Free fall of the naira

Kaine Agary

My first degree is in socioeconomics. I started out as a pure economics major but as I advanced in my studies and started taking seminars in economic development I started getting irritated by the phrase, “ceteris paribus”, all other things being equal.

Life is never ceteris paribus and a lot of economic theory is based on ceteris paribus. People do not always act the way that you expect them to act because their behaviour is not only shaped by market forces but by culture, history and politics. When we try to solve a society’s problems based solely on economic theory, we get varied results, not all successful, as we have seen with the International Monetary Fund’s controversial cookie-cutter Structural Adjustment Programmes that have arguably failed in more countries than it has been successful.

Sometime in May, I went to visit a family friend who was a banker for at least 40 years. I was complaining about the exchange rate and confessing to him how I had done a very stupid thing by closing my son’s domiciliary accounts and converting the money to naira investments because I was upset that the accounts were bearing minimal interest. I did this just before the first dive in the value of the naira this year. Now I feel even worse considering what the rate of the naira was last week. Let’s just say that I owe the boy, and you live and learn. At the time, this family friend said to me, “It’s going to get worse.” I did not want to believe him, but someone who has been a banker for as long as he was and had a career spanning public and private banking in America and Nigeria must know what he is talking about. And here we are, from black market exchange rates around N120/N130 to the dollar at the beginning of the year, to N243 last week.

The Central Bank of Nigeria has implemented certain policies restricting access to foreign exchange on the interbank market through which customers get forex at “official” rates (better than the black/parallel market) for approved expenditures. Before now, it would be fair to say that customers had unlimited access to forex through the official window to fund certain approved overseas expenditures and import goods. Both have now been restricted – approved overseas expenditures such as mortgage payments, school fees, credit card and utility bills are limited to US$5,000 (or the equivalent in other foreign currencies). The CBN also released a long list of items that can no longer be funded with forex from the official window. These items include rice, cement, tinned fish, palm kernel oil and other vegetable oils, poultry, processed meats, building materials, soap and cosmetics, and clothes and textiles. The CBN hopes that this will reduce our dependence on imports and spur on the growth of local industries. This is the expectation. In the meantime, all we have is hardship from price increases and pressure on the black market.

I remember a few things from economics classes from 20 odd years ago, but no one needs an economics degree to know the relationship between price, demand and supply. When demand increases and supply remains the same or decreases, price will increase. When demand decreases and there is a supply surplus, price will decrease. Those who have been restricted from accessing the forex window now have to go to the black market. So while the official forex rate is still just below N200 to a dollar, the black market rate is in a free fall, now down to N243 (as of Thursday, July 16, 2015).

I have heard that some parents have had to repatriate their children schooling overseas because of their inability to keep up with the school fees. Traders and international businesses are also in a bind as the changes in policy and the unpredictable changes sometimes take effect in the middle of a transaction.

A friend of mine, whose clientele includes businesses in international trade, is concerned about what this all does for international business transactions, and attracting foreign investment into Nigeria. Investors say that the riskier an investment, the higher the return on investment. Investing or doing business in Nigeria is not for the faint of heart but it can be a very profitable place to do business in, which is why despite the challenges, there are still people who don’t mind dealing with the unpredictability of our policies.

There are businesses that started processing forex purchases through their banks before the new CBN restrictions became effective and are yet to conclude those transactions. It makes for a difficult situation because the cost of that transaction is now much higher than anticipated.

This is a nightmare for those on the demand side of the forex market. One day you think you can afford a transaction, and the next day you cannot. We can only hope that the current hardship will pay off in the end.