CBN Helpless as Naira Plummets, Economists See Danger

The Naira plummeted further on Friday against major foreign currencies like the dollar, Pound Sterling and the Euro in all segments of the market, an indication that the flexible exchange rate policy of the Central Bank of Nigeria (CBN) is a colossal failure.

At the so-called parallel market otherwise Bureau de Change (BDC) segment of the market, the Naira exchanged at N378 to the dollar down from N375 om Thursday; while the Pound Sterling and the Euro exchanged at N487 and N405, from N485 and N405 it traded on Thursday respectively.

At the interbank window the Naira crashed further to N307.98 to a dollar from N295.38 it traded on Thursday.

It would be recalled that following the floating of the currency by the CBN, the local currency lingered between 346 and 348 on the parallel market before falling to 360 by the end of last week.

It continued trading in an around 360 this week before falling to a new low of 376 at the close of business Thursday.

The dangerous slide of the Naira against major world currencies has prompted economists to advise the federal government and the CBN to consider alternative policy options to halt the currency’s decline and reverse the nation’s fortunes.

Nigerian Economists Society (NES), stated that the flexible foreign exchange, forex, regime of the CBN cannot survive in a non-productive economy, warning that the country may slide into depression.

Warning that some form of managed pegged system is consistent with the structure of the Nigerian economy, the society urged CBN to review the new regime, stressing that managed float policy is a better option given the Nigerian economy’s current local productive capacity and over-dependence on crude oil as its major source of forex earning.

According to the economists, “The new foreign exchange policy which implies that the exchange rate will be determined by market forces (clean float) is faulted as it admonishes a spot and forwards, assumes the economy is sophisticated and productive in producing needed goods and services typically of the advanced economies, when the actual problem in the foreign market is a supply-side issue (scarce availability of foreign reserves) which is insufficient to satisfy the demand.

“Floating will generate macroeconomic instability as financial market participants stand to gain through market speculation which will only stimulate portfolio investment (hot money) as the real or “green field investment’ which is expected to generate wealth and create employment would not be attracted because of macroeconomic uncertainty.

Nodding in agreement, Dr. Ayo Teriba, chief executive officer, Economic Associates, told Venture Africa, that that there was a need for the Federal Government to seek foreign exchange from alternative sources in order to cover for the shortfall.

“There are a number of things we can do as a country to boost our forex supply. Just the way India did some years ago, we can tap Nigerians in the Diaspora to contribute forex to save the situation at home. We can’t say we have done all when we have not done this,” said Teriba.

Citing the case of India, he suggested tapping into Nigerians in the Diaspora to contribute forex and supply the market with liquidity. He also suggested publicly listing government agencies in critical infrastructure like rail, power transmission, oil and gas pipelines to raise forex through an initial public offering (IPO) as was done in Saudi Arabia.

Nigerians are searching for innovative solutions to end the dollar liquidity crisis as most investors would like to see a more liquid forex market before resuming the purchase of local assets.

Foreign investors have welcomed the removal of currency controls, but many are still holding out for signs of a recovery before committing resources.