$8bn naira subsidy: Beware of forex manipulation

The decision of the Central Bank of Nigeria (CBN) to ‘stabilise’ the naira with $8 billion in recent months sounds like a monetary policy summersault by this government. At the time it initiated the unbelievable devaluation of the naira in 2023 in disregard of a national outcry, the CBN Governor, Olayemi Michael Cardoso, argued that […]

The decision of the Central Bank of Nigeria (CBN) to ‘stabilise’ the naira with $8 billion in recent months sounds like a monetary policy summersault by this government. At the time it initiated the unbelievable devaluation of the naira in 2023 in disregard of a national outcry, the CBN Governor, Olayemi Michael Cardoso, argued that floating the naira would reduce speculative trading in the foreign exchange market.

The CBN governor told Nigerians that “floating the naira, a decision met with considerable public criticism, was necessary to bring the official exchange rate closer to market reality. The disparity between the official and parallel rates had encouraged arbitrage and speculation, eroding trust in the market. Credibility is earned by consistency. The decision to close this gap, while painful in the short term, sent a message to market participants that the CBN was committed to “transparency and sound monetary policy.”

Mr Bismarck Rewane, the Chief Executive Officer (CEO) of Financial Derivatives Company, who revealed the subsidy, praised it but not without caution about its economic implications. Rewane said, “We’re seeing that the naira is strengthening, but with caution. Let’s not be too hasty because it’s going to correct itself. There are many things that are happening: reserves of over $40 billion are coming down. We’ve also borrowed $4 billion in bond issues. When you look at all of that, we’ve almost spent $8 billion to support the naira at the current levels.”

Many Nigerians appreciate the improved value of the Naira against other foreign currencies. In some quarters, it is argued that even at N1,500 to the USD, the local currency may actually be undervalued, as the devaluation of the currency since 2023 has battered the people’s purchasing power and led to a dilemma in the manufacturing sector, whose storage facilities overflow with unsold goods. However, this strategy of stabilising the naira with bonds and from our foreign reserve provides only temporary relief without addressing the underlying economic issues that cause currency depreciation.

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As Rewane noted, the government cannot continue to subsidise the naira for too long. Already, as much as $8 billion, approximately N12 trillion, has been sunk into this monetary measure. What may actually play out is that currency speculators, aware that the government’s intervention is unsustainable, will engage in speculative attacks that will further weaken the naira in the next few weeks when the government may not be able to further subsidise the naira.

Alternatively, the government’s continuous intervention can create a dependency where market participants expect the government to always step in, reducing their incentive to hedge against currency risk. Nigerian politicians may have actively started buying up the subsidised dollars to resell at a higher rate when the government shall be unable to raise such dollars that could support the naira to maintain its current value.

The monetary measure of subsidising the naira may have some immediate impact of making imports cheaper and reducing inflation. Such intervention in the foreign exchange market can signal to investors that the government is committed to maintaining a stable currency, which can boost market confidence. However, using foreign reserves to support the local currency can deplete the reserves, leaving the country vulnerable to future economic shocks. Even if the foreign reserve is depleted, the fund should be channelled into other important economic priorities, such as infrastructure development, education, or healthcare.

We support efforts to stabilise the naira, boost its value, and shore up the purchasing power of Nigerians. However, a superficial or cosmetic measure at achieving that objective may not have an enduring impact. We, therefore, call on the government to embark on fiscal policies that will ultimately bring about reliable and enduring support for the naira.

The government must deliberately support industrial production. Not just the federal government but also the state governments that have benefited from unexpected increases in the monthly allocations from the federation account. It makes more economic sense for the government to invest in industrial production or fund private sector initiatives around industrialisation than to subsidise the naira with a huge sum of N12 trillion in a few months.

The most urgent strategy for strengthening the naira is for the government to take a cue from other countries that have overcome adversities to become prosperous. For instance, over the past few decades, China has become the world’s factory, producing a wide range of goods from electronics to textiles.

The South Korean government’s policies and investments in infrastructure fueled rapid industrial growth. South Korea was transformed from a war-torn country in the 1950s to an industrial powerhouse. South Korea invested heavily in shipbuilding, electronics, and automotive industries, with companies like Samsung and Hyundai leading the charge. Another example is Vietnam, which is emerging as a significant manufacturing hub in Southeast Asia.

Vietnam has attracted foreign investments in the electronics, textiles, and consumer goods industries. The Tinubu government must unveil its industrial policy and strategies and clearly pursue them instead of engaging in cosmetic monetary measures that are deceptive and will be short-lived.