Who Will Save the Naira?
The current Ag. Central Bank of Nigeria [CBN] Governor, Mr. Folashodun Adebisi Shonubi, has given a signal that the apex bank will soon deal with speculators/adventurers in the FX market.
There are fears that the exchange rate of the Naira vs the US dollar could worsen and hit anything above N1000 to the dollar. This is really becoming very creepy and we need all the experts to come together very quickly to save the situation.
One action point for the CBN could be to insist that all Forex transactions take place at the official fixed rate and implement severe penalties if anyone is caught trading at a different rate. This runs counter to International financial institutions’ preference for flexible exchange rates. Can we call the bluff?
On October 6 2021, for instance, Zimbabwe cracked down on the black market by arresting unofficial currency traders as the currency plunged. Offenders were barred from accessing financial services for 2 years. The effort did not yield the desired results.
Like every other market, price is determined by the interplay of the forces of demand and supply. If a central bank fails to intervene regularly in the forex market, a black market will very likely move northwards very rapidly and the central bank will eventually lose control of the exchange rate.
Whenever there is a sustained unsatisfied demand for FX, as we currently have it in Nigeria, it leads to an insidious urge to meet this demand at the illegal or black market. This then continues to push upwards the exchange rate. Excess demand creates a willingness to pay more than the official rate to obtain foreign currency.
The willingness to pay more by the buyers of FX creates a money-making possibility for the suppliers of FX.
Suppose an individual or business earns dollars, perhaps by selling goods abroad and being paid in foreign currency. This person could convert the dollars for Nairas at the official rate or, if he or she wants to make more money, could trade the currency “unofficially” at a higher exchange rate.
The only probable problem is finding someone willing to buy the dollars at the unofficial rate. This turns out rarely to be a problem. Wherever black markets develop, unofficial traders find each other on street corners, at hotels, and even within banks as we currently have them in Nigeria.
If the Central Bank does not intervene very quickly in the FX market, it may end up losing control of the exchange rate which may spell doom for the economy.
One key reason for fixed exchange rates i.e. the certainty of knowing what the currency will exchange for is lost once traders decide whether to trade officially or unofficially. The black-market exchange rate typically rises and falls with changes in supply and demand; thus, one is never certain what that rate will be.
Considering the potential for black markets to thrive, if the government wishes to maintain a sound fixed exchange rate, regular intervention to eliminate excess demand or supply of foreign currency is indeed required. I am totally in support of this; we should not allow our Naira to die.
Many are now asking why we, as a nation, did not move beyond rhetoric since independence when it comes to diversification of the productive base of the country as well as FX earnings. Let someone now tell me that ”the problem of Nigeria today is not money but how to spend it” except, of course, the beneficiaries of fuel subsidy! Dollar Index Decreases by 1.6% in July
By Dr. Emmanuel Moore ABOLO, PhD-Econs, FGRCP,FIMC, FNIMN,FPSSN
