The naira is fast becoming a junk currency. The British pound is heading to N1600 at the parallel market and may be exchanged for N2000 before the end of December. The Nigerian currency failure is the highest in the world in the past six months. If 65% of Nigerians, representing about 135 million, were multidimensionally poor when the rate of dollar to naira was 1$ to N422, now with the rapid collapse of the naira to about N1200 to 1$, the number of Nigerians that would be multidimensionally poor may be heading to 200 million by 2024 because the relationship between currency failures and poverty index is very linear.
In a modern economy, the strength of a nation is the value of its currency in relation to other baskets of currencies, which is also referred to as purchasing power parity. The value of the local currency compared to other basket of currencies also determines the monetary poverty index in the country. The Nigerian purchasing power parity is among the weakest in the world. President Tinubu’s macroeconomic management may further weaken the purchasing power parity and create more monetary poverty in the country with unsustainable borrowing, expansionary spending, mostly on recurrent expenditures and his preferred market-determined exchange rate. Throughout the 8 years of President Buhari’s administration, the CBN governor, Mr. Emefelle was always at loggerheads with IMF and World Bank for refusing to completely floating the currency and adopt a market-determined exchange rate. Mr. Emefelle understood that adopting a floating exchange rate policy regime would destroy the socioeconomic variables of income, price stability, and purchasing power parity. It was claimed that President Buhari was never in charge of his government. But despite the multiple exchange rate scheme, oil subsidy scam, and oil theft that characterised Buhari’s administration, the Nigerian currency was relatively stabilised against the dollar due to Emefelle’s wits in manoeuvring the market forces, but the CBN governor lacked the strongwill to pursue de-dollarization policies that would have strengthened the Nigerian currency and addressed monetary poverty.
Unlike his predecessor, President Tinubu is practically in charge of his government. Tinubu is not interested in the oil subsidy scam nor in the multiple exchange schemes, and the Tinubu’s administration is gradually improving oil production and sales at the international market which will gradually improve the Nigerian foreign earnings. President Tinubu envisioned a great Nigerian with the passion to improve the socioeconomic index in the country and has entrusted his cabinet to create, pursue, and implement policies that will actualise his vision for the nation. But the Nigerian macroeconomic policy regime is not being managed prudently towards achieving Tinubu’s vision for the country. My initial assessment of the Tinubu’s cabinet showed a lack of practicality and creative ideas and some of the cabinet may be underperforming the president’s vision.
The Ministry of Finance ought to have initiated policies that drastically reduce the cost of governance to save the naira from becoming a junk currency.
To address the on-going currency crisis and save the naira from further depreciation, Nigeria must drastically reduce the cost of governance. It is not sustainable for Nigeria that is spending about 80% of its internally-generated revenue on debt services to engage in expansionary fiscal spending, primarily on recurrent expenditures. The ministry of finance ought to have initiated and begun to implement policies that reduce the cost of governance to stabilise the fiscal regime. In response to the public outcry against the decision of the National Assembly to purchase luxurious SUVs valued at N140 million for its members, the chairman of the Senate Committee on services accused the Federal Ministers of having more than six luxurious Suvs in their convoys. Nigerian governance costs are among the highest in the world, despite being a low-income where over 65% of its population is experiencing monetary poverty. President Tinubu must show exemplary leadership by drastically reducing the cost of governance in the executive arms of government to save the naira from becoming a junk currency. The ministry of finance must also review the Nigerian international borrowing regime and engage in sustainable borrowing to save the naira from further depreciation. The current spending spree, funded primarily through borrowing from the IMF and World Bank is not sustainable, and if this continue, it would further weaken the macro-economic and micro-economic variables of inflation, price level, income, and purchasing power parity and further increase the monetary-poverty index. The ministry of finance must also coordinate properly with the Federal Committee on Fiscal Policy and Tax Reforms to implement its brilliant ideas aimed at increasing the Nigerian tax to GDP, which is among the lowest in Africa. It is only by increasing the internally generated revenue, reducing the cost of governance, and engaging in sustainable borrowing that the country can achieve macroeconomic stability.
The CBN is yet to create a new monetary policy regime needed to save the naira from further depreciation.
The new CBN governor was appointed about 2 months ago, but the governor has yet to make major changes to the monetary policy regime. The CBN’s primary responsibility is to stabilise price levels and constantly initiate policies to protect the value of the national currency against other baskets of currencies because of the linear relationship between currency failures and monetary poverty. The CBN under the previous administrations in Nigeria till date has failed in this perspective. The initial intervention of the CBN to pay up the outstanding forex backlog of about $10 billion has not produced the desired result as the dollar is officially exchanged for about N900 against the government target of N750 and the dollar is over N1000 at the parallel market. The CBN must review the currency regime to save the naira from becoming a junk currency. The Tinubu favoured market-determined exchange rate regime has caused the decline of the naira by over 50%; it has led to a rising inflation rate, interest rate, and weakened the general consumption. The government will not be able generate the required dollar to maintain a floating currency regime. The ideal policy regime is to peg the currency against the dollar, while the CBN provides dollars for essential goods and services that are critical to price stability and exchange rate stability. The earlier the CBN reviews the monetary policy regime and adopts a peg exchange rate regime, the quicker it prevents the naira from becoming a junk currency. The CBN and the Ministry of Finance also need to pursue de-dollarization policy by initiating currency swaps with the Nigerian top trading partners as some of the medium term solutions to the currency crisis.
The only solution to addressing the currency and inflationary crises in Nigeria is to reduce the cost of governance by 30%.
Finally, without engaging in capital control, Nigeria may not achieve economic sustainability. There is no other solution President Tinubu has to save the naira; no international support from any foreign government can save the naira from becoming a junk currency; and there is no policy recommendation from the IMF or World Bank that can substitute reducing the cost of governance to save the naira from becoming a junk currency. Dollarization is one of the leading causes of macroeconomic misalignment in most countries in the world, so every country needs a sufficient supply of the dollar to stabilise the macroeconomic system. That’s why the “begging thy neighbour” foreign policy of President Tinubu that took the President to the UAE and Saudi Arabia to solicit liquidity support for the Nigerian economy may not produce any meaningful result other than reducing the cost of governance to address the Nigerian macroeconomic crisis. The President Tinubu-led administration must reduce the cost of governance by 30% to save the naira from becoming a junk currency, stabilize the macroeconomic system and create inclusive growth that will address the poverty index.
By Festus Tokunbo, Email: festus@ayomipo2022@my.ntu.ac.uk
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