Mailafia: Over-dollarisation of economy a disaster

Former Deputy Governor of Central Bank of Nigeria (CBN), Obadiah Mailafia.

Former Deputy Governor of Central Bank of Nigeria (CBN), Obadiah Mailafia, told GBENGA SALAU that the country needs to restore confidence in its economic and monetary policies in order to shore up the fortunes of a falling and weak naira.

Many African countries, including those with weak economies, and those that are war-torn or donor-driven have stronger currencies than the naira, which now exchanges for over N350 /$1, why is the naira doing so badly?
The naira, our national legal tender has been experiencing a massive fall for decades now. You would get the perspective as to how deep the fall has been when you realise that in the 1970s, N1 exchanged for US$2, and was at par with the British pounds sterling.

The naira was widely accepted by traders on Liverpool Street, London, as it was in Mecca and Medina. It was the de facto currency of West Africa. Today, nobody wants to touch it with a long pole as it has gown down to as low as N400 for US$1.

The question before us is: ‘Why is our currency performing so low in comparison with those of countries with even lower endowments?’ First, we need to understand what factors shape the value of any national currency. There are several: value of growth and output in the economy; the volume of trade balances; inflation differentials with trading partners; value of foreign direct investment (FDI), as well as the volume of portfolio investments and capital inflows. Others are the magnitude of the national debt; the rate of unemployment in terms of its impact on aggregate demand; political stability or lack of it; general level of confidence in the economy by local and foreign investors; currency speculation by large shadow banking entities such as hedge funds; natural disasters; central bank actions or inactions; and global market factors, including oil and commodity price volatilities.

When you apply these factors to Nigeria, one would better appreciate why the naira has been on a free fall.

How has our dependence on oil for decades worsen our situation?
Our monocultural dependence on oil for over 90 per cent of our foreign earnings has been nothing short of a disaster. Matters have not been helped by issues like geopolitical uncertainties and conflicts by Boko Haram and rampaging Fulani herdsmen militias; over-dollarisation of the economy, as Nigerians lose faith in the future and offload their naira to keep their assets in dollars; massive capital flight in a time of uncertainty and confusion; fear, panic and greed; policy inconsistency and confusion in the foreign exchange markets; lack of transparency with regard to the policy actions of the central monetary authority; and massive speculation on account of all the above by local and foreign speculators. Since 2014, things have been generally down in terms of the economy.

It appears that things got a lot worse in 2015
The nation was on a keg of gunpowder during the presidential elections. There were rumours of arsenals of weapons being created in readiness for war, in the event of the elections turning the other way. Everybody lived in fear. Nigerian commercial domiciliary accounts swelled by a massive US$40 billion. There was feverish capital flight. FDI plummeted.

These events coincided with the global collapse in oil prices. Output fell and workers were massively laid off. Confidence was profoundly undermined. Meanwhile, Boko Haram and the Fulani herdsmen were upping their game. The food sector was affected. Poverty and unemployment worsened. At the same time the new government took months to constitute a cabinet. The latter itself was not particularly inspiring. The CBN did not inspire confidence. There is anecdotal evidence of widespread rent-seeking behaviour in the foreign exchange markets. These are the circumstances that have led us to where we are today.

What then is the way out of this economic crisis?
As to what we need to do, we would have to leave that for another day. Suffice it to say that we need to restore confidence in economic and monetary policies. We need more transparency in the system and bolder actions in stemming the secular downward spiral. For me personally, I find the over-dollarisation of our economy rather unacceptable. We need to restore confidence and pride in our naira. It is not only our national legal tender currency; it is equally a symbol of our statehood and nationhood. The naira can do so much better. We can do so much better. The naira ought to take its place among the international convertible currencies if we stop going about with a Third World mentality.

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