The implications of Naira’s unprecedented rally

Unprecedented, yes! Never has the Naira made such a comeback against global currencies – especially the US Dollar – as it has recently. Even Bloomberg and other financial news sites called it “world-beating”. The last time the Naira ever made some recovery from the one-way devaluation was the upshot of our dalliance with the Structural Adjustment Programme (SAP) of the late 1980s. It was only in August 2007, with crude oil selling at all-time-highs of $140 per barrel, and with our reserves nudging $62 billion, that the Naira rallied from N127=$1 to N117=$1 before losing grounds to N130=$1 and above in December of the same year as the oil boom of that era ended.

Many Nigerians harbour the belief that whatever goes up never comes down. It is this fatalistic belief that things will never get better for Nigeria that the current reality has destroyed. I know a few folks will believe the current 30-year high inflation could never trend down as well just as some have made bets on the Naira never to get to this point. I will describe the kind of losses those who have positioned against the Naira are making now presently, but I wager that when our inflation starts to drop in no distant time, the correction will be equally swift, in leaps and bounds, as the economy recovers fast.

What we have also seen is that many bogeymen have held and may still hold our economy to ransom in some respects. But due to the honesty of current economic managers whom President Bola Tinubu has given unfettered authority to do their jobs dispassionately, we are seeing an era of ghostbusting. In the case of the Naira, the moment the Central Bank of Nigeria stood up to the activities of Binance and other funny crypto traders who were running rings around us, the game was up. Nigeria has captured two executives of that global company, and we seem to have good grounds to prosecute, hence one of them would rather be a fugitive from the law. Nigeria is the 20th country to ban the activities of Binance.

Recall my opinion in the last administration when the then Vice President tried to push cryptocurrencies into our mainstream banking system. I had sounded vehement then, but I’m now proven right, that a sane nation cannot normalise the activities of often faceless financial renegades who have set out to destroy the financial system as it is. Well, there is nothing wrong with change, but when the new system being introduced is opaque, amenable to frauds and illegal businessmen like money launderers, drug dealers, corrupt politicians, child traffickers, and other patrons of the dark web (the chief customers of cryptocurrency), one needs to be wary. It does not matter that our young folks bet on crypto prices. The fundamentals are simply not there.

The final straw, in my books, was President Tinubu’s ability to move against black market traders. Bureaux de Change had morphed with black marketers and lost their sense of identity as part of the legitimate, official market. Everybody was behaving as they liked. I begged President Buhari in several articles before he left the government, to please clean up that segment, which had grown too large. He was rather catatonic. This was my biggest fear, especially given the ease with which action against illegal street trading of foreign currencies could be used politically. But between the CBN, EFCC and NSA, they successfully moved against these guys and now, we have been reset to something better than 1990 when those guys were happy to make thin margins between official and unofficial rates. Today, one can access the US Dollar and other currencies cheaper in the banks than on the streets. This is a sheer miracle!

The sacking of 4,173 BDCs and the engagement of the remaining 1,588 in biweekly interventions at reduced rates is something I had always prayed for. I believe that in time, the numbers will go down even further, as these institutions are encouraged to merge or recapitalise just as the banks. When that happens, the remaining players will be able to handle much larger volumes through these interventions, and they may also be able to expand their businesses to local and foreign remittances – including those coming from Nigeria’s burgeoning diasporans. Today, chances are that people who intend to send money home are now going through official channels rather than unofficial ones. They always hunt for higher rates. What a coup! Kudos to Mr Cardoso and his team for the yeoman’s job that they are doing presently.

There are broader implications, however, for the current rally – which many are now predicting will take Naira to N800=$1. Some outliers are even saying N500. I watch in amusement as some of those who joined the bandwagon to pronounce a death knell on the Naira are now aligning fast and making positive predictions. Those who had questioned the credentials of Mr Cardoso when he was appointed – saying he is not an academic and whatnot – are now singing Hossana! That is human nature for you.

Other implications are:

1. Economic orthodoxy defied: Thinking for ourselves is what works – As has been widely acknowledged, this rally was not predicted by anyone. Economic orthodoxy had us convinced that the free-floating of the naira without any interference or even any alternative perspective that could help our peculiar situation was the way forward. What the CBN did this time is to think for Nigeria. This instance has shown that at all times, we should take a little time out to think for ourselves and isolate peculiar variables that could help to solve our peculiar problems.
2. Big losses for speculators, including those in grains: Some folks who betted against Nigeria have now made serious losses. There are Nigerians who swore that it was over for this country. And indeed, it looked very dicey and catastrophic at some point. These same people were ready to trade the Naira down to N5,000=$1 where possible. But now they are met with this shock. Some rich Nigerians also bought grains and hoarded them away so they could sell them for good dollars. These grains are likely to be sold at losses as their strategy blows up in their face. This coming fire sale will also drive down inflation as excess grains make it into the markets.
3. Boom for foreign portfolio investors: Of course, with the monetary policy rate at 24.75% with prospects of rising further, and several T-bills issuances paying rates in the 20s, the aim of attracting portfolio investments is paying off. A stronger currency works for investors as well, as their biggest nightmare is an erosion in the value of their Naira when investments are liquidated. However, I know that the core focus of the government is not to attract too much hot money
4. Implications for inflation: In many circles, there is the expectation of a tapering of inflation due to the strengthening of the Naira. After all, some times in the recent past, when retailers increased prices, they blamed their actions on the falling Naira. Even the Federal Competition and Consumer Protection Commission (FCCPC) has picked up the gauntlet, going after the practice of price gouging, unfair competition, and exploitation of consumers. This is the way to go. My prediction is that when inflation starts to drop, it will drop like a rock. I am in the vanguard of saying we should not sit around waiting to simply fulfil the mediocre predictions about us from the multilateral agencies. Nigeria can achieve 15% inflation by the end of 2024, and not 24% by 2026. We know our challenges and should set our own goals.
5. Implications for economic (GDP) growth: There was a time in the recent past when some opposition members mocked Nigeria for the fall in the Dollar value of our GDP. That was when Naira fell to almost N2,000 to the Dollar. Today, with Naira having firmed back to about N1,000=$1, the dollar equivalent of our GDP has climbed and Nigeria may claim back its top spot in Africa. Bravo!
6. Depletion in reserves? Contrary to what opposition members have been tooting, the Central Bank of Nigeria has not used our foreign reserves to defend the Naira. Instead, it has used the same to clear backlogs of forward contracts and to service Nigeria’s debts. The dollars sold to BDCs are indeed very insignificant (about $15 million each cycle), even though the gest is powerful enough to reshape mindsets and send a profound signal to the markets. I don’t think it will be necessary to start liquidating reserves to defend Naira even though that is one of the uses of reserves. Mr Cardoso clarified this at the recent World Bank meeting.
7. Long-term stability of the naira expected: Some folks believe the current actions are temporary and that the Naira will fall back to where it was or even lower. Some of them took loans to bet against the Naira. However, the reality is that having got rid of those who staged a speculative attack on the Naira and gained back control of the forex market, the CBN can keep the current status for the next five years or more. This is very bad news to speculators and the enemies of Nigeria many of whom will go bankrupt. The kind of frugality and integrity surrounding the forex markets right now at CBN is enough firepower to depend on for a long game.
8. Wellbeing of the people: Imports will become less expensive with the strengthened Naira. But lessons have been learnt. Nigerians are now thinking inward with the scare of the last few months. For example, most Nigerians no longer shop abroad. The Dubai ban also had an impact in this area. The average Nigeria has seen a mindset reset in the last few months, going to a year now. The recovery of the Naira translates directly to better living standards for the people.
9. Cessation of cheap exports of Nigerian food/petroleum: When the Naira fell to N1,900, the conversion rate to the CFA was over N3.00. Nigerian food and petrol became too cheap such that our neighbours couldn’t believe their luck. They bought Nigeria’s grains for cheap and petroleum smuggling went up several notches. This is a very significant point, which rendered useless the efforts at subsidy removal. Today, the conversion rate is down to N1.80. This means that Nigerian food and petroleum now cost almost double what they did just a month ago. This way, we can be assured that our food is produced for the benefit of Nigerians and petrol imports here don’t end up elsewhere.
10. Related to 9 above, the Nigerian government no longer has to worry much about paying huge subsidies on electricity and petroleum. The recent hikes in electricity tariffs along some bands is chiefly due to the fall in the value of the Naira. The way it works is that our electricity and petroleum prices are benchmarked to the dollar. The stronger the naira, the more we can tend towards paying commensurate prices for these international goods. The generational problem is that in those sectors – electricity, and petroleum – we have very little in terms of local content. When the Naira falls, the dollar equivalent of what Nigerians pay for these two essential goods falls, leading to pressure for Nigeria to increase prices (in Naira), just to meet up.
11. Pricing assets in USD is no longer fashionable: This will also help assure the medium to long-term stability of the Naira. Companies pricing in US dollars like schools and real estate companies will have found out that they could have stuck with Naira. Subsequently, the demand for Dollars will simmer down and Naira will take prime position in the transaction of business in Nigeria.

There are other implications to the strengthening of the Naira no doubt. Not all of them will be positive. But for one, naysayers have been shamed and those who betted out of spite and some sort of hatred against the Naira and Nigeria have themselves to blame. In my view, we shouldn’t necessarily celebrate for rates to revert to what it was a long time ago. Nigerians need these lessons in frugality and self-reliance. We need to patronise more and more of our own. Local producers need to get more benefits for their efforts. We need to lose that unnecessary sense of abundance and that arrogance that is very Nigerian. We need to learn how to delay gratification and understand that Nigeria is indeed one of the freest, most enjoyable countries in the world where the government bothers nobody. But we cannot continue like there is no need to think for our future and our unborn children. We need to also build from the ground up, for our country is ours to build, cherish, and develop.