Recently, Japan, one of the OECD countries attempted to prop its currency to no avail. Starting in 2022, the Japanese Central Bank spent up to $60 billion of its reserves to defend the Yen, its first intervention since 1998. This was after the exchange rate fell to 146 Yen to the dollar. Today, the Yen is still weaker.
Japan is one of the most productive economies in the world with a robust foreign exchange reserve to the tune of over $1.2 trillion. Yet, it has failed to successfully fight the market in its bid to strengthen its currency.
Unfortunately, this is the same mistake that Nigeria’s monetary authorities have been making for the past decade – defend the naira with our paltry reserve.
Since the inception of this government, which inherited the foreign exchange crisis, the Central Bank of Nigeria, under Yemi Cardoso has been in a fierce wrestling match with the exchange rate. It doesn’t appear that the dollar will yield.
Cardoso’s CBN has adopted a raft of measures, some, conventional and others not so conventional, such as cracking down on currency speculators in collaboration with the anti-graft agency, the Economic and Financial Crimes Commission.
Part of the conventional measures have included the resumption of FX sales to the hitherto excluded bureau de change operators and raising the benchmark interest rates to attract inflows from portfolio investors to boost liquidity and alleviate the shortage.
These measures have shown some signs of efficacy with the Naira strengthening from its weakest level of N1,900/$1 in February to N1,000/$ in April, its highest gain in seven months.
However, as the Naira appreciated, there were genuine concerns around the supporting fundamentals as the industry watchers struggled to account for the basis for the significant gains. It did not help that the CBN auctioned the dollar at below market rate, while the reserve charts trended downwards simultaneously, from $34.44 billion to $32 billion.
This prompted the CBN to clarify that it did not intervene in the market. In fact, on April 18, Mr. Cardoso told a forum at the IMF Spring meeting in Washington that the “CBN has no intention of intervening in the foreign exchange market, and was committed to market-driven rates.”
Five days after this assurance, on April 23, the Naira tumbled to N1,234/$1 from N1,169/$1, a 5.25% depreciation. The Naira has sustained the losses since then as it currently exchanges between N1,400/$1 and N1,500/$1.
Bloomberg reported on May 10th that the Naira was the world’s worst-performing currency, barely a month after Mr. Cardoso hailed it as the world’s best-performing currency.
The cat and mouse game continues, with the apex bank now under increased pressure to raise rates yet again to appeal more to foreign portfolio investors to further boost foreign exchange liquidity – a fantastic strategy except that these FPI inflows are highly vulnerable to capital flight.
Perhaps, those at the helm need reminding that the Naira’s woes result from simple economic logic. Nigeria imports nearly everything but exports almost nothing, and with imports at a historical 16-year high, it is hard to imagine a strong Naira.
Meanwhile, a weaker naira should not be the death knell that Nigerians imagine it to be. Ideally, a weaker Naira should position the country to earn more foreign exchange through increased exports.
Take the world’s second-largest economy, China, for instance. It recently pursued a strategic policy that sought to weaken its currency, which translates to increased exports and prosperity for the already-prosperous Chinese.
This is the kind of policy that Nigeria should consider, instead of relying on monetary policy tools to drive economic growth.
However, if Nigeria were to consider such a policy approach, then those in charge of fiscal planning must put on their thinking caps and roll up their sleeves. This current fixation on Cardoso and the monetary policy team will not save the day.
To benefit from a weaker Naira, the fiscal authorities must focus on driving local productivity and promoting exports, not the Central Bank.
Boosting productivity and becoming a net exporter is the time-tested pathway to earning the foreign exchange required to boost the reserves, which can be deployed as an arsenal for defending the naira, when necessary.
For this to work, the fiscal authorities must employ radical measures to resolve the intractable issues that have kept our economic growth below 2% over the past decade, starting with power, which when successfully resolved, can unlock the true potential of our economy by restarting the productivity engine and position the economy to benefit from a trade surplus.
Sadly, policymakers do not realize that until we fix power, the country will continue to pay with weak currency, low growth, unemployment and poverty.
