The undulating downward movement of the naira against other foreign currencies has left in its trail, hardship, failing businesses, loss of jobs in its trail, reports SIMEON EBULU,LUCAS AJANAKU, CHIKODI OKEREOCHA, OKWY IROEGBU-CHIKEZIE, COLLINS NWEZE, KELVIN OSA-OKUNBOR, DANIEL ESSIET and OLUWAKEMI DAUDA.
The unstable nature of the naira is a very troubling development for key industry players and will continue to shape and reshape the direction of the nation’s economy and businesses.
The exchange rate of the naira, vis-a-vis other foreign currencies, especially the U.S. dollar, has and remains a source of concern, both for the monetary authority, in this case, the Central Bank of Nigeria (CBN) and the business community, typified by the Organised Private Sector (OPS), and others at large. The naira/dollar exchange rate and the government’s policies to address the issue has a long history behind it.
The Naira was resilient and enduring, one that held sway in the 1970s and early 1980s. It stood shoulder-to-shoulder and in parity with the British Pound sterling and it was stronger in value than the US greenback until the mid-1980s. There was a time you needed less than a naira (in fact 85 kobo) to obtain a dollar. But those days are far gone.
In 1986 during the Structural Adjustment Programme (SAP) era, Nigeria devalued the naira by 100 per cent. That singular action dropped the naira by such a wide margin, and that marked the beginning of the naira slippery journey to its present unstable exchange rate status we are experiencing today.
Nigeria, being an import-dependent country, losses sleep anytime the naira comes under pressure and its value falls against other currencies, the reason being that that singular development can result in a multiplier effect, affecting other sectors of the economy, including the OPS. The current devaluation of the naira that has pushed its value to about N485 to the dollar (it was N500/dollar a few days earlier) has sent cold shivers in the spine of many businesses because of portends serious economic and business implications for many. Firstly, it will raise the cost of production, resulting in inflationary tendency across the board.
The frequency with which the naira exchange value changes makes it difficult for long-term planning, thus denying businesses any benefit of low exchange rate regimes that might have manifested here and there. Besides, it puts the regulatory authority in a difficult position as its various policies and regulations aimed at stabilising the naira, are more often than not, never allowed enough time to be tested for their veracity and resilience.
‘We will be affected as a result of our import dependency’
Lagos Chamber of Commerce & Industry (LCCI) Director-General Dr Muda Yusuf said because the economy is highly importing dependent, the impact of devaluation on the economy and welfare of the citizens is often profound.
He said: “As the naira exchange depreciates prices of goods and services spike. Inflationary pressures erode real incomes, weaken purchasing power, and aggravate poverty. This is a major factor in the current social discontent in the country. We are dealing with a stumbling economy and rising inflation. It is one of the worst things that can happen to any economy,” he added.
However, the silver lining is that a weak currency is good for exports. It makes exports competitive. With the right supportive policies, a weak currency regime would provide a significant boost for export growth, Yusuf said.
Naira may hit N800/dollar
High as the dollar/naira exchange has climbed, there are fears that the tally might climb higher. Going by the persistent free fall of the naira against major foreign currencies especially the dollar, the local currency may crash to as low as N800 to a dollar, Economist and Regional Director, Small Business Academy Africa, Dr Alaba Olusemore, has predicted.
Small Business Academy Africa is largely a not-for-profit organisation that improves business stability by up-scaling the skills of African Small and Medium-scale Enterprise (SME) owners. Dr. Olusemore said unless something is immediately done to address the pervasive insecurity across the country, which has posed a serious hurdle to local production and inflow of foreign investments, the exchange rate may hit N800 to a dollar by month-end.
“The major factor is insecurity which must be addressed to open the floodgate of foreign investment inflow into the country and also encourage local production,” he said, adding that there is no better time than now for various tiers of government to prioritize fiscal discipline.
Naira fall lowest since independence
So far, experts said the downward trend of the currency’s value has not helped the government in its battle against a parallel currency market. Economists and business executive expect the currency to keep falling, raising prices and reducing purchasing power for a country that relies heavily on imports. An Abuja based farmer, Innocent Mokidi, said the devaluation is affecting agriculture because most inputs used in the sector are imported. His words: “The inputs are bought in dollars, when you convert it into naira you realise that the prices are too high.”
A lecturer in the Department of Agric. Extension and Rural Development, Faculty of Agriculture and Forestry, University of Ibadan, Dr Kehinde Adesina Thomas, has been canvassing increased domestic output. This, according to him, will lead to an expansion of agri-business activity.Thomas said farmers face challenges with the increasing devaluation of the naira.
A consultant to the World Bank, Prof Abel Ogunwale, said it may have many benefits. His words: “The impact of currency devaluation as it affects the agricultural sector could be positive and negative depending on how we manage the necessary variables and factors that influence both the devaluation of currency and agricultural in Nigeria. Ogunwale said: “The impact of currency devaluation as it affects the agricultural sector could be positive and negative depending on how we manage the necessary variables and factors that influence both the devaluation of currency and agricultural growth in Nigeria.
He said: “Currency devaluation prescribed for many developing countries are usually expected to generate agricultural growth and stimulate reallocation of resources in favour of export production. Hence any time there is the devaluation of the local currency, there may be growth in export agriculture with a decline in some traditional export crops and expansion on specific non-tradable food crops.”
Impact on aviation
Like in other sectors, businesses in the aviation sector have come under intense pressure on account of fluctuations on the exchange rate as they are forced to cough out more naira to secure dollars for their business. From airlines, ground handling companies, aircraft maintenance centres, aviation fuel suppliers, Bureau de Change operators a weakened naira is beginning to take a huge toll on their operating costs. Aviation in Nigeria is dollar intensive as every cost is charged in the dollar from the maintenance of aircraft, buying of aircraft spares to the training of human capital, however, ticket prices are in Naira and have slumped against the dollar. According to airlines, the CBN has made it impossible through its new policy for airlines to buy and remit dollars to pay for leases, aircraft spares, flight crew trading and sundry obligations.
Investigations reveal that many indigenous carriers are going through tough times to secure foreign exchange to sort out funds required for aircraft spares, aircraft lease rentals, flight crew training, insurance premiums and other obligations. Beside aviation fuel which is imported and sold to airlines in naira, everything that aircraft uses is sourced abroad requiring a foreign exchange.
An operator who pleaded not to named said fluctuations in foreign exchange may soon force many carriers out of business unless the CBN creates a special window for indigenous carriers to access dollars, which he said is causing disruptions in airline operations.
The operator said many airlines that ferried their aircraft offshore for maintenance may have difficulties in bringing them back because the cost has quadrupled on account of the increasing value of the dollar. Besides, aircraft repairs, which cost have become prohibitive, airlines he said are also trapped in the rising dollar quagmire as they are expected to spend more in securing aircraft spares, payment of aircraft leases, often denominated in dollars as well as sending their flight crews abroad for statutory recurrency training.
Aviation ground handling companies, aviation training organisations, regulators and airspace agency, which send their personnel overseas for requisite regulatory training and procurement of operational equipment are also adversely affected by fluctuations in the exchange rate. Worried over the development, Chairman, House of Representatives Committee on Aviation, Nnolim Nnaji urged the Federal Government to create a special window for indigenous carriers to access foreign exchange as part of measures to mitigate the effects of foreign exchange fluctuations on airlines.
He said the weakening value of the naira has already led to a spike in local fares, saying if the situation is not addressed it could have dire consequences for domestic travel and the overall economy.
The committee further suggested that a forex window similar to that offered to foreign airlines be created for the domestic airlines to enable them to access foreign exchange at the official rate. Speaking on the development, former Director-General of Nigeria Civil Aviation Authority (NCAA), Dr Harold Demuren, said that inflation and Forex have affected operations of domestic airlines thus the increase in airfares. The former NCAA boss emphasised that aviation business is dollarised and whatever was charged by operators was based on forex.
Currency fluctuation has a negative impact on telecom sector
The President, Association of Telecoms Companies of Nigeria (ATCON), Ikechukwu Nnamani, said the impact of currency devaluation and unstable forex regimes are terrific on the telecoms sector, saying, most of the equipment used in the sector are denominated in dollars, while cash payment for services is done in local currency.
Nnamani, who is also the Founder/CEO, Medallion Communications Limited, said: “Currency devaluation and exchange rate instability have a negative impact on the telecom industry. While all the revenue generated in the telecom industry is in a local currency, the infrastructure needed to support the service delivery has to be acquired in foreign currency since we don’t have a strong manufacturing industry for telecom equipment.
With currency devaluation, the revenue generated when converted to foreign currency will not be sufficient to make purchases. This will delay the implementation of the much-needed infrastructure to expand the locations of service delivery and also negatively impact the quality of service. “The foreign investment into the telecom industry will also be negatively impacted since the investors will lose money when they covert the business profit from Naira to foreign currency.
Government has to create a programme that guarantees access to foreign currency by telecom operators at the official exchange rate.” His counterpart and Chairman, Association of Licensed Telecoms Companies of Nigeria (ALTON), Gbenga Adebayo, said the impact of currency devaluation and fluctuating exchange rate, is severe on the telecoms sector and expressed serious concern about the development. He said: “The impact is quite severe and will be for the foreseeable future. Maintenance and network upgrade parts are sourced in USD.
Expansion equipment is sourced using dollars. International traffics exchanged with foreign operators are denominated in USD and we can’t increase international call rates corresponding to the devaluation. So we are very concerned as an industry.”
The CEO, Dellyman, a logistics firm, Dare Ojo-Bello, said the impact of the development on the industry is serious because a huge percentage of its cost is in foreign currency while the billing system is in local currency.
“We bill in naira and a huge part of our cost is in dollars. I think that today, well-structured logistics companies are not well compensated.
“There is a limit to what we can adjust price today because of the exchange rate. I think what we have done in the last few weeks is that when the last fuel increase came up, we announced to our customers that prices will go up and I think that today, we have done between 15 and 25 per cent increase.
“Exchange rate fluctuations affect us. I think half of our costs today are foreign costs- the cost of hosting, the cost of developers, the cost of paying for services like Google Map and others,” he said.
Naira a dead currency
An economist and former President, Chartered Institute of Bankers of Nigeria, Okechukwu Unegbu, said the naira’s gain is marginal. He said the naira has not gotten to saturation point, as there is still a lot of pressure in the market for people wanting to sell their dollars. Unegbu said more people now want to offload the dollar and only very few people want to buy because they see the exchange rate as not reflective of market realities. “For me, the naira is now a dead currency, because most people, if they have a choice will have nothing to do with it. The naira is now meant for buying and selling at the local market only.”
President, the Association of Bureaux De Change Operators of Nigeria (ABCON) Alhaji Aminu Gwadabe, said currency speculators pushing the naira to forceful depreciation through their illegal activities will continue to insure losses. Gwadabe, said forex speculators are taking huge risks with their funds, as the CBN has enough financial muscle to defend the naira and close the widening gaps between official and parallel market rates.
Although the naira has tumbled against the dollar at the parallel market, it has remained stable at N379 to a dollar at the official CBN rate. According to Gwadabe, with $35.6 billion foreign reserves, the CBN has what it takes to punish the enemies of the economy forcing the naira to depreciate through speculative activities. According to him, the funding of Bureaux De Change (BDCs) has also helped to deepen the forex market and reduce the level of forex scarcity that always formed the basis for speculative activities.
He said that with the CBN having the needed financial strength to fund the market, the rates will soon converge to save the naira. He said exchange rate unification will further narrow the gap between official and parallel has been canvassed by the International Monetary Fund and the World Bank because it makes for positive transparency, it makes for clarity of direction and drastically reduces speculative demand for the naira.
It’s hell for Importers
Importers and other stakeholders in the maritime sector have expressed deep concern over the devaluation of the naira, as they identified low export and trade deficit as the major factor responsible for the devaluation. They are seeking the government’s subsidies to mitigate their losses. They want the government to give them a palliative.
A maritime analyst and importer, Samson Agbaje said the devaluation will lead to increase in duty payment to the Nigeria Customs Service (NCS) and storage charges by the terminal operators, massive congestion and drop in the volume of importation that will affect the economy more. “What we want the government to do is to give us palliative so that we can continue in business,” he said. The Vice-President, Association of Nigeria Licensed Customs Agents (ANLCA), Dr. Kayode Farinto, said the instability in the exchange rate will make many importers stay away from importation and that imported cargoes would be abandoned at the port.
He said many commercial banks have equally stopped lending money to importers because of the high exchange rate.
“Many importers that are still expecting their Bill of Lading may find it difficult to pay duties and their cargoes will go into demurrage because shipping companies start collecting money immediately the cargo lands at the port,” he said, adding that “many goods are already trapped at the port.”
A member of the Port Consultative Forum, Tolulope Ajayi, said: “Nigeria is a highly import-dependent economy and has an export that is mainly raw material with weak elasticity. This means that devaluation will usurp the living standard of the people because it is not going to increase exports to earn more foreign exchange, but liable to make imports of necessities,” he said.