Nairametrics| Economists often disagree on everything including the best metrics that should be used to measure the intensity of a currency crisis, but all agree that a currency crisis is fuelled by a sudden decline in confidence.
The institution charged with maintaining the value of Nigeria’s legal tender (Central Bank of Nigeria) has demonstrated over the currency’s 44-year history, that it lacks the drive, will power and intellectual know how to manage the naira.
The stability of any currency is not solely derived from a favourable term of trade. Rather, the volume of money and the flow of capital determines to a large degree the strength of a currency.
Crude oil is an important commodity in Nigeria and its effect cuts across sectors, but it accounts for only a fraction of total foreign exchange inflow into the Nigerian economy.
In 2014, oil accounted for only 24.66% or $38.6bn of the total foreign exchange inflow into Nigeria. In 2015, $99.76bn came into Nigeria with crude oil accounting for 19.31% or $19.27bn despite the shock and uncertainty that engulfed the Nigerian economy.
The Decline in foreign exchange inflow from $156.52bn (2014) to $99.755bn (2015) can not be solely connected to the black hydrocarbon.
Elementary economics tells us that the more Naira we supply into the market, the less valuable the Naira becomes. Nigeria would have done better if only it reduces the supply of Naira into the market.
As it turns out, the monetary authorities created and pushed additional N7.24tn into an already stuffed market between October 2014 and December 2016, with broad money supply (M2) growing from N16.56tn to N23.8tn.
The 43.71% expansion in money is now working its way into the system, fuelling inflation, killing confidence and escalating the battered image of the Naira.
Interestingly, the biggest proportion of the new money created do not go into any productive adventure- rather money is printed to pay salaries and finance the excesses of the federal government.
In simple english, the monetary authorities in the face of declining foreign exchange earning created approximately N6.9tn (between October 2014 and December 2016) and handed it over to the federal government.
In the last quarter of 2014, a total sum of N2.4tn was created to fund the federal government’s budget while only N587.61bn was expended on capital items.
N1.54tn and N2.96tn were created for the federal government while N601.27bn and N750bn was released for capital projects in 2015 and 2016 respectively.
The central bank’s disastrous management of the economy in the last 3 years is unforgivable. Policies that should ordinarily build confidence and correct the abnormalities around the economy in the face of dwindling oil revenue and foreign exchange are now fueling a new crisis.
Africa’s most populated country’s only competitive advantage has been destroyed beyond redemption.
Nigeria and Nigerians need a new currency and a new central bank.
If the legislators fail to move fast enough, private fintech organisations or gold/silver standard promoters may fill the vacuum just like bitcoin and cryptocurrency.
The Naira’s only use today is purely for transactional reasons. People accept the battered currency only because there is no attractive alternative.
Cheaper internet access, blockchain technology, central bank issued digital currency, POS and trust is not hard to sell in an economy like Nigeria. That could just be the alternative.
Look closely at the MMM movement. It won’t move me significantly if 50% of economic activities are done without reference to the Naira going forward.