Nigeria’s FX Crisis: Can Fixing Power, Education & Security Solve It?

Economists and financial analysts have criticised the forecasts by analysts at Goldman Sachs Group Inc, Citigroup Inc. and Standard Chartered Plc that see the naira advancing by as much as 25 per cent against the dollar this year, closing at N1,200 to a dollar by year end.

According to the analysts at Goldman Sachs Group Inc, Citigroup Inc. and Standard Chartered Plc, having plummeted by 72 per cent in the course of the year, it was projected that the value of the Naira would rebound, signaling a result of the many policies put in place by the Central Bank of Nigeria (CBN) and the Bola Ahmed Tinubu-led government, as huge interest-rate increases and other steps to attract foreign capital yield results.

As against the N914 which it sold at the official market at the beginning of the year, the naira currently is around the N1560 and N1,620 band. However, analysts at Goldman Sachs Group Inc, Citigroup Inc. and Standard Chartered Plc see the naira advancing by as much as 25 per cent against the dollar this year, as huge interest-rate increases and other steps to attract foreign capital yield results.

However, experts told LEADERSHIP that as much as they respect the opinions of analysts at Goldman Sachs Group Inc, Citigroup Inc. and Standard Chartered Plc., relying on their assumptions appears like clapping with one hand and telling Nigerians what would make them happy.

Speaking with LEADERSHIP, analysts said that the solution to Nigeria’s forex crisis depends on the country solving institutional challenges like fixing power supply challenges, education and insecurity. After that, the country needs to work on increasing production, plantation farming and manufacturing.

In an interview with our correspondent, chief economist at SPM Professionals, Paul Alaje, said what the CBN had been doing in the area of foreign remittances is that when the forex comes into the country, they would give the naira equivalent to the receivers in Nigeria and collect the forex. This, according to him, is what is responsible for the increase in foreign remittances.

He said Nigeria is yet to attract reliable foreign investors, as those we have are portfolio investors.

‘‘The dynamics is that the CBN sells dollar to the bureau de change at N1,300. The CBN is targeting a price band. The apex bank is rationing supply of forex. Our problem is in the supply side. By rationing, it will appear as if we are doing well. This might seem to be working on the short term but in the medium to long term I don’t see it working. The best approach is to work on the supply side,’’ he said.

Also, a development economist, Professor Tayo Bello of Kola Daisi University, Oyo State, told LEADERSHIP that Nigeria has not seen the end of its forex challenges. He queried why the federal government had to float the Naira, saying that there is no currency in the world that practices free floating of its currency.

According to him, there is nothing wrong with fuel subsidy removal but free floating of the naira was a major mistake by the current government.

‘‘The economy is a different ball game; it is not like politics. We should stop deceiving ourselves; the government needs to come out with good policies. Military President Obasanjo came out with Operation Feed The Nation and Shagari introduced Green Revolution. People are hungry and internally angry. We have an unemployed reserved army. I don’t see the Naira coming down to N1,200. The problem is that people lost confidence in the Naira.’’

Analysts also said that currently, what may have been responsible for the relative stability of the naira is the high oil price, but that it should be noted that the country is still paying interests on huge debt, both in foreign currencies and in local currency.

An analyst, Babajide Babatunde, said, Broadly, the CBN has three basic objectives which include the management of FX, the management of interest rates, and also the management of inflation. These three things are inter-related, and there is a way one element that drives the other. One of the key ways of managing inflation is through interest rates as the CBN has done. Looking at the power of the CBN, they are doing what they should do, which is controlling the money supply so that too much money is not running after a few commodities.

‘‘However, I have a reservation about that because inflation in Nigeria seems to be cost-pushed and not the other way around. More of the responsibility lies on the fiscal side. The fiscal side of the government needs to look into policies that provide security so that people can go to their farms and that could increase the local food supply because food inflation is 51% of CPI, and that is half of it.’’

The naira has been devalued twice since June after President Bola Tinubu ended Nigeria’s longstanding practice of fixing the exchange rate, alongside other reforms to lure foreign money and boost the economy.

Chief economist for Africa and the Middle East at Standard Chartered, Razia Khan, said she sees the naira ending 2024 in a N1,200 to N1,300 per dollar range.

“In more benign conditions, we could test even N1,100 to a dollar or lower. Some of the forex backlogs have been cleared, monetary policy has been tightened and the transmission mechanism of policy is more effective,” he stressed.

That optimism is buoyed by a series of measures to support the currency, including a massive 400 basis point increase in interest rates by the central bank last month to 22.75 percent, with more tightening expected when its policymakers meet again in late March.

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