- And Why The Naria Is Still Hopelessly Sliding
From my experience and study of the Global Economic meltdown of 2008, the present woes of the Naira, can be attributed to the activities of speculators.
Whenever an opportunity is created in any financial market for profit to double or triple, speculators are attracted like vultures seeing a dump of carcass.
I saw a lot of that in 2008, when some investors would visit my office and the only reason for their investment decision is that the prices of the stock would double or triple in a short time.
A speculator cannot hear that price would double and keep quiet. Their activities usually create bubbles in any market. What is happening to the Naira is the bubbles created by speculation.
It is a bubble because; there are no genuine importers that can be making profit with an exchange rate of N500. Unlike other bubbles, this is a bubble that would hardly burst unless urgent steps are taken to arrest the situation.
Before we castigate the monetary authorities for such policies on domiciliary accounts and outward transfer of the dollar, we must appreciate the underlining economic environment.
It is no longer news that our earnings from crude sales is at the lowest ebb, coupled with militancy in the Niger Delta drowning output, receipts can no longer guarantee steady supply of dollars to the market to support imports.
When the reality that demand would not reduce, it is obvious that prices must go up, whether we elect to devalue or not.
It is therefore not impossible to see prices appreciating in geometric proportions. The reality also is that anyone with Naira can convert to dollar to amass tremendous gain. If this is the situation, why would any businessman want to hold Naira?
And, when you have any dollar, would you want to sell, when prices are expected to double because militants are still blowing up the pipelines?
Therefore, you desperately want to get it or hoard whatever you have. This has nothing to do whether your business needs forex or not.
If you can buy dollar from the BDCs or mallams and deposit into your domiciliary account, you can transfer abroad and be sure of reaping a fortune in the immediate future.
And the beauty is that there is no risk. Therefore, the scramble is on and the Naira is receiving due flogging.
In attempting to check the activities of speculators, the CBN imposed transfer restrictions and went ahead to remove 41 items from the official window. But, this is now the major problem.
The importers of these items, together with speculators are putting pressure in the parallel market. This is where the monetary policy failed. The removal of the 41 items ought to have been with the instrumentality of fiscal policy.
This issue is an obvious contradiction between monetary and fiscal policies. If the 41 items had been proscribed, it becomes illegal to procure dollar from the parallel market to import them.
This is not the case presently, as the items are officially allowed to procure dollar from the parallel market to import and pay duties, which the Customs collect and yet would not allocate forex officially.
We also need to look at the issue of the parallel market. Why should it exist? It must be understood that the parallel market is a semi official market, different from the black market.
It is the turf of the BDCs. When government is allocating dollars or opening windows to the BDCs, they are directly and indirectly funding the market, without officially acknowledging its existence.
We must appreciate that under the present arrangement, the woes of the naira is just beginning and must accept the enormity of the situation.
The speculators would not rest and the naira may hit N1000 in a short while, unless urgent steps are taken to arrest the situation. I would therefore propose the following measures:
Adopt a single liberalised foreign exchange market. This is a market that would operate only through the commercial banks. Every forex transaction should be done through the banks.
The money transfer agents – Thomas Cook, Travelex, Ria should continue to be effective.
Flowing from the above, the BDCs should be proscribed. Without mincing words, I recommend that the operation of BDCs be abolished. Unlike the banks, they are poorly regulated and are the source of the wild speculation going on presently.
When you visit the drawer of a BDC operator and notice the volume of passports, mostly fake, you would appreciate the con going on. This would not mean that the black market would die. It never dies, but let it remain an underground market devoid of the wild publicity it enjoys now.
The monetary authorities should revisit the 41 items and remove the restrictions. The FG should come in with fiscal policy and look at the products that ought to be proscribed.
There is no reason why rice, tgomatoes, toiletries, decorations, footwear etc should not be immediately banned.
The issue of domestic borrowing and interest rate would be the subject of another article.
Simon Osigwe, Is CEO, Scientific Trust Investment Ltd, Lagos, Nigeria, and a progressive financial analyst.