In defence of the naira as CBN fights back, by Adefolarin A Olamilekan
Economists care much about how nations manage five mechanisms around their currency stability, which include devaluation, revaluation, depreciation, appreciation, and redenomination.
For instance, a decrease in a currency’s value relative to other major currency benchmarks is called depreciation (this happened through floating exchange transactions or market forces); likewise, an increase in the currency’s value is called appreciation. On the other hand, altering the face value of a currency without reducing its exchange rate is a redenomination.
Meanwhile, revaluation is the opposite of devaluation, which is a change in the exchange rate making the domestic currency more expensive.
Interestingly, among these mechanisms mentioned, devaluation is largely dreaded. Because this speaks volumes about how a nation’s economy will be competitive in global trading.
What then is devaluation?
Instructively, devaluation is an official lowering of the value of a country’s currency within a fixed or pegged exchange-rate system. This occurred when the monetary authority formally sets a lower exchange rate of the national currency in relation to a foreign reference currency or currency basket. Hence this demonstrates the working of micro and macroeconomics as well as modern monetary policy.
In this case, a monetary authority in our clime that is the Central Bank of Nigeria (CBN) maintains a fixed value of the Naira ready to buy or sell foreign currencies (US Dollar, Pounds Sterling, and others) with the Naira as a domestic currency at a stated rate.
Simply put, currency devaluation is an indication that the CBN through the Deposit Money Bank (DMBs) will buy and sell foreign currency. Although, apart from the earlier monetary system, it determines currency devaluation such as fixed or pegged rates.
Critically, there are also market forces determinant or floating exchange rate systems. This system acts not by CBN monetary action, but rather the will to sell or buy on the foreign exchange market (supply and demand).
Grippingly, we cannot fail to mention that all the foregoing are related in distinct to the concept of inflation. Another is a monetary economic mechanism that monitors the value of the currency in terms of goods and services related to citizens purchasing power.
Expressly, the reasons for the above narrative are based on the recent media reports that the Central Bank of Nigeria (CBN) has devalued the naira to exchange for ₦630 for a dollar. And the reports went viral on social media. The news of naira devaluations came 48 hours after President Bola Ahmed Tinubu announced the plans of the Federal Government to unify the country’s exchange rate to stimulate the economy.
Recall that the Media Trust Group publisher of Daily Trust newspaper first published it as an exclusive report.
However, in a swift reaction, the CBN through its Twitter handle, @cenbank, published a screenshot of Daily Trust’s report, with the words ‘Fake News’ branded on it. Adding that this is the “imagination of the newspaper, and the Investors & Exporters (I&E) window traded at ₦465/$1 on June 1”.
But responding in a statement, Daily Trust said it had evidence of those who bought the dollar at the reported rate and challenged the CBN to provide any facts to the contrary. The CBN had not provided any proof at the time of filing its report.
In what looked like a fight back CBN reminded us of her circular tagged: “Investors’ & Exporters’ FX Window”, dated April 2017. In which the monetary authority explained all about the new window benefit to “boost liquidity in the forex market and ensure timely execution and settlement for eligible transactions.”
Further, the I&E window is described as “the market trading segment for its investors, exporters, and End Users that allows for FX trades to be made at market-determined exchange rate”.
Instructively, on the I&E window, the naira exchange rate within this platform may differ from the CBN official exchange rate of ₦461.6.
Understandably, the I&E window is not for everybody. It is created for players operating on the corridor of investment, importation, and exportation. Accordingly, investors may buy forex from an exporter. In what is simply an insider dealing on the window, two entities may wish to trade and exchange a dollar for naira above the CBN official exchange rate.
Nevertheless, this happens between both parties in the CBN I&E window mechanism. All transactions have no bearing on the CBN official exchange rate.
The question that begs for an answer is why then is the Investors’ & Exporters’ FX Window perpetuating naira devaluation for excess gains, round-tripping, and as an official outpost for illegality amongst its players?
As reported in the media, manufacturers and investors are lamenting that “Nigeria’s currency has been long devalued, according to business leaders from manufacturers to importers who say they have been buying dollars at N630 since the beginning of May”. This, however, is in contrast to the Central Bank of Nigeria’s refuted claims of “falsehoods and destabilising innuendos, reflecting potentially willful ignorance of the said medium as to the workings of the Nigerian Foreign Exchange Market.”
A clear indication of what is happening in the CBN I&E window is a back-door devaluation of the naira to enrich certain elements in the system.
Although having acknowledged that the FX market is sensitive, the platform must not be used to create uncertainty in the system. Nigeria operates a multiple exchange window, with the official rates (N464) trading well below the parallel market rate (N750).
At the same time, devaluation does have its benefits (increasing exports, diminishing trade deficits, and reduced interest payment costs on the due government debts), although with the exception of a developing nation like ours that is struggling with corruption and a dysfunctional economic system.
Devaluation challenges far outweigh its benefits as it bring about expensive imports, causes inflation, stifles FDIs, and long term negative effects on growth.
As it is being insinuated that a 15% devaluation of the Naira is among Tinubu’s earliest priorities, coupled with the government’s determination to remove the petrol subsidy.
What then should be done?
Noteworthy, currency devaluation as a monetary policy tool and mechanism to boost economic growth, especially trade through export is appreciated. Its shortfall and limitations are one priority the Tinubu administration should analyze critically if they decide to roll out such a policy.
Adefolarin A. Olamilekan is a Political Economist. He can be reached via:
Email: adefolarin77@gmail.com. Tel: 08107407870,08073814436
