By Michael Chibuzo
Nigeria is a highly unusual country with a handful of paradoxes, one of which is the misfortune of having, perhaps the largest population of unpatriotic citizens in the world. There is no other country apart from Nigeria where you will find a huge number of people actively praying for bad news to befall their country!
I was drawn to put up this piece by the disturbing commentaries I have seen from many of my fellow countrymen regarding our strengthening national currency especially in the wake of reports showing a dip in our foreign reserves on one hand and the CPI report by the NBS showing the national inflation rate.
The Naira after weeks of plunge caused by largely artificial factors and exploitation of loopholes by cold-hearted speculators, has now rallied so strongly and is poised to trade below N1,000 to the dollar this week. This Naira rally is now a source of sadness to many, including opposition figures and their allies, who are confused and trying to discredit whatever it is that is behind the upsurge.
It is instructive to note that a Chieftain of the Labour Party, Aisha Yesufu is publicly advising Nigerians to buy and hoard dollars and wait for the exchange rate to spike again. Another Chieftain of the Labour Party, Prof. Pat Utomi had earlier gleefully predicted that the dollar would exchange for N10,000 to the dollar. You then begin to wonder if Obi had won the election, will his party turn our national currency into an object of uncontrolled speculation or will they be advising Nigerians to hold their dollars close?
Meanwhile the revelation that our foreign reserves dipped by around $2 billion in 29 days from a high of $34.45 on March 18 to $32.29 billion on April 15 awoke many who were waiting for any little ray of negative reports to chew on loudly. Many of such people started a bizzare and ignorance-filled “We told you so…” narratives, some (including progressives) were even describing the CBN interventions in the FX ecosystem as abracadabra that was not sustainable.
There is also the legitimate concern of many Nigerians on the slow impact of the recent Naira gains on inflation. One would expect that weeks of Naira appreciation would translate to notable reduction in prices of commodities that were rising almost at geometric proportions when the Naira was being battered. In this piece, I will connect the dots between the Naira gains and our foreign reserve fluctuation. I will also address the Naira gain vs inflation concern.
NAIRA APPRECIATION VS FOREIGN RESERVE
The widespread sentiment that our foreign reserve reduced by around $2 billion solely due to CBN’s intervention in the FX market to prop up the Naira is very erroneous to say the least. Let’s look at the reference point of March 18, 2024, where our foreign reserve was at a high of $34.45 billion. Two days later, the CBN announced that it has cleared the verified outstanding FX backlog of $1.3 billion bringing total cleared verified backlogs to just under $5 billion since the new CBN management team came onboard in September, 2023.
This last tranche of the FX backlog didn’t fall from the sky, it came from our reserves. Also, the CBN is the one providing FX for the federal government to service its foreign debt obligations and already, Nigeria has paid its debt service obligations for first quarter of 2024 (January – March) to its creditors. This also came from our foreign reserves. In Q4 2023 (October-December), CBN forked out $943.2 million for external debt service. Even though the DMO is yet to release the figures for Q1 2024, if we do a little extrapolation it will definitely be within the $900 million range.
From the foregoing, it is immediately clear that the combined FX outflow from our reserves for Q1 2024 external debt service and clearing of outstanding FX backlogs by the CBN is in the region of $2.2 billion. This amount alone is enough to consume the dip of $2.16 billion in our reserves that many Nigerians are gleefully trying to pass as a catastrophe. The CBN direct sales of FX to BDCs within this 29-day period definitely does not come close to $1 billion and therefore not the cause of the noticed reduction in our foreign reserves. Let me do a little mathematics to prove this.
CBN’s intervention in the FX market is more of strategic posturing and signaling than brute flooding of the FX market with cheap dollars. CBN in the few occasions it sold FX to BDCs capped the volume it can sell to interested registered BDCs at $10,000. Before the CBN deregistered 4173 BDCs, there were 5690 registered BDCs in Nigeria. After the deregistration, it means we are left with 1,517 registered BDCs. Assuming all the BDCs bought the CBN’s 10,000 dollar package, CBN would have expended only $15.17 million in each round of interventions. This does not even scratch the surface of our foreign reserves.
The appreciation of the Naira is MAINLY not due to any excess liquidity pumped into the FX market by the CBN directly but mostly SIGNALLING and other CHECKPOINTS by way of policy direction that the CBN had put in place over the past couple of months. The artificial bubble that was trying to consume the Naira simply could not cope with the CBN’s ‘detergents’. So, it is incorrect for commentators especially Economic experts to attribute the temporary not-too-significant reduction in our FX reserves to CBN defence of the Naira because CBN was never pumping too much FX into the market.
NAIRA GAIN VS INFLATION
Nigeria, like I said at the beginning is an unusual country. We don’t always obey many laws or principles of economics. The dramatic rise in prices of goods and services that accompanied the artificial plunge in the value of the Naira to the dollar was very unconventional. It is only in Nigeria that prices of goods that had nothing to do with the dollar was rising on a per second basis based on unofficial exchange rate of the dollar in a crypto exchange platform!
With the firming up of the Naira, prices that skyrocketed before naturally, should start coming down with similar speed with which they rose, but that is expecting too much. Many businesses are still watching to see if the Naira will sustain its gains while others are not willing to reduce prices regardless of where the exchange rate is except other factors such as competition and regulation force them to bring down prices. This is where the FG will need to step in to protect consumers and ensure they don’t get exploited.
That notwithstanding, the latest CPI report by the National Bureau of Statistics has shown that prices of goods have started responding to the changing monetary climate. As usual, many commentators failed to spot the part of the CPI report that revealed that inflation increase (both food inflation and headline inflation) slowed down in March. Many were focused on reporting the general increase in the percentage points on a year-on-year basis and missed (possibly deliberately) this crucial indicator. This is the sort of thing that made Atiku Abubakar to praise Argentina’s President, Javier Milei back in January – easing of inflation increase. What this means is that we are most likely to start witnessing an actual fall in the inflation rate as prices of commodities and services come down.
The IMF has already predicted a reduction of Nigeria’s annual inflation to 26% by end of 2024. This prediction is not out of place. Just yesterday, Dangote refinery announced a reduction in the price of its diesel to N1,000 per liter with further price reductions possible in the near future. This alone can drive down prices significantly. For example, cost of moving food and other items will reduce and that will rub off on the prices of these items. Manufacturers who rely heavily on diesel can also heave a sigh of relief and equally pass the relief to their consumers.
NIGERIA’S IMMEDIATE FUTURE BRIGHT
Nigeria has passed through a lot of turbulence in the past couple of months due to the barrage of structural reforms President Bola Ahmed Tinubu is erecting at multiple junctions. Thankfully, the storms are now subsiding, the gloomy landscape is giving way for rays of sunshine. Cardoso is holding the monetary side very firmly and creditably. He has achieved the rare feat of making the unofficial exchange rate lower than the official exchange rate. This singular act, if sustained, will ensure that sanity reigns in the forex market and help the apex Bank achieve one of its goals of ensuring price stability in the economy.
The dip in our foreign reserve is temporary. 2024 will likely see the end of importation of petroleum products. This has huge implications for our balance of trade as well as foreign reserves. Ease of doing business reforms is also getting practical attention with the recent launch of the National Single Window initiative to facilitate trade. A combination of other interventions ongoing across multiple sectors is also positioning Nigeria for a giant economic leap, one that will be difficult for the rest of the world to ignore. It is therefore in the best interest of those who derive joy in seeing Nigeria stutter to change vocation or better still get ready for persistent sadness.