Sunday, April 5, 2009

NAIRA - The way forward

We have seen a precipitous drop of the Naira in recent months and the problem it has caused policy makers, manufacturers and the whole economy as a whole.

Let’s take a look back and reflect on why the Naira gained strength in recent years.
The Nigerian economy saw a massive inflow of funds from Nigerians in Diaspora and foreign investors into the equity market. Also crude oil prices at record highs provided enough foreign exchange to meet pent up demand. It was boom time and hence the naira strengthened in the process.

However in the history of the world boom times don’t last forever hence with the onslaught of the global recession, there was a massive capital flight from the capital market, the price of crude oil headed south as global demand went into a tail spin and as with anything else, the naira followed suit heading south in the process.

There was absolutely nothing the Central Bank could do to save the Naira, it had to bow to the currents of market forces or else it would have been carried by the currents itself. Just ask the Russians who tried to defend the ruble. They had their fingers burnt. They spent almost half of their reserves in the defence of the ruble but to no avail. They should have lent from the Japanese. In that respect I want to congratulate Prof Soludo for not standing in the way of a fast moving train.

Having taking a bitter pill, what is the way forward for the Naira? Just as boom times don’t last forever, gloom times to last forever as well. How do we place ourselves in such a way we benefit when the naira is strong and when the naira weak?

There should be a massive investment in the non oil export sector. As governments around world increase there fiscal stimulus, I believe there would be an increase in the price of commodities (softs, precious and base). With a weak Naira and a well developed non oil sector we stand the chance of capitalising on this increase and providing employment for the masses in the country.

Policy measures should also focus on infrastructure development to provide a base for the export sector. It should be the government’s objective to bring down the cost of doing business in Nigeria. In so doing Nigeria will be another India or China as we have the resources (natural and human), good climate and a business friendly populace.

It is imperative that the CBN looks into the cost of borrowing in Nigeria. The current rate is a massive disincentive to doing business in Nigeria. While inflation is falling in most countries which are reflected in the long end of the yield curve, inflation in Nigeria has become a monster that successive governments have not been able to tame. Cost of borrowing will continue to be in double digits until this beast called inflation is tamed. I will discuss ways of taming this beast in another article.

Risk management policies are also lacking in the sale of our most precious foreign exchange earner. While well-informed countries with crude oil as Nigeria were hedging their exposure to price movement at $100.00, Nigeria simply sat on its backside, hands akimbo and did nothing. Buying a Put option would have ensured we still sold crude at $100 while the price of crude fell to $40.00. That is $60.00 per barrel more of revenue or the equivalent of $60m dollars a day!!!

In summary the political will and serious policy measures will see Nigeria navigate successfully this difficult period and put us in a better shape when global demand returns.

Mr Niyi Omidire is a global macro player (currencies, interest rate and commodities)


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