How politicians’ dollar demand devalues the naira

Despite sustained measures to defend the naira, the currency has been depreciating at a high rate. Now it is N156 against the dollar. What might be responsible for this steady fall?

Since the beginning of this month, demand for foreign exchange has been very alarming. Between March 1, 2011 and Wednesday, 23 March, the Central Bank of Nigeria (CBN) has been intervening with an average of N325 million daily, thereby putting more pressure on the fragile naira.

So far, the apex bank has pumped into the market over $2.9 billion at the official Wholesale Dutch Auction System (WDAS) window. This is far higher than $2.25 billion traded in January. $1.7 billion was traded in February. In January, an average of $281 million was traded per session while $242 million was traded in February. With the volatility at breath-taking level, Nigerian naira has been depreciating at high a rate against the dollar.

In January, a naira to a dollar was N154 and this was sustained till middle of March when demand plummeted and the naira crumbled to N156 against $1. CBN on its part, in a bid to further strengthen the naira and neutralize the effect of increase in government spending as well as curb inflation, had at its Monetary Policy Committee (MPC) meeting last Tuesday, raised the Monetary Policy Rate (MPR), interest rate to 7.5 percent.

Pre-liquidating of the dollar

Analysts said with last Tuesday’s tightening of monetary policy, the cost of borrowing should reduce pressure on the exchange rate. They believe that more companies are pre-liquidating their dollar obligations ahead of maturity because of the uncertainty ahead of the April elections and this, they said, is putting further pressure on the naira, a dealer in Lagos explained, asking not to be named. “The interest rate hike coupled with the rising stock of foreign reserves should reduce pressure on the foreign exchange market within the next few days,” the dealer noted.

Politicians’ demand pressure

However, a bureau de-change operator based in Abuja who wouldn’t want his name mentioned for certain reasons, attributed the slide in the value of the naira to on-going political activities. “Politicians are killing the Nigerian economy. They are contributing to the free fall in value of the naira. The demand pressure on dollars from the politicians far outstrips supply. I operate a bureau de-change and I know what I am saying. The demand for dollars by the politicians is too high,” he said.

He explained, “Of course, I stand to be corrected; the dollars are for bribes because it is easy to carry huge sums of money in dollar bills rather than carry millions of naira in big bags or brief cases. For instance, I can carry $10,000 in my wallet. That is N1.5 million. That could be the possible reason why politicians have besieged BDCs to buy foreign currencies – bribery and corruption.”

Heavy subsidy

According to him, “another possible reason why the naira is falling is the heavy subsidy on petroleum products. For instance, Kerosene lands in Nigeria at N120 per litre yet government sells it for N50 per litre so the difference is borne by government.

“Agreed that the prices of oil have risen significantly on the international community, but the increase is not impacting on our reserves. The money is still being depleted by government to fund campaigns and the political process,” he noted. “We have been reading how aspirants have been spending huge sums chattering aircraft, helicopters and more for campaigns. They are paying in hard currency and that puts severe pressure on Nigeria,” he said.

“I can tell you categorically that the demand for the dollar since the campaigns began is over 100 percent. If not for bribery, what do they need dollars for? What are they importing? What business are they doing?” he asked.

Demand, supply forces

Frank Ogiemien is of Partnership Investment Plc. On his part, he said, the political situation in the country has a little impact on the naira.

According to him, the naira is responding to demand and supply forces, he explained, “The rise is an indication that we still depend heavily on imported goods and services. Up till now, the CBN does a lot to regulate the exchange rate; so the N157 is not the highest the rate could get to. The political situation has little impact on the rate in that with a calm political and social environment, our GDP would go up thereby strengthening the naira.”

He said, “the CBN will not devalue the naira; I see it getting the money deposit banks to increase lending to real the sector so that our dependence on foreign items can be mitigated. This will reduce the pressure on the naira.”

The International Monetary Fund (IMF) had concluded its last article 4 consultation with the federal government on February, 11, 2011 and released its report on February 17 and questioned the wisdom of continuation of “fiscal stimulus” in spite of solid GDP performance and high inflation.

The Fund made some critical statements about Nigerian economic management that despite world oil prices in excess of the budget benchmark price, the government spent all current oil revenues and drew on savings in the Excess Crude Account, despite high inflation. The CBN reduced the rate on its standing deposit facility in response to pressures on the currency and sold reserves rather than raise interest rates or let the exchange rate depreciate.

IMF however asked the apex regulatory body to devalue the naira. But in response, the CBN goverGor, Sanusi Lamido Sanusi said government would not devalue its currency.

Devaluation may be answer

But, Opeyemi Agbaje, Chief Executive Officer (CEO), Resources and Trust Company Limited, a strategy, policy and business advisory group said in spite of the CBN governor’s emotional position on the exchange rate, it is clear that the naira is under pressure and something has to give.

“The rising demand structure for foreign exchange suggests most businesses expect the naira to depreciate and are taking a position against the naira. It is either we beef up foreign exchange reserves, slow demand through higher interest rates or devalue the naira! The political risk associated with elections may be a contributory factor, but the dominant factor is the depletion in foreign reserves and rising spending may be the real drivers,” Agbaje explained.

Unbridled imports

Managing Director, CRC Credit Bureau, Tunde Popoola said unless federal government tackles the issue of poor production, the nation will continue to have hike in exchange rate. “Nigeria being a mono economy is prone to fluctuations in exchange rate. We need to move from our mono-cultural economy, diversify the economy and produce for export—it is when you produce for export that you can have enough foreign exchange to cushion the effect of inflation,” Popoola stated.

He added, “There must be practical frame work on how the economy will be driven by export. We need to control what we bring into the country. Unless we do that, we cannot control the rise in exchange rate. It is subject to demand and supply and if demand for import is high there is tendency for the rise.”