allAfrica.com: Nigeria: The Fallacy of a Stable Naira Rate (Page 1 of 2)

IT may not be an overstatement to observe that possibly over 99% of Nigerians currently hold the view that the rate of the naira has remained stable against the dollar over the last two years or so.

So, the 1% or less of Nigerians who may hold a contrary view on the stability of the naira, must be on the far wrong side of the divide, that is, if we accept the Biblical injunction that majority is the voice of God or even the democratic culture of majority carries the vote.

Thus, it would require a certain degree of courage to fly against the wind of popular opinion and declare that the naira has not truly been stable as perceived by an overwhelming majority.

However, my observation on the stability or otherwise of the naira is not borne out of any unusual level of courage but the result of the uninhibited exercise of the human endowment of commonsense.

I will not even ascribe my confidence on this matter to any specialist knowledge of the subject of exchange rates and monetary economics per se, because these disciplines derive first and foremost from the bedrock ofA rational thinking or simply commonsense in plain language.

But, let us first examine why over 99% of Nigerians maintain that the naira has been stable lately. The records show that the naira rate of exchange against the dollar has hovered around N117-N120/$1 in the last few years.

This is in contrast to an all time high official rate of about N135 and a black market rate which approached N150=$1 previously. Indeed, the disparity between the official and the black market rates induced the widespread financial malfeasance of round tripping, a process whereby bankers bought foreign exchange speculatively at an official rate from the Central Bank, and resold the same dollars at premiums which oftentimes approached N20/$1 in the parallel market! Indeed the profitability of most commercial banks at that time depended largely on the proceeds of forex round tripping.

Today, thankfully, the huge margins are gone and, the difference between the official and black market rates has fallen to around N3/$1, while bank profitability is now largely derived from the constant generosity of the CBN in providing excess cash to the banking sector every month and subsequently borrowing back tens of billions of these same funds from the commercial banks at a cost of about 10% interest per annum!

But that is another story; let us return to the rate of the naira to the dollar. So, if the naira under the current dispensation has remained between N116 - N120 steadily, why should we maintain in this column that the naira rate is only stable optically but in actual fact remains in a state of disequilibrium?

An object or situation may generally be regarded as stable when the forces which induce stability do not change or indeed, if they do change, the rate of change of the component forces cancels out each other so that the object, situation or indeed rate remains steadfast and the same.

If, however, a disparate change exists among the component forces but the subject remains the same as before, then it would be reasonable to conclude that any optical stability that may be apparent can only be artificially contrived.

In other words, the word 'stability' may be a misnomer as the expected change in form or rate as a result of changes in the catalytic components has failed to manifest. So it is with our rate of the naira against the dollar.

Fundamentally, the exchange rate of a currency is a function of demand and supply in a free market. Generally, the more dollars, for example, that we earn, the stronger will be our naira rate against the dollar.

Thus, if our dollar earnings double over time, and yet the naira rate only improves marginally by say 5%, or less, then, of course, we cannot correctly say that the naira rate is in equilibrium even if it remains optically stable.

If the rate continues to be resistant to change and remains the same in spite of increasing or decreasing dollar earnings, then it must be obvious that the prevailing optical rate is contrived and any attempt to ascribe the lack of change of the rate to a liberalized foreign exchange market must be an open attempt to deceive the people!

The records show that the naira exchanged for between N116 - N120/$1 when our foreign reserves was just about $30bn about two years ago.

Apart from the fact that Nigeria's international credit ratings was expected to improve after exiting the controversial Paris Club debt, our foreign reserves have also since doubled to about $60bn, representing a net imports cover of over 36 months against the erstwhile 15 or so months two years ago!

These fundamentals clearly portend a stronger naira but alas, the naira rate has regrettably and unexpectedly remained 'stable' at the old rate of about N120=$1!

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