 2021 budget is implemented.

“The CBN, in particular, should sustain its demand management strategy while pursuing the issue of Exchange rates unification at a gradual pace.”

Also, commenting on the issue, an economist, Dr. Muhammad Rislanudeen, said a weak naira will incentivise foreign direct and portfolio investment but will do little to support diversified export given our heavy reliance on oil.

He pointed out that the monetary authorities might also jerk up monetary policy rate as part of the incentive measures to address the investor’s concern of negative interest rate given the current elevated level of inflation rate.

On the other hand, Rislanudeen said the weak naira policy may trade off growth and in the face of stagflation, recovery process from current recession to growth may be U-shaped or W-shaped instead of the projected optimistic V-shaped.

He said, “Besides, most of the so called foreign direct investments are actually foreign portfolio investment which is ‘hot money’ and typically short term in nature.

“Moderated floating exchange rate may be apt where central bank do intervene from time to time to address demand/ supply gaps or speculative demand and round tripping.

“This will be more cogent as policy makers will have the leverage to support growth while at same time incentivising foreign investments given the fact that the naira exchange rates will be market determined, albeit with moderate interventions.”

Also, in his intervention on forex management, former Deputy Governor of the CBN Kingsley Moghalu, said floating the naira must however, shield infant export industries from undue competition.

“And as I have said before, a float must be accompanied by robust trade policy to protect infant industries that will manufacture for export. That’s the trick. Between this and the attraction to potential investors of an economy with such a large market of 200 million, we’ll be okay.

Meanwhile, the CBN Governor, Mr. Godwin Emefiele, had recently assured foreign investors in the country of the safety of their funds despite the scarcity of forex due to the significant drop in oil revenue.

He had further promised to work towards exchange rate unification as detailed in his five-year roadmap for the bank.