The battered naira | Guardian News Nigeria

The Central Bank of Nigeria (CBN) has recently announced the launch of newly designed N200, N500 and N1,000 banknotes that are of political and economic significance. The move was a bolt from the blue and shocked many, especially politicians who advocate money politics. Those who accumulated naira and dollars for the upcoming elections are biting their fingers.

The move is a tactic against corrupt politicians who have hoarded huge sums of money to buy votes during the 2023 election. By redesigning the naira and releasing it a month before the election, CBN may have played the trump card to thwart all permutations and combinations of politicians pinning their hopes on hoarding the naira. In doing so, the CBN may contribute to the country’s more credible elections in 2023.

But the economic impact is more profound. A dramatic intervention in the fate of the battered Naira could be the straw that breaks the camel’s back. Prior to this, the CBN had made several interventions against the naira in an attempt to boost the currency’s strength, to no avail.

These include implementing floating exchange rates, moving away from pegs, monetary policies that allow transactions with markets, government policies to attract foreign investment, and state purchases of domestic currencies. But Naira is still in free fall.

In order to keep the peg stable, the government must hold large monetary reserves pegged to its currency to control supply and demand changes.

Unfortunately, foreign reserves that enable CBN to defend the naira reportedly fell by 5.47% from $40.5 billion at the end of last year to $38.28 billion on September 29, 2022.

The latest interventions may not have any impact. Before it was launched, it had pushed the Naira to N850/$ on the black market. There are fears that if nothing is done to stop the rapid decline, the naira will cross the N1000 line against the dollar within a few weeks and the crisis will escalate from there. This will bring more crisis to the economy.

Reasons for the naira’s plunge include improper valuation or naira-linked, chronically low growth and inflation. Currency crashes are due to a lack of confidence in the stability or usefulness of money—whether as a store of value or as a medium of exchange. A situation where people are buying and hoarding dollars instead of naira is bad for naira. Confidence in the dollar is higher than confidence in the naira.

The question of whether having a strong currency is beneficial is relevant. There are pros and cons to having a strong currency. Pundits say it depends on the country’s trade balance. Net importers like Nigeria prefer to keep their currencies strong because it makes their imports cheaper, while net exporters like Japan tend to benefit from a weaker currency because it makes their exports more beneficial Can be pictured.

Again, it depends on the productive capacity of the economy. I have said before in this column that no amount of financial engineering or tinkering will strengthen the naira outside of a booming economy driven by industrial and agricultural productivity. Without a strong production base like the 60s, 70s and 80s, the naira has no pillars, so it will continue to fall without anything wedging into it.

Unfortunately, instead of making a concerted effort to develop an aggressive economic reform strategy as the basis for reforming the naira, economic planners have focused on formulating policies to provide temporary remedies for the naira’s predicament. I must be grateful that this country is in a quasi-war state and people’s lives are unbearable due to severe insecurity. Therefore, it is impossible to have a stable and sustainable economic plan that works. We need a stable economic plan to work.

For example, CBN’s Anchored Borrower Program (ABP) aims to provide loans (in kind and in cash) to smallholders to boost agricultural production, create jobs, reduce food import bills, and thereby create economic linkages between smallholders and processors, Focus on increasing agricultural production and ensuring food price stability. This is a commendable intervention that has the ability to shake up the economy by sponsoring agricultural productivity.

But the project has been in trouble since then, because as soon as the project was launched, farmers borrowed money to farm, and bandits, herdsmen and terrorists in the northwest and northeast regions attacked the helpless farmers and destroyed their crops. , leaving farmers frustrated with huge losses. The result was that many farmers were unable to repay their loans, putting the program in limbo. The expected economic benefits from the program have been undone.

One way to strengthen the naira is to increase the terms of trade by increasing the demand for Nigerian exports. This, in turn, will lead to increased export earnings, which will increase the demand for naira and increase the value of the currency. Unfortunately, there is nothing to export except what’s left of the stolen crude. There are no agricultural or industrial exports, so the Naira will not be strong anyway.

Naira’s continued free fall indicates that none of the interventions employed were working. Otherwise, the beleaguered Naira will have some respite, even a minimal one. The latest move has been interpreted by pundits as marking the start of a broader currency census and sweep of dark money. But are these the main problems facing Naira?

Nigeria is an import-dependent economy that requires foreign exchange to function. While there’s nothing wrong with trying to reorient the economy inward, the feat cannot be accomplished overnight with an executive order. A strategic return to agricultural and industrial productivity is the only solution to the Naira chaos. Naira should be supported by the export of industrial and agricultural products to earn foreign exchange. The current import-dependent economy is suicidal.