Financial and Economic experts have been suggesting ways out of the continuing depreciation of the Naira, the Nigerian currency, saying reduction in importation of non-essential goods and excessive frivolous foreign trips by politicians and government officials have had a negative impact on the value of the local currency.
“Until, we reduce our penchant for foreign consumption and the love of our leaders to, at the slightest opportunity, travel to foreign lands, I do not see the Naira becoming stronger against major international currencies again,” Godwin Ude, a financial expert with a stock-broking firm in Lagos, South West Nigeria indicated.
“Some of those imports that are not important should be cut. When the Government officials and politicians junket around the world, it is the naira that will be used to exchange with dollar or other currencies. Most of our imports are also paid for in dollar not to talk of other payments such school fees, medical bills and bogus travelling. All these put unnecessary pressure on the naira,” Ude added.
Dollars and Depreciation
He said also that capital flights by way of Nigerians buying up dollars with Naira and moving it offshore because of the fear of the unknown, which became rampant in October 2008 when several billions of dollars were bought through the bureaux de changes (forex bureaux- a place where people can walk in to buy or sell foreign exchange) and the financial meltdown that also resulted in foreign investors withdrawing huge sums from the economy to settle pressing financial needs at home, were partly responsible for the naira depreciation.
Some money market operators also believe that the high demand for dollars was being driven by importers and portfolio investors taking money out as the credit crunch persisted. They said huge demands for dollars without a corresponding supply of the same currency had led to massive depreciation of the naira.
“It is also fuelled by banks, businesses and individuals shifting their balance sheet out of naira into dollars,” one official of a leading commercial bank who spoke on condition of anonymity said.
Blames
But the Central bank of Nigeria (CBN) attributed the collapsing naira at the inter-bank market to currency speculators who buy and hold currency to sell later to make more profit. The apex bank has therefore been taking steps to address the situation.
“I can see where the explosion in the market is coming from. They shouldn’t operate through statutory allocations from the Central Bank. We will introduce measures to stop all speculative acts,” CBN Governor, Professor Charles Soludo, told members of the National Assembly who wanted to know what the apex bank was doing to halt the depreciation of the naira.
But the bureaux de changes operators are not folding their arms either. They blamed CBN for the situation. “The exchange rate at which the CBN is giving on the dollar is too high. They are selling to us at the rate that we cannot but sell very high,” Garba Mohammmed, a bureau de change operator in central Lagos said.
US$13.9 billion moved out
The naira which has remained relatively stable in the last two years started depreciating towards the last quarter of last year against major international currencies particularly the dollar.
For instance, in early December 116 naira exchange for one United States dollar, but the end of that month the naira had further depreciated as it exchanged for 130 naira to the dollar. By last week, one dollar now exchanged for 150 naira, while pound sterling exchanged for 225 naira, the euro exchange for 201 naira and the Swiss Franc 134.22 naira.
According to the CBN website, corporate funds are massively moved out of the country. No fewer than 13.9 billion dollars were repatriated within the spate of eight weeks between last year September and November. By the end of September 2008, about 757 million dollars had gone out, two months later in November the figure increased to 1.262 billion naira.
These have resulted in the crash of the naira exchange rate. The capital flights also resulted from business travels, allowances, personal travels allowance and direct remittances among others.
Solution
As a way out of the Naira depreciation, the CBN last week announced the suspension of the Wholesale Dutch Auction System of the foreign exchange (FOREX). In its place the apex bank has introduced the Retail Dutch Auction System (RDAS).
According to Soludo, while it is desirable to allow the exchange rate to adjust in response to market forces, the CBN remains determined to restore stability in the market.
Speaking shortly after the meeting of the Monetary Policy Committee (MPC) in Abuja last Wednesday, Soludo insisted that the current depreciation of the Naira is speculative as players in the FOREX market do not usually have the cash to back their high dollar request in most cases.
Under the new scheme bids for the purchase of FOREX must be cash-backed at the time of the bids. The apex bank has also promised to publish purchases of foreign exchange by banks on behalf of their customers in the national dailies fortnightly. With effect from Monday the FOREX net open position of banks will be reduced from 10% to 5 %.
The CBN has equally made it known it would to clamp down on “round-tripping” among banks. This is a situation whereby banks source dollars at the official rate from the apex bank and later sell the currency at the inter-bank market at a profit. Any culprits found would be banned from the currency market.
