“The fact that we have done this consistently for almost four to five weeks should tell everybody or those who doubt the strength of central bank to sustain this policy that they are taking a risk and they will lose in this bid to want to place a wrong bet on the direction that we are going.”
Mr. Godwin Emefiele, Governor Central Bank of Nigeria. The series of bullish interventions in the past six weeks by the Central Bank of Nigeria have successfully stamped a significant level of stability in the foreign exchange market after an extended period of volatility.
This is commendable work by the leadership of the apex bank. Most deserving of the plaudits is the Central Bank Governor, Mr. Godwin Emefiele who has since the start of the foreign exchange crisis canvassed for a more context-sensitive approach to handling the crisis.
He took the right initial steps of putting the country’s interest first and rallying critical stakeholders against the idea of taking hook line and sinker the prescriptions of western interest groups and international financial organizations for the full float of the naira.
Emefiele’s refusal to go with traditional prescriptions in dealing with the crisis and insistence on applying practical homegrown strategies within the context of our economic peculiarities may not have delivered results as early as many wanted.
Yet today the measures are indeed working and the results are not in doubt. Roughly three weeks ago, one dollar exchanged for a whopping N550 in the parallel market. Today, the story has changed significantly. In the past few days the exchange rate has come down by about 12% and now ranges between N370 to N385 to a dollar. This means that on the average, the naira has gained about N165 to the dollar in value. This is impressive. And it is looking as if things might improve even further.
What makes this intervention different is that it has not only halted the continued fall in the value of the naira into dangerous territory, but also reversed the negative trend to a positive trajectory of sustained recovery. It marks the end of a painful period of high exchange rates.
While it is true that such gains in recent past did not last and quickly reversed, there are strong reasons to believe that this time around, they are going to stay on for quite some time. Maybe improve even further considering the positive indicators that have so far defined this intervention. To start, the naira is having its longest stretch of recovery and gains over the dollar.
Two, the reversals in gains have been marginal, less frequent and they quickly correct. Three, the interventions of the Central Bank have been intense and expansive targeting commercial banks and Bureau De Changes with consistent sale of forex. The signals from the regulatory institution have been that of a determination to make this work for the long term.
Speaking recently, Mr. Emefiele, the Central Bank Governor promised that the bank will keep the liquidity flow and ensure that currency speculators who are betting on the naira lose money.
Specifically, the Central Bank at the start of this campaign had one clear objective: to close the gap between the interbank exchange rate of N375 and the parallel rate that hovered around N550. The significant gains that have been made by the naira against the dollar in the forex market within the span of five weeks show that progress has been made and that things are actually changing for good at so many levels.
First is the remarkable improvement in forex availability and the ease of access by Nigerians especially for purposes of paying tuition, personal travel and medical expenses. There is a noticeable policy objective to ensure that the process of getting forex for those purposes by Nigerians is friendly and not a sentence to suffering. This might explain why the CBN now sells forex directly to banks for retail purposes.
The banks now have sufficient forex liquidity to treat request by Nigerians. It has instructed commercial banks to ensure that applications are treated within 24 hours and threats of sanctions for noncompliance. These range of measures that the CBN has taken in the interest of ordinary Nigerians deserve commendations.
They have brought great relief. In the past, getting access to forex was a difficult and tiring ordeal. Those who applied for had to wait in line for about a month or two before their applications could be treated. On top of that, there were no guarantees of a positive feedback. More like a gamble.
There have been many sad stories of parents who applied for tuition, sick people requiring forex to travel abroad for better medical treatment but after a month of waiting simply got the information that their bids were not successful. The 24hour deadline for treating applications at the fixed rate of N360 to the dollar is therefore a remarkable improvement. Besides reducing the financial burden for expenses in dollars for regular Nigerians, it has also made life a lot easier.
The gradual rise in strength of the naira against the dollar is also a good signal that prices of essential goods and services are likely to come down, a development that will help to alleviate the suffering of ordinary people. This includes prices of imported goods or items that are critical inputs for production of industrial goods, agricultural inputs such as fertilizer.
Similarly they inspire hope that prices of necessities and items consumed by ordinary Nigerians which have more than doubled within this period will soon come down. Some of these essentials include house consumables, toiletries, health products and medicines.
While it may be too ambitious to hope for instant reductions in the prices of these in the supermarkets or pharmacies, the trend suggests that in time, they will come down. On another front, the improvements are a strong vindication of Emefiele’s nontraditional style of managing the wide-ranging negative effects of foreign exchange crisis. The campaign for him to toe the traditional route was strong and intense.
The pressure came from the organized international investing community, local manufacturers and even members of the Monetary Policy Committee. Yet he stayed true to his convictions and refused to bulge. One, he consistently argued that the demand for forex was being fuelled by speculators and the price was not in fact a true reflection of the value of the naira.
Two, he consistently canvassed that allowing a free fall of the currency would hurt the country given the highly import dependent nature of the economy.
Three, that there really was no easy option given the lack of sufficient savings and low foreign reserves. Four, that if the fiscal policy side complements the actions that he is pushing from the monetary front, the situation could be managed without having to allow the Naira go on a free fall in order to prevent the likely rise in prices of goods and services. While his efforts may not have achieved in full the results hoped for, they helped a great deal in slowing down the escalation and pain that Nigerians would have experienced.
Fact is without Emefiele’s strategic demand management measures which include placing restrictions on access to forex for forty one items and other smart initiatives, the country would have rolled dangerously and faster into recession.
The Naira would have lost even more value earlier and stayed down for much longer than it did. In addition, prices would have shot up much earlier and the suffering of Nigerians as a result would have lasted for a much longer period.
So, on the whole, while it may be fair to argue that Emefiele’s strategy may not have delivered as expected, the other uncontestable reality is that it was effective in preventing the degeneration of the crisis as we have seen happen in other countries like Venezuela. Overall, the pro-people focus of the CBN’s bullish interventions that are being championed by Emefiele inspire a new beginning that is good for the economy. A stronger Naira means higher purchasing capacity.
Ensuring that it stays strong will help to boost efforts of the government to reflate the economy as it works to get the country out of recession. A stable and predictable foreign exchange market is also good for investment. Emefiele and his team deserve commendation for finding a workable formula for keeping the Naira strong.
Olufemi is a public analyst based in Lagos.