Economists believe that the strength of a country’s currency is largely determined by the productive capacity its economy. It is very difficult to argue that point when one is comparing the Kenyan economy and its currency the shilling, with the Nigerian economy and its currency, the naira.
The two countries operate one-handed economies. They depend rather disproportionately on one source for their foreign exchange earnings.
The Kenyan economy depends heavily on tourism. In recent times, al-Shabab terrorists, a spill-over of the failed state, Somalia, have threatened that source of income seriously.
The Nigerian economy depends heavily on oil revenue. Proceeds from oil export accounts for 90 per cent of Nigeria’s foreign exchange earnings.
Since July 2014, tumbling oil prices have reduced Nigeria’s forex inflow by 60 per cent.
That analogy becomes necessary when one tries to weigh the strength of the naira against that of the Kenyan shilling. The shilling has waxed stronger than the naira despite al-Shabab’s threat to tourism. Last week the shilling traded at 91 to the dollar as the naira tumbled to a record N199. There is no empirical evidence that the Kenyan economy is more productive than that of Nigeria. If an obviously weaker Kenyan economy could keep the shilling stronger than the naira, then an invisible hand, not the forces of demand and supply, must be controlling the exchange rate mechanism of the naira. The powers of that invisible hand transcend the well known evils of speculative bidding, round-tripping and excessive dependence on imports.
That invisible hand looks more like corruption, which is at the root of the federal government’s fiscal rascality. That probably explains why, unlike the capital market, the naira has never regained an inch of the ground it lost when oil price tumbles. Even if oil price climbs to $200 per barrel, the naira would no longer trade at the rate of N150 to the dollar.
The naira has been teetering on the brink since oil prices started its southward journey last July. The Central Bank of Nigeria (CBN) responded with strong-arm demand side intervention which did nothing to halt the currency’s journey down the precipice.
Last week after sailing perilously close to depleting the nation’s lean foreign reserves, the CBN cowered under intense pressure from the invisible hand on the exchange rate mechanism. The apex bank finally devalued the naira through the back door by closing the official forex windows and offering to fund the market through the inter-bank window. No one knows how long that policy would last. However, the inter-bank rate is now the official exchange rate. Last week the official exchange rate was N199 to the dollar, down from N168.The CBN decision has sweeping implications for the economy. The 2015 Appropriation Bill was predicated on the exchange rate of N165 to the dollar. Now, the exchange rate has plunged by N34, while oil price is $5 below the budget reference price. Architects of the budget must return to the drawing board to tally their projections with the new exchange rate.
Last week I argued in this column that the apex bank has no option than to drag the official exchange rate of the naira closer to the inter-bank rate to stem the pernicious spate of round-tripping and speculative bidding.
It has now dawned on CBN governor, Godwin Emefiele that he cannot punish currency speculators with lean reserves in the face of fiscal rascality. He had boasted that those who buy down dollars with the hope of selling when the naira plunges deeper, would lose. Now we know the losers. With the naira now officially at N199 to the dollar, and N212 in the parallel market, speculators are smiling to the banks. The 110 million Nigerians living below poverty line are the prime losers. Many more would join their ranks as inflation prices basic necessities beyond their reach.
Like the CBN governor himself said the day he threatened to make speculators lose their hoarded forex, the way out of Nigeria’s currency predicament is to export more and import less.
With power supply at an abysmal 2, 800 megawatts for a population of 170 million, Nigeria is light years away from real industrialization. But it can reduce its voracious appetite for imported goods by producing the basic things it has comparative advantage.
A country that churns out 2.2 million barrels of oil daily has no business importing refined petroleum products. Nigeria could save $20 billion annually by attaining self-sufficiency in refined petroleum products. Nigeria needs functional refineries.
Its food imports bill is simply indefensible in a country sitting on expansive arable land. Akinwunmi Adeshina, the minister of agriculture has clipped the wings of the fertilizer scammers who stood between the peasant farmers in the villages and government subsidized fertilizers. The productive capacity of the Nigerian farmer has surged tremendously. The bumper harvest has kept food prices low and exerted downward pressure on inflation rate at a time when the naira is taking a humiliating pounding. But a good chunk of the bumper harvest still rot away in inaccessible and isolated rural communities. They are no roads to ferry the farm produce to urban areas where the farmers would get value for their commodities.