Naira Valuation Crisis has rocked the Tinubu government despite initial radical financial reforms. The Tinubu government started with an intense focus on the Central Bank of Nigeria (CBN) and the entire Nigerian monetary operation, but little did the current government understand that the country’s financial woes were only being compounded. As the Nigerian Department of State Security is currently grilling the former governor of the Central Bank of Nigeria, one would think there would be a solution to the Nigerian Naira Valuation Crisis; however, the problem seems to be compounded by the current reality of Nigerian Petrol subsidy removal.
As the Naira Valuation Crisis continues, what does one need to Know?
- Naira has earlier been Floated; however, Subsidized.
The recent bruhaha of the Tinubu regime’s floating of the naira makes one ask whether the naira valuation was fixed earlier on or subsidized. Understanding the difference between fixed, floated, and subsidized naira could help us better understand the direction of the current monetary policies and where we are headed. Looking at the naira earlier from a close range, one may understand that the naira had been subsidized and for long had been floated; while the official exchange channel maintained an outlook of a fixed currency, the greater number of forex demands fell outside the official channel, these currency exchange transactions usually occur in the black-market where bureau the change merchants allows the market forces of the demand and supply to take effects. This makes one wonder what is the real exchange rate; these parallel exchange channels that are a result of the subsidized valuation system further complicated the Naira Valuation Crisis.
With the way things happen in Nigeria, it becomes tough to relate to the situation accurately as the line between contexts blurs out; while the notion recently regarding the Naira Valuation is that the naira has been recently floated, the reality was that the naira had been floated a long time ago; the difference is that foreign currencies were officially subsidized for some windows of the economy, terminologies matter a lot in understanding reality; despite a seemingly fixed outlook in the official exchange, more unofficial transactions that do not use the official exchange rate goes on, this implies that the exchange rate was only subsidized either for some select essential products or some privileged individuals. This earlier practice and its resulting parallel exchange network still exist today as Nigeria’s black-market currency exchange market thrives.
2. The Petrol Subsidy Removal and subsequent Deregulation further heightened the Naira Valuation Crisis.
The removal of the petrol subsidy and the deregulation of petrol pricing has increased the stress on the naira when paired with other currencies. Refined petrol products are some of the largest imports of Nigeria; with deregulation, several private businesses acquired the license to import petrol and other refined crude oil products into the country. Most of these importers, for some reason, could not get the USD needed to import these essential products from official channels and rely on the black market. Since Nigeria is largely an importing economy, the demand for forex has become so overwhelming that Niara can no longer withstand the pressure. Unless the Nigerian import reduces, the naira will find it hard to recover from the current Naira Valuation Crisis. The biggest sector that makes huge demand for this forex is refined crude oil products; the first step towards fixing the Naira Valuation Crisis is local refining of crude oil products, especially Premium Motor Spirit (PMS), also known as petrol.
3. Not just the Naira Valuation Crisis will Persist, but other Societal aspects May be Impacted if there is no Serious Intervention
The nation’s money is its value, and when the naira is not stable, it implies the entire Nigerian society is not stable. The naira has been rising and falling several times within a week; it becomes concerning as the gap of rise and fall within a short period could be large, thereby putting investors and society in an unstable value system. A fluid currency in a society that thrives on adaptation is a dangerous reality; as adaptation becomes harder, it makes life tougher; how can one adapt in a society where prices and values are unstable?
One can exchange the USD at N790 today, and the next day, it has already climbed to N900 or even more, while the official channel of the CBN, which maintains that naira exchanges to the USD at about N750, has limited supply to needing importers so the Naira Valuation Crisis has become overwhelming and there should be intervention as quick as possible if possible a state of emergency should be declared on the Naira Valuation Crisis.
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