Nigerian stakeholders and experts from in zoom conference took time to discuss the state and future of Nigeria’s currency; the Naira especially with the fluctuating foreign exchange rates and the COVID-19 pandemic that has posed a great challenge to the Nigerian economy.
The discussion was attended by Global Chief Economist, Renaissance Capital, Charles Robertson; Financial Derivatives Company, Bismarck Rewane; Head, SSA Equity Sales, Stanbic IBTC, Akinbamidele Akintola; DG, LCCI, Muda Yusuf; Lead Wealth Advisor, Artios Capital, Abiola Adekoya; President, Association of Bureau De Change Operators of Nigeria (ABCON), Aminu Gwadabe.
The discussion themed, ‘The Naira in 2021: Optimizing Choices for Growth focused on the Naira and had the keynote speaker, Charles Robertson saying that the underlying problem Nigeria has, is “Lack of savings.” The more children you have, the fewer saving you have.”
“Lower fertility countries such as Morocco, where it is an average of two kids per woman have lots of savings, big banking systems, and low interest rates. However, high fertility countries such as Nigeria, Congo, Angola and Burundi, are where you have high-interest rates, not too much birth controls and many unorthodox policies.”
Robertson emphasised that a major solution was to have cheap currency, disclosing that this was the measure the Asian countries applied in the 70s, 80s and 90s when they had high fertility rates. According to him, “higher fertility countries such as Kenya, Angola had double digit interest rates, while lower fertility countries in Africa or Asia had low-interest rates.”
But for him, even though he believes the naira is overvalued, he does not see the Central Bank of Nigeria (CBN) allowing the naira to slide down to an exchange rate of N500 to $1; “Or, to N600, that Angola of Kazakhstan would imply…” Robertson predicted that the naira may end up at N429 per dollar by year end.
Bismarck Rewane said Nigeria’s broad macro-economic thrust from 2017-2019 was based on what he called economic patriotism, import substitution and defending the naira “on the belief that inflation was a function of exchange rate passageway to applied disruption rather than all the factors put together.”
“Wrongfully, they have now made it a binary choice; you either do this or you do that. Quite frankly, there are many contributory factors. I believe the policymaking mentality in Nigeria is changing towards the one of being compliant, one of not being a maverick country and getting away from the idea that capitalism and economic reform are agenda of exploitation of the Nigerian economy,” he added.
Rewane was confident that Nigeria would be more compliant and accepting economic reforms agenda from relevant global economic bodies. Examples of that included the removal of fuel subsidies last year. He sees Nigeria benefitting from the policy decisions “we made in 2019/2020 in terms of subsidy removals, subsidy reduction, in terms of cost reflective tariffs. In terms of accepting that investment multiplier is key to growth rather than any other strategy at this time.”
Indeed, Rewane, who said a strong naira might not necessarily mean a strong economy, however, believe a strong economy will necessarily lead to a strong naira. He, therefore, predicted that, “we may see a more market-determined naira.”
Unlike Robertson’s forecast for the Nigerian currency, the FDC CEO sees the naira landing on N409/410 to $1. But with the speculative or fear premium based on the fact that policy could change, he calculated that “if you add that 20per cent to N410, you may then arrive at N470-N480…”
According to him on today’s fair value based on demand and supply, the naira could be going for N410. However, unpredictable policies could well push the battered naira to the realm of N470 to N480. The economic expert warned that should government continue in the line of unpredictability in policymaking, the naira will remain of the N470-480. But if the government does not waiver in accepting and sustaining the reforms, N409/410, he said, “will be the sweet zone for the naira.”
There is also the adjustment of rate and the issue of rates-determination. What is being required today is that you adjust the rate to cover the gap. Perhaps that was the concept that was applied to arrive at N410 from N390. But then, the managers of the economy have to accept the flexibility of the rate, which moves upwards or downwards and once that Praxis is accepted, according to Rewane.
“Once market knows that the price of petrol and Diesel can move then can now adjust the rate to their own mentality, knowing that the exchange rate is not fixed,” he said.
Concluding his opening thoughts on the topic, he said government must accept the flexibility of the rate and “stop rationing foreign exchange …”
In other words, the CBN should quit flip-flopping on the rates and management of forex.
Akintola aligned with Robertson in the area of the exchange rate. “I don’t believe, the government will move it beyond N420 or N430.” For him, the rationale behind such policy move could include trying to manage the possibility of naira devaluation of leading higher price of petrol and also considering the issues the country has been having recently with electricity tariff. “The implication of massive devaluation could lead to a fiscal backlash for the government,” he said.
The Stanbic IBTC Equity Salesman was not optimistic that government would want to move the exchange rate beyond the N420-N430 mark. According to him, Nigeria’s economy would enter the Egyptian model, “where the flows that come into the equity market are more driven by locals as opposed to international players.” This, he pointed out, is because “we need to believe in our own market before the world believes in our market.”
He believed this year may likely not see any significant equity inflows until there are some clarities in the capital atmosphere of the economy.
Baring his thoughts on the reason why the market rallied at 50 per cent in 2020, Akintola said, “it was not because people woke up and suddenly became Nigeria Equity crazy. It was a case of we had so much cash and there was nowhere to put it.”
“However, when you look at the market with array of stocks, I think there are probably ten investable names. Names I will be personally excited to put my portfolio; so, I feel there is probably some sort of latent money in the background that can potentially chase equity.”
President, Association of Bureau De Change Operators of Nigeria (ABCON), Aminu Gwadabe, affirmed that the naira has been facing “a war of attrition.” He wasn’t happy that the foreign exchange inflow his association had anxiously awaited may not be forthcoming this year. For Gwadabe, a fixed exchange rate regime always provides unscrupulous people to divert forex “the official way to take this currency into the official market.” Most of the forex transactions in the market are ‘dry transactions’ as foreign currencies are ferreted out of the Nigerian markets to foreign countries.
According to him, between the official and parallel markets, currency valuation in Egyptian currency is about 16per cent, while Ghana’s ranges between 26per cent and 30per cent.
His worry is government’s subsidy on inflows. A situation where over $100 billion would leave the country with little or no string puts pressure on the forex market in the country. And that is why the ABCON President would prefer a policy that will ensure forex is not allowed to flow out of the country just like that. In other words, Gwadabe is saying that instead of allowing you to take your forex out of the economy just like that, you would have to be mandated to take it out through export of Nigerian goods which you would sell in your country or wherever you can to make your money.
Speaking on how businesses will be navigating 2021 and his view on the state of the naira, the Director General of the Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, said the business community in Nigeria face two major challenges as far as the currency situation is concerned.
“First is the issue of the depreciation of the currency. You know how import-dependent the economy is; ranging from the manufacturing to the service sector to the consumer and so forth are highly import-dependent,” he said.
And so, any time these stakeholders experience a sharp depreciation in the currency, it causes lots of shocks in the industry, spiking cost of production, operations. According to the LCCI DG, “when you are in a market where purchasing power is also weak, you are forced to transfer this cost.” This unfortunate situation affects profit margins and ultimately impacts the sustainability of businesses.
It is a major, but an inevitable challenge that is made worse by the fact that businesses do not have much control, in terms of the currency and international pricing.
In the end, these stakeholders could only arrive at the conclusion that it wasn’t about if the nation’s liquidity market would be out of the woods in 2021, but more about hoping that it is able to survive through the harsh effects of the coronavirus pandemic.
Suzan O
