HOW TO FIX THE NAIRA.part 1

Nations of the world place immense significance on the quality of their sustainable economic growth and the welfare of their people.Forex market however as the most important market in an economy determines the underlying health of that economy.In this piece,the blogger ibikunle laniyan critically examines the fundamental framework to actualise the dream of macroeconomic stability.He believes the currency is the best barometer or alibi of good or bad economy and nigeria is not an exception and proffer solution on how to fix naira.enjoy the reading. We cannot be wrong to contendthat development in any economybegins with theforex market and ends with it.However,like in other climes,we must devise every portable measure badly needed to strengthen the national currency and it is a prime obligation of the central banks worldwide.The forex market mirrors the underlying health of the national economy and the barometer of its welfare.We examine the fundamental health of that welfare over the last 30 to 40years.There had been huge pressure on the naira during the period.This precarious situation grew worse since return to democracy and particularly currency woe was doubled with the emergence of Goodluck Jonathan regime and agravated undeniably with the buhari regime,whereon it defied all plausible solution.Despite the bold and lacklastre initiatives by the central bank,the persistent slides of the naira against the dollar in the forex market did not stop for once.The question is:How do we fix the naira?It seems that there is no solution in sight.Recomendations were made countless times to devalue naira Did you hear me right?Yes,basically to devalue the naira and check unbriddled abuses in the black market and close the gap for arbitraging opportunities.Such recommendations were resisted by the ministry of finance and central bank.Unfortunately the apex bank in her weak defense later carved in and given the nightmare of demand pressure in the forex market,was castrated to undertake the fruitless exercise.Ever since the huge gap between the official and paralel market had widened like the coast and davy jones locker.In 2002 one of the house committees made recommendation that the naira be devalued to 127naira per 1dollar to check the abuses associated with unduly large parallel market premium and why did the apex bank later carve in to accept this option?Because it was clear there was no rescue plan yet in sight or respite for the naira.Though this paper goes beyond the point to stress the need for fiscal discipline and political will to stabilise the exchange rate but so much more poised to propose a new macroeconomic model and abandon volatility of western shocktherapy. This is particularly significant giving that in general terms,the exchange rate reflects underlying economic health.Permit me to rephrase Baroness Margaret Thatcher who says if you want to destroy a nation first destroy its currency.Prior to 1918 German mark exchanged for 4.2 marks for the dollars and after the war it exchanged for 4.2trillion german marks to the dollars in 1923 from 200marks in 1921.They adopted strange program between 1919 to 1923.Why did it degenerate so much to make mark the currency of the pride of europe a horror in the international community?It was because they adopted German SAP and she became the first country to adopt the programme later adopted by over 100 countries.Whoever advised IBB in the economic mayhem of the late 80s ought to have been exterminated long ago at the guillotine withouut impunity. the causative factors mainly economic fundamentals such as inflationary expectation,inflation rates,market forces,balance of payment position,external reserve adequacy,market psychology,forex market earnings and a host of other factors are at work.These are in line with macroeconomic tradition but before i highlight the changing macroeconomic order and new model,let me quickly review the following factors at work behind the woe of the naira in the forex market.They include but not limited to undue fiscal expansion funded by hot money or high powered money;political incertitude,industrial and social unrest;financial malpractices such as smuggling overinvoicing and underinvoicing,roundtripping,freefunding;liquidity overhang;renewed inflationary expectation and soaring rates;rapid monetisation of petrodollar earnings aggravated by excess liquidity in the system especially during electoral year;structural factors including high import dependent nature,non oil stagnation and monoeconomic structure of petrodollar earnings. Since SAP emerged in september 1986,forex market is influenced by market forces and empirical evidences glaringly indicates the failure of fixing the exchange rate to quote victor odozi by'administrative fiat'.Various options proposed since year 2002grewfourfold with no panacea,as shown below:Fixing the exchange rate by fiat and far below market rate and otherwise to mean revaluation of the naira;Massive devaluation of the currency bringing official rates close to the parallel rate;Avert further decline of official rate and if possible outlaw or decree blackmarket out of existence;then forex market convergence or unification process.Obviously,this elaborate policy framework would depreciate official rate to unsustainable level and not consistent with purchasing power parity ideal framework,indication inducing depreciation of free market rates in various segments through the instrumentality of demand management modules and supply side measures. To be candid,it is a common knowledge the devaluation of the naira had contributed untold hardship to the naira.It started in 1986 under IBB's SAP Program,a free market led reform initiative proposed by bretton woods institutions such as the IMF and World bank recommendation dancing to the criticism that the naira was overvalued.Subject to the goals of revamping the economy,first tier foreign exchange market as an aspect of Structural adjustment products,to increase local production was introduced in september 26 in 1986,and shockingly in the first bidding session naira was down 66%.In october 9,1986 and january 19,1987,when new rules emerged and banks started to sell forex to each other,in addittional to CBN intervention that was begun in january 29,with the intervention by central bank growing from $5m weekly $75m,did not stop naira from sliding.lnfact it declined to a peak 69.14% against the dollar and 67.39%against the pounds.With only two bidding sessions naira was down to only worth 19.67cents of american dollars.When it ended at 4.6174 or 22 cents even central bank officials were aghast at their trials and error and screamed at the framework that was thought would correct the overvalued naira.There were all clueless about the wherewithal or coherent framework to float the naira.Contrary to the advice and foresight of professor Sam Aluko that if SFEM and its godfather SAP was sacked naira would pick up the following,the likes of Dr Chu Okongwu,chief olu fale,Dr kalu idika kalu,some bank chiefs and many others were fond of the new valuation system and full of praises of what was happening in the fields of agriculture,capital inflow,nonoil exports and local innovation. We thought by 1999 it would have stop or nipped in the bud and a new approach adopted but rather it had become the most prominent method of fixing the unfixable naira.There was so much dollar auction for the importation of mordern technology that was never seen nor ever realised or used.They bought dollar at 22naira and sold at 80naira in open market,in the 90s. Infact,with OBJ administration,citing the above factors,democracy was under threat and naira plummeted and same method was suggested and freefall persisted.Professor Adetiloye in the press conference to the NUJ at Ado Ekiti at Ekiti state suggested on May 14,2018,the revaluation of the naira to make naira exchange for 750kobo in current exchange rate of present day parlance to the dollar and denominate currency in kobo rather than in naira,something Henry boyo had earlier commented.In other words,100naira,200naira,500 and 1,000naira should be printed in kobo and not naira.Two of them have made the best proposition.That old denomination should be spent until naira goes out of circulation and the naira be exchanged to 7.50kobo to the dollar.Likewise,Henry Boyo in one of his essays'Naira:Redesign,redenomination or Revaluation?He explains the redenomination is the simple process of changing the nominal value of a currency moving the decimal point.That is the naira is restructured by two decimal points replacing 1,000naira as the richest currency profile with 10naira denomination and 100naira notes be replaced by 1naira and 50naira be replaced by 50kobo and 10naira be replaced with kobo.This will grow the purchasing power of the coin. The main problem now to avoid is inflation.He cited the Ghanaian cedis that was pegged to $1.2 to 1 cedis and later plummeted when annual inflation grew by 15% in 5years to 1.8:1dollars.The possibility and the success of the proposition is based on political will to fight corruption.And it can be very hard to fight corruption,when you fight corruption to requote Soyinka,corruption will fight back. Devaluation has plummeted living standard of the citizenry beyond deplorable limit including heavily retarded purchasing power,weakened import and skyrocketed inflation.It makes interest payment on international debt costly with debts denominated in foreign currency.Is it not madness to devalue naira from 0.75k in 1980 to the current rate of $1:750naira?National crude oil are bought at auction or give away price and devaluation has only benefited the balance sheet of banks,lined the pockets of directors and their cronies. Moreover Professor Bello of financial management,Pebble Hills University,Delaware,USA proposed a 10point agenda to revalue in his essay'Naira Revaluation:The Bulkwark for Rapid Development?published in Tribuneonline.In the essay,he proposed the following:1.Abolish the foreign exchange market.2.Revalue the naira.3.If revaluation work,peg it $1:1naira.4.the exercise should stream down with positive growth in the consumer price index.5.The return of price control board unit of the ministry of trade,industries and investment.6.The marketing of forex through banks at monetary policy rate(MPR) approved at MPR committee and banks deducting only administrative charges.7.Forex market be banned outright.8.Forex traffickers such as BDC banned everywhere.9.EFCC Investigate and arrest them.10.Banks should give preference to manufacturers before any other clients.Most of these propositions and virtually all might not work without political will and market discipline to fight corruption.One insurmountable challenge the issue of currency counterfeiting particularly worrying and wasnt peculiar to our times.The question is:Why didnt they make similar suggestion to OBJ by the Adetiloye team that was responsible for the creation of four denominations.Why did theyfail theintroduction of kobo coin later suggested in the proposition by two luminaries instead of creating of unwieldy naira notes?Yet the team oversees the Obj government over the creation of 100,200,50 0 and 1,000naira notes.Netherless,i found the answer in one of Tope Fasua's essays entitled'Naira Redesign And Value:What CBN Must do urgently?That'in 1991,50naira was created,100naira,in 1999,2000 and the following year came the emergence of 200n and 500n. respectively.Tope noted by 2008 when CBN created 1,000notes,they had a fruitless exercise over the reintroduction of coins.This was good to control inflation,market forces and reduce currency management cost to the barest minimum.No action was taken.Currency counterfeiting was nothing new,that it had been with us since 1968 whereas british pound was created 9years after currency was created and a year after the british left us.