Why the Naira crisis is likely to worsen – Moghalu


Nigeria’s currency crisis will only get worse if the country fails to diversify but continues to rely on its crude oil-driven single-product economy, said Kingsley Moghalu, former deputy governor of the Central Bank of Nigeria.

In a press release published on its official Facebook page On Saturday, Mr Moghalu said that the most important determinant of the value of the Naira is whether the Nigerian economy is productive and competitive in international trade.

“… So if we don’t diversify but continue to depend on crude oil as a single-product economy, the Naira crisis is going to get worse, not better,” he said.

The former presidential candidate explained that the diversification of the economy is not done by trading cashew or yam tubers but by adopting value-added products which are products of engineering and serious innovations. .

“I’m not talking about diversification into cashews and yam tubers. No. These are primary products, not complex value-added products that are the product of serious engineering and innovation, ”he said.

Mr Moghalu’s remarks come amid an unprecedented plunge in the value of the Naira, especially on the black market after the CBN’s ban on sales of currency to exchange bureaus.

Mr. Moghalu noted that what Nigeria needs to do is let the Naira find its level in the market. Thus, the CBN should stop subsidizing the currency.

Read Mr. Moghalu’s full statement below:

BEYOND ABOKI: THE IFEKA EGO TUTORIAL ON FOREIGN TRADE

The most important determinant of the value of the Naira is whether the Nigerian economy is productive and competitive in international trade. That is, if it has a diversified base of complex, value-added products that it exports and if it derives foreign exchange from these exports. I’m not talking about diversification into cashews and yam tubers. No. These are primary products, not complex value-added products that are the product of serious engineering and innovation.

Since we obviously don’t have such an economy, our main source of foreign exchange is crude oil, which gives us 90% of our foreign exchange. Unfortunately, we do not control the price of crude. Its prices are volatile and unstable due to various international political and economic factors. This means that because we are essentially a one-product country, a one-ride pony, we are exposed to the instability of our main source of income. When the price of oil drops and the world innovates towards alternative energy sources, the amount of external reserves available to us to safeguard the international value of our legal tender (our reserves) is frequently under pressure. It is these reserves, our main defense in a football analogy, that determine the value of the Naira.

Therefore, among the five main objectives of the Central Bank of Nigeria, we have: “to issue legal tender in Nigeria”, and “to maintain external reserves to safeguard the international value of legal tender”. So if we don’t diversify but continue to depend on crude oil as a single-product economy, the Naira crisis will get worse, not better.


READ ALSO : Insecurity is not a sufficient reason to stop the 2023 poll – Moghalu

Unfortunately, achieving a diverse and complex economy, especially in a resource dependent economy, is not easy. It requires a high level of knowledge, political will and coherence in economic policy and takes decades to achieve. This was the subject of my lecture a few months ago at the 2021 Nigerian Economics Students Association (NESA) annual conference held at the University of Port Harcourt, and will feature in my next book in 2022, The Pundit’s Mind.

There are also other facts that affect the value of the Naira. These include the basic supply and demand factor (if too much Naira runs after scarce dollars, the dollar becomes stronger against the Naira, and vice versa). Others are inflation (a high inflation economy like Nigeria’s weakens the value of legal tender), high government indebtedness (again our case, especially relative to our income and our economy). ability to pay, which will be stretched as we borrow on low incomes, and 90 kobo out of every L1 goes to debt service).

Speculation also affects the value of the naira, as there are currency traders around the world for whom the weakness of a currency is their very good fortune. Such traders “attack” these currencies for profit, especially when the currency uses a fixed official exchange rate determined by the central bank instead of the market. As the Naira is effectively measured against a “reserve” currency (dollars, euros, pound sterling), speculators can attack such a currency for profit if the country (Nigeria in this case) is perceived to have insufficient foreign reserves to meet demand.

Because our inflation rates at 17% are much higher than those of these “reserve currency” countries, we are once again exposed to possible currency attacks. If reserves are low and the demand for dollars massively exceeds the supply, currency devaluation is inevitable and traders who launch speculative attacks profit from this devaluation. These traders will borrow the Naira from Nigerian banks, convert it to, say, dollars, and then buy Nigerian bonds at short interest. If, as speculators predict, the central bank devalues ​​the naira, traders sell the bonds in foreign currency, convert them into naira, and repay the initial loan in naira. The greater the devaluation, the higher the profit for the speculator.

What should we do about all of this? As I said before, and I will say it again, we have two options. One is to let the Naira find its level in the market. In order, words, the CBN should stop subsidizing the currency. While there will likely be an immediate surge in the dollar’s price, this move will have two benefits. The first is that because Nigeria has a large and profitable economy and market, dollars are likely to overwhelm the market in search of profit for investors.

When this happens, the laws of supply and demand will work in the naira’s favor. At the same time, maintaining different exchange rates for different types of transactions must cease. This is called rate convergence.

The second, and most important, advantage is that, given that the CBN’s current practice of pumping dollars into the foreign exchange market (from reserves, which also depleted them) is essentially an import subsidy, this which has made Nigeria increasingly dependent on imports, the abandonment of the subsidy on the Naira will refocus the economy towards exports.

This will create an incentive for complex production of a quality that can be competitive in the international market. This must be accompanied by good trade policies to support and create such incentives for the massive exports of value-added finished products from Nigeria.

If we do not want to go this route, perhaps due to the political risk of a further immediate decline in the value of the Naira (which will recover in the medium to long term if the right policies are continued), we can consider dollarization. of the Nigerian economy.

Here, the dollar officially becomes legal tender in Nigeria, either replacing the naira or alongside it. Countries like Panama, Liberia, Ecuador and Zimbabwe have done so. It will lower interest rates and help deepen the financial sector because we are a high inflation country.

But it also has serious consequences. Nigeria will lose its monetary autonomy (our central bank will no longer be able to make independent decisions on interest rates, for example). The CBN will lose the seigniorage, the income it derives from issuing currency from the difference between the face value of the Naira and its cost of production. And of course, this will lead to a loss of national prestige and independence. You could argue, of course, that what is your prestige worth when your national economy is in tatters? So there we are, the simplified AZ of our FX Crisis. Either way, tough decisions have to be made. Politics is easy. True leadership is not.

#Ends

Kingsley Moghalu OON

Ifekaego Nnewi

Support PREMIUM TIMES integrity and credibility journalism

Good journalism is expensive. Yet only good journalism can guarantee the possibility of a good society, responsible democracy and transparent government.

For free and ongoing access to the best investigative journalism in the country, we ask that you consider modestly supporting this noble enterprise.

By contributing to PREMIUM TIMES, you help maintain relevant journalism and keep it free and accessible to everyone.

Make a donation


TEXT ANNOUNCEMENT: To advertise here . Call Willie +2347088095401 …





PT Mag campaign ad


Source link

Previous Boris Johnson live news: PM warned CO2 situation was "national security issue"
Next How Christopher Lloyd could appear in Rick & Morty season 6