Neusroom Explainer: Why Naira has continued to fall in the parallel market
It was a windy Saturday morning in 2020. I accompanied a few maritime colleagues to the home of the National President of the Association of Nigerian Licensed Customs Agents, Iju Nwabunike.
He had just gotten off a call from the ports, when he appeared in the living room of his VGC home to see us. Apparently, freight forwarders were dealing with several bottlenecks of clearing amidst the coronavirus pandemic.
Right there and then he told us, “There is coming a time when a dollar will sell in Nigeria for a thousand naira.”
Since 2020, that iconic moment has not left my head. The fact became clearer when Nigerian economist, Bismarck Rewane predicted that naira would depreciate to 470 against the dollar in February 2021. It didn’t take a week before that happened. As at last Monday, the naira was N570 per dollar according to Lagos street traders. Real-time black market data is currently barred by the apex bank.
This worrisome trend led Neusroom to run this explainer while dissecting its attendant implications. For this article, I spoke to West Africa Tax Leader at PricewaterhouseCoopers, Taiwo Oyedele, a public affairs analyst, Bala Zakka, Head, Research and Intelligence, Phillips Consulting, Samuel Bamidele, and an analyst at Ernst & Young Global Limited (EY) that didn’t want to be named.
What is a free fall?
The common jargon “free fall of the naira” has been circulating in the public domain for weeks now. I got Bamidele to define what that meant.
“A free fall is the downward moment of the naira,” he said. “It means that the naira has been declining despite the Central Bank of Nigeria interventions. What is causing the problem is that there is a demand and supply gap. The market works based on demand and supply.”
The crux
There are several layers to this problem but we have to start somewhere. Following the free fall of naira this year, the CBN finally set an official exchange rate for the dollar to naira a few months ago. It was finally pegged at N411/$.
However, the Bureau De Change operators kept selling for higher and the CBN was very angry with that. For people that clear goods at the ports, import goods, or even school abroad, they pay in dollars hence the growing demand for forex. The problem with the apex bank and other commercial banks is they don’t have enough for the average importer or student who seeks to pay their fees abroad.
So the quick option is the dollar merchant (aboki) down the street who is a certified BDC operator. That merchant will increase the exchange rate while trading and the CBN Governor felt if he stopped selling foreign exchange to them, maybe the price may come down.
On a certain Tuesday, July 27, 2021, Godwin Emefiele stopped sales of forex to Bureau De Change operators. This is not the first time he has done this, however. His excuse for this was that “the parallel market had become a conduit for illicit forex flows and graft.”
The problem however is that it doesn’t change anything. Why? Because there are a plethora of other connecting factors why forex is in high demand.
The other factors
With help of the economists I engaged, we delimit the factors into seven or even more. The factors range from Nigeria’s debt to the fall of oil prices (heightened by COVID-19), the fact that we never produce anything, inflation, BDC operators, CBN’s unhelpful monetary policies, the desire to withhold forex to the public, making everyone patronise abokis, and unscrupulous politicians who are buying dollars desperately because they think Nigeria will collapse. We will take you through these issues paragraph by paragraph.
My analyst who refused to be named took her time to really go down the points one by one with me.
Mono-economy
She revealed that Nigeria is a mono-economy. It is no news that we are majorly oil-dependent and everyone is waiting for the Federal Government’s monthly allocation to get paid. We are not getting any income from anywhere other than the Federal Government who depends solely on oil. So anything that happens to the oil market affects Nigeria.
Balance of trade
Another factor worthy of note is the balance of trade, which is referred to as our available funds. Since we are import-dependent, we need dollars to buy toothpicks, milk, fish, clothes, and all the other stuff we bring in. Like what Bamidele said earlier, it is a demand and supply game.
“The demand for our currency is lower than the supply of it, so that reduces the value of it,” she explained.
Poor CBN policies
“The demand for naira is not equating the supply and no one is hedging around it. Some of these monetary policies the CBN brings in are terms and conditions for the loans they are taking from other countries or from international bodies like the IMF. So these recent bans on BDCs were part of a requirement for accessing an IMF support of $1.5billion. These policies harm the naira more,” she explained.
BDCs, and dollar merchants (abokis)
The failure of the CBN to curtail the BDCs’ growing power is also a part of the problem. This can be attributed to the lack of oversight function by the CBN. It can also be tied to selfish interests, failure of their oversight function, and what we all complain about every single day- poor decision-making.
Political instability
Similarly, political instability in the country has also affected food prices. The demand for food is higher than the supply and it also affects the dollar since we mostly import food to survive. Some of these issues affect fuel prices which impact transport costs. Not to forget, the high prices of food in the market, and the pandemic which adversely affects Nigeria’s growth.
Finally, the important factor is Nigeria’s debt which our analyst feels will impact Nigeria’s currency. Debt devalues currencies and there are terms and conditions debt collectors offer indebted nations for them to get their money back
The implications
The implication of this is widespread poverty. Salaries are not changing, but prices of goods and services are on the increase. The BDCs source for forex and sell to everyone at a higher rate above CBN’s N411 rate. This will also affect savings and investments.
Bamidele believes the biggest beneficiaries are the BDCs.
He said, “Some people go to the bank and they can’t access forex on time. Due to this, they are forced to go to the black market. The reason is that the model the CBN is using is not working. The BDC guys are still gaining. The ban is not placed on them to stop trading; CBN just said we are not selling for you again. They can get their forex from another source and sell it at any price they deem fit.”
Bamidele believes that the CBN was right to stop selling forex to the BDC but the question is if the banks can cater to people’s forex demands. The BDCs also source their forex externally, so CBN’s ban on them is just like blocking one place and leaving others open.
Bamidele said speculations abound that the CBN is deliberately holding back on the supply of forex for the naira to go up while the other forex dealers are waiting for the naira to depreciate. He portends that the CBN may then push more forex into the economy to curtail the BDCs from taking profits based on the differentials in the black market.
“Maybe the CBN is trying to burn the fingers of market players who want to create an imbalance in the space. If it will work, time will tell,” he said.
Experts warn that the impact could be disastrous
Bamidele said only good policies can save Nigeria.
“I hope the CBN is making the right move or a well thought out process to reverse this trend; otherwise, it will be bad for the economy. Maybe CBN is really up to something. I hope we don’t see another devaluation of the naira. It won’t be good for businesses and individuals.”
Bamidele however noted that due to the free fall of the naira, people who have dollars are not willing to sell at any price. He said most people were speculating that the naira would depreciate further. However, CBN has tried to clampdown on organisations paying their staff in dollars
He added, “There was a list that was released and some schools were placed in the spotlight. The CBN is making an aggressive move on them. The Nigerian economy is not a dollar economy where you can use dollars to transact but some people earn in dollars in Nigeria. CBN is trying to block those leakages where the demand pressures are coming from.”
West Africa Tax Leader at PricewaterhouseCoopers, Mr Taiwo Oyedele had this to say regarding the matter. He believed higher import tariffs may discourage importation.
“Naira devaluation is expected to fuel inflation to the extent that some imported goods and materials are not eligible for forex or the importers are unable to source for foreign exchange in the official market. The CBN should consider revisiting the items prohibited on the foreign exchange list and work with the Fiscal authority to impose higher import tariffs on such items to ease the demand pressure which has been pushed to the parallel market.”
Hope may be the only answer
Public affairs analyst, Bala Zakka believes that Nigerians need hope and government backing to make things work again.
“The government needs to give her citizens hope. This is the time the National Orientation Agency and other agencies should give Nigerians hope in terms of jobs, and health. Why would someone go out of the country for heart surgery if our health facilities are in good shape? They should do something about the insecurity situation.
“A lot of people are fleeing the country. They should do something about the cost of living. Most importantly they should sit down with the Central Bank Governor and find out why the monetary policies are not working.”
Recent developments
In a bid to tackle this trend, CBN Governor, Godwin Emefiele ‘banned’ Abokifx, a website that collates the black market exchange rates of the naira. He even blamed the owner of the platform, Oniwinde Adedotun, for arbitrarily fixing the rates. The latter responded by suspending its daily publishing rates. This has made it difficult to access real-time dollar rates.
Vice President, Prof. Yemi Osinbajo reacted to the matter during a two-day Mid-term Ministerial Performance Review retreat where he clearly knocked the CBN’s monetary policies. He asked for the dollar issues to be made to reflect the real status of the country.
Emefiele, on the other hand, wants the government to operate a managed-float exchange regime.
Under this regime, the exchange rates fluctuate daily, but central banks attempt to influence the rate by buying and selling currencies to maintain a specific range.
One thing is sure- all our experts think this issue can be sorted if all these problems are combated.
In the meantime, the general advice is to save in dollars however you can. This is what all experts agree with. The painful part is just that #500 is not up to a dollar as we speak. Does that make it useless?
