Can More Dollar Supply Stabilise the Naira?

Can More Dollar Supply Stabilise the Naira


By Ahmed Adamu

A few days ago, I was interviewed at Vision FM (Katsina) during the  popular live programme “Babban Magana”, and we discussed  the new  Central Bank Nigeria (CBN) policy on Foreign Currency Exchange. I feel compelled to share my thoughts and shed more light on the issues.

We have seen series of policies and interventions by the central bank  since the beginning of the economic crisis in Nigeria, but there is no  significant change and stability in the foreign exchange market yet.  Sometimes, short term positive impacts are noticed, but they are not  sustained. Then, I ask, would this new policy of increasing supply of dollar make any difference in the long term?

Just like before when dollar was subsidised and made available, this  time around too, the increased supply will stimulate some latent  demand for dollar and therefore not make any difference, as the  increased supply of dollar will be surpassed by additional demand for  dollar. Some Nigerians would have ordinarily travelled abroad for  shopping, holiday, luxury, healthcare or education, but they will not  when dollar is not available, but when it is available, they will. So,  additional supply will always create additional demand. So, this will  mean the equilibrium value of Naira will shift to an upper position,  leading to a weaker Naira despite the increase in dollar supply  eventually.

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That is why many of the CBN policies do not achieve its  objectives, and it is not surprising if this new policy of additional  dollar supply to all commercial banks and creating new dollar exchange  outlets will not have positive effects too in the long run.

When dealing with a country like Nigeria, CBN’s policies cannot work without new strategies that will manage foreign currency demand,  because the Nigerian demand for foreign currency is unlimited and its  supply is limited. No matter how much dollar is made available, it  always has its limit, and the demand will always catch up with it.  Foreign currency demand management must therefore complement any forex  policy.

Nigerians’ appetite for foreign products, and poor local  infrastructure especially in health and education sector will never  allow for stability of the Naira. So, instead of subsiding the rich  and middle class to meet their demand for foreign luxury, health and  educational trips, the cost can be channelled towards improving  infrastructure that can meet those demand locally not for the middle  class alone but for the lower classes too. The government should let  the Naira determine its value, but curb the demand for foreign currency.

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No amount of dollar supply will meet Nigerians explicit and latent  demand for dollar, so the only possible measure is the control of its demand. The best strategy is to identify the major causes of demand  for foreign currencies and set targets and strategy for reducing them  to the lowest possible level.

Like in my previous article (X-raying  the current Nigeria’s Economic Challenges: Prospects & Solutions), I  listed the major imported products that needed to be tracked and their  consumption reduced. They include imported refined petroleum,  vehicles, electronic equipment, machines and engines, healthcare,  education, consumables and cloths.

Therefore, this currency instability can be a blessing, because it  will compel us to produce and rely on our local products if we  strategize well. The campaign for local products patronage especially  in healthcare, education, tourism and other consumables should be  emphasised.

The government should not put a ban on any importation of  any product. The best way to ban importation of a product is to create  a competitive alternative for it locally. Creation of these best  alternatives is the only solution, so that Nigeria can prosper without  foreign currency influence. And this is what can make Naira an  international currency, because by then other countries will start  importing Nigerian products.

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Apart from instilling unyielding patriotism, basic infrastructures  like stable electricity, railways, healthcare and education must be  adequately provided to curb importation. I once suggested a five-year  suspension of government sponsored scholarships abroad, and use the  savings to build a world class standard university locally that will  not only meet Nigerians demand for high quality education, but those  of foreigners.

Generally, changing the people’s culture and improving  local capacity is the way to go, because, the problem with the Naira  is not the Naira itself but the people that spend the Naira and the  weak economy.

 

Dr. Ahmed Adamu, is a Petroleum Economist and Development Expert at  the Umaru Musa Yar’adua University, Katsina. He can be reached on 08034458189.

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