The Central Bank of Nigeria joined a growing list of emerging markets that are counting on digital money to cut transaction costs and boost participation in the mainstream and global financial system.
As President Muhammad Buhari declared, Nigeria has become the first country in Africa, and one of the first in the world to introduce a digital currency to her citizens. But all of this notwithstanding, Nigeria has a major problem in how to keep the NAIRA stable.
As we all know the exchange rate in Nigeria is the amount of Naira that is exchanged for a unit of a target foreign currency. The Naira is certainly not strong. There is no argument there. That’s not the problem. The problem is that the Naira is unstable and suffers from poor demand because of several militating factors, including weak domestic production of tradable goods, insecurity and an insatiable demand for foreign goods. In general no one is really sure how to truly value the Naira. Is the currency really overvalued? And how do we know by how much it is overvalued?
As conditions become more treacherous people, investors and citizens are feeling more insecure. So the attitude today of foreign direct investors, portfolio investors, and citizens is that of being increasingly concerned about the fortunes of the Naira. The persistent slide in the currency added to other insecurity issues that are spooking the country are a cause for action to be taken.
As we have said, the real reason for the slide in the value of the Naira is the apparent inability of the nation to produce tradable goods. The industrial sector is still weak, contributing well under 30 percent to GDP, compared to over 40 percent for similar nations to Nigeria like Indonesia and many other emerging market countries. The Central Bank has been left alone to defend the Naira.
Some people speak of a gyration in the value of the Naira. I don’t see a gyration. What I see is a slide in the value of the Naira as the foreign exchange rate has simply roared upward since 1999 when it was correctly released from under control. Notice that the economy in growing, between 2000 and 2009 at well over an average of 8 percent literally cheered the liberation of the Naira. Indeed in the history of Nigeria, the period from 2000 to 2009 is recorded as the best in economic growth and performance.
So here is the question. Should the Naira be devalued? By the way, I don’t believe we have to wait until there is enough production of tradable goods to devalue the Naira. Certainly with political will and catalytic governance, a devaluation can trigger production. I will soon do a more robust discussion on a possible Naira devaluation. For now let me just state that only a very bold and courageous government or Central Bank of Nigerian will insist on a Naira devaluation at this time. And it is not because it is a bad idea but because there are many other factors to consider.