There is no doubt whatsoever that these are exciting times with the Nigerian economy with the Naira adjudged the best performing currency in the world for the month of March, 2024. Please no one should misconstrue this observation because the Nigerian economy is still in the doldrums with the latest data on inflation as per Nigerian Bureau of Statistics as at end of March, 2024 estimated at 33.20%, indicating rising inflationary spiral, albeit there is some cooling off seen from the perspective of month-to-month rate of increase.
If I recollect correctly, this represents probably the highest rate of inflation in the country in a period of 28 years. Therefore, getting the economy out of the woods remains a present, veritable, tedious, arduous work in progress. Let us not even bring up other depressing statistics such as the rate of GDP increase, now estimated at a reassuring rate of 3.6%, debt/revenue ratio, the rate of unemployment which stands at almost 40%, with youth unemployment registering an even worrisome and higher rate for a restless and potentially violent group.
But the undisputed fact is that we have not seen the like of what is currently happening to the rate of the exchange of the Naira before now. Hitherto, there was hardly any risk if you took a bet against what will happen to the rates and that situation largely fueled massive speculative activities and contributed in no small measure to the nightmare which the management of the Naira has been for the authorities. And from where I stand, this is a major and significant development which not many will appear to appreciate. Current developments have to a large extent changed the psychology of the market and this is no mean feat for which the authorities at the Central Bank are most deserving of our applause and accolades.
The fact remains that we are enjoying some respite in the confident expectations that the glimmer of light at the end of the tunnel is clearly discernible to offer some consolations. One of the clear indications that the economy is on the mend is that the spate of wild cat protests across the length and breadth of the country bemoaning hunger which is next door to violence in the land has now simmered down. And the causative factor for this welcome development in my well-considered opinion is the recent salutary and rather unexpected developments with regard to the Naira/Dollar exchange rate during when we witnessed the Naira unusually appreciating.
Some otherwise respected voice recently traced the improvements in the economy as coming from two major dominant players; Aliko Dangote’s Refinery as well as Allen Onyema’s, Air Peace. There is no doubt that the efforts in this regard have contributed to the good omens about the economy, even as it remains true to observe that progress with the Dangote Refinery and its impact on the economy remained protracted until very recently when we started hearing concrete developments with regard to the impact of the Refinery on the price of diesel for instance. As we put thoughts down now, there is report that trucks laden with Diesel are leaving the Refinery to parts of the country at a relatively reduced selling price quoted at 1,000 Naira per liter. We also anticipate the same result with the pump price of fuel as supplies commence.
Allen Onyema’s Air Peace certainly has been a game changer as it altered radically the narrative with regard to air fares out of Nigeria. In fact, as we discuss, there is an ongoing price war with other mostly foreign operators whom are intent on driving Air Peace out of the market by making fares unprofitable and not market reflective and therefore not sustainable. The expectations are that the Nigerian authorities will step in and not allow that to happen.
But for many analysts and other compatriots, the main driver of the respite we enjoy today is the rapidly appreciating Naira/Dollar exchange rate, for which we must give unreserved and unalloyed kudos to the Central Bank for this remarkable feat; particularly as this salutary development has been facilitated despite our celebrated lack of productivity and diversification of the export base of the economy which we have been told made it impossible for the Naira exchange rate to appreciate.
The headline in the papers on Tuesday 16, 2024 as we put these thoughts together seems to say it all: “Dollar is falling: New Exchange Rate declared as Central Bank begins another round of sales to Bureau De Change operators.” Naira finally sells for N1, 000 as the BDCs are set to get new Dollar allocations from the Central Bank. This development is so reassuring as the exchange rate was clearly headed for 2,000 Naira; and such a rate of depreciation is patently a dangerous development for an import dependent economy like Nigeria with its massive population and high poverty rate.
It will be good for us to tarry a while to interrogate how this feat was brought by the Central Bank and to ask about the prospects even as there are discordant voices regarding sustainability and the fear of a sudden reversal in fortunes. The Central Bank first focused on blocking all identifiable loopholes in the allocations of dollars to drastically reduce the scope for abuse particularly by speculators. The Bank then reduced the level of Open Position which the banks are authorized to keep thereby injecting suddenly substantial supply of dollars variously estimated at four billion dollars into the market. It almost stopped the ability of individuals to obtain dollars in their personal accounts by ensuring that all payments are made directly to the beneficiaries removing the incentives to store dollars and face the temptation to round trip.
The Central Bank restored access to official foreign market by removing the restrictions hitherto placed on some items to provide a level playing field and ensure that all in need of dollars for their businesses operate from the same space. It disallowed the use of dollar deposits held in foreign banks for the granting of Naira denominated loans in the country, thereby terminating the illegal practice of indirect dollarization of the Nigerian economy. It cleared all certified backlog of remittances to the tune of 7 billion dollars and resumed the sale of dollars to Bureau de Change after they have been pruned down from an unsustainable number of over 5,000 to under 2,000. The spate of policy initiatives in a short space of time is simply unbelievable and mind boggling! And we all the better for it.
The Central Bank then unleashed the master stroke by rapidly hiking the Monetary Policy Rate by over 600 bases points in under two months’ duration. This singular move boosted the returns on investments making Nigerian bonds irresistible to foreign players resulting in a deluge of dollar inflow thereby directly impacting the rates of exchange. The Central Bank increased cash Reserve ratio to 45% with Liquidity ratio at 30% virtually draining cash from the system making it challenging for interested parties to source credit from the banking system. NNPCL was mandated to remit all dollar inflow into its account with the Central Bank thereby plugging the leakages arising from the fact that hitherto NNPCL earned and kept the dollar inflow from oil. There have been of course the usual criticisms of these policy initiatives and no doubt there are inevitable downsides to contend with.
There is the worry about sustainability. We don’t entertain such worries but, in any case, the situation remains fluid and the Central Bank keeping a keen watch, we are assured that appropriate response will follow as the need arises. Why should we sell to BDCs? To grant access to individuals in need of routine, nominal foreign exchange to meet dollar-based obligations and reduce demand pressure at the unofficial window. In any case this accommodation has been on and off with us. It did not start now. Price stability is the primary reason why an attempt is now made to revise the free fall which we witnessed with the exchange rates which was poised to knock off the bottom from the Nigerian economy. If we are able to address obstacles to supply chains from the farms and stem food inflation, there is no doubt that the current high rate of inflation will start coming down. In fact, the World Bank is more upbeat with regard to expectations with developments with the rate inflation in the country.
There is no doubt as we all know that the key to long term sustainability of the exchange rate is to boost productivity of the economy particularly in the real sectors of agriculture, manufacturing, housing and industry and to address issues that undermine the viability of the economy such the provision of critical infrastructure such as power supply. It is also advisable that we caution on the need to ensure that reforms are appropriately sequenced to avoid outcomes which are at cross purpose as to generate uncertainty in the economy. All said we remain upbeat that we are on course and will soon be riding the storm to get the country out of the woods if we keep our eyes firmly on the reform ball.
Dr. Boniface Chizea is the MD/CEO of BIC Consultancy Services, Lagos
