From Fuel Subsidy To Currency Subsidy? -By Azuka Onwuka

One piece of good news from Nigeria in the past one month is the rapid recovery of Nigeria’s currency, the naira. The naira was rated as the best-performing currency in the world in the last one month, rising rapidly from a low of about 1 USD to N1,900 to about 1 USD to N1,000. That brought some calm into the minds of people.

The naira witnessed unprecedented depreciation from May 2023 when President Bola Tinubu was inaugurated. In 2015 when Muhammadu Buhari (retd.) took over from Dr Goodluck Jonathan as president, one dollar was exchanged in the parallel market for about N220. By the end of his eight years in office in 2023 when Buhari was handing over to Tinubu, the exchange rate had dropped to about N750 for a dollar. Just ten months into the Tinubu presidency, the naira had plunged to about N1,900 – over 150 per cent depreciation.

Immediately the administration of Tinubu came on stream, it took two decisions that it saw as pragmatic and transformational. One was the removal of fuel subsidy. The other was the introduction of the floating of the naira by which the naira would be allowed to compete with other currencies based on market forces. The two actions immediately dealt a big blow to the Nigerian economy, as petrol price went up astronomically from N185 per litre to about N650, while the naira began to depreciate speedily. It was very destabilising for many Nigerians, as there was no change in the salaries or earnings of most people.

Even though the naira has not returned to where it was when Tinubu came into office last year, the recent rally of the naira has been comforting. The speedy depreciation had created fear and uncertainty among Nigerians and foreign investors. The fear was that the naira could eventually plummet to as low as N5,000 to a dollar before the end of the four-year term of Tinubu in  2027. The picture that came to mind was that of some currencies of some countries which depreciated to a frightening low that there were jokes that one needed a wheelbarrow full of cash to buy a bottle of water in such countries. But the recent appreciation of the naira brought some relief.

However, the strengthening of the naira has coincided with the dwindling of Nigeria’s external reserves. As of April 17, 2024, Nigeria’s foreign exchange reserves had lost a total of $2.33 billion in 31 days, dropping from $34.45 billion on March 18, 2024 to $32.12 billion on April 17. The April 17 figure was the lowest the reserves had witnessed in seven years since September 20, 2017, when it stood at $32.08 billion.

This current fall started in mid-March. Before that, the reserves had grown by $1.28 billion between February 5 and March 18, 2024. But since March 18, the foreign reserves have been dipping. For example, between March 18 and March 19, the reserves dropped from $34.45 billion to $34.39 billion. The next day, it fell to $34.32 billion. Two days later, it further dropped to $34.26 billion. The drop was so consistent that in 18 days, the foreign exchange reserves had lost $1.02 billion. Within a month, that figure had almost been doubled to $2.33 billion.

Coincidentally, the depletion of the foreign exchange reserves began to happen shortly after the Central Bank of Nigeria announced its resumption of the sale of foreign exchange to eligible Bureau de Change operators in the country. The CBN had suspended the sale of foreign exchange to BDCs on July 27, 2021. But on February 27 this year, the CBN announced that it would sell foreign exchange worth $20,000 to each eligible BDC in Nigeria, for the purposes of rectifying “the persisting distortions in the retail segment of Nigeria’s foreign exchange market and bridging the widening gap in the exchange rate.”

The CBN sold the foreign exchange to the BDCs at the rate of N1,301 per dollar, with a proviso: “All BDCs are allowed to sell to end-users at a margin not more than one per cent (1%) above the purchase rate from CBN.”

On March 26, the CBN sold the second tranche of foreign exchange to the BDCs, allocating $10,000 per BDC at N1,251 per dollar. On April 8, the CBN allocated $10,000 to each eligible BDC at the rate of N1,101 for each dollar.

The correlation between the time the naira began to appreciate and the time the nation’s foreign exchange reserves began to decrease led many to raise the alarm that it was caused by the pulling of money from the foreign reserves and selling to the BDCs at a lower rate. This was seen as another way of robbing Peter to pay Paul. If Nigeria’s foreign reserves had to be depleted by over $2 billion in one month to achieve the news that Nigeria’s currency was the best-forming currency in the past month, how would it benefit Nigeria in the long run? How long will the CBN dip its hands into the foreign reserves to bolster the naira? How is it different from paying subsidies to importers of refined petrol so that it can be sold at a lower rate to Nigerians, thereby incurring huge national debts? If the CBN stops, what will happen? Will the naira not start depreciating again? How then will the billions of dollars lost so quickly to the BDCs be recouped?

The CBN Governor, Yemi Cardoso, denied the allegation that the foreign reserves were being depleted by “currency subsidy.” He said that the decrease in the nation’s reserves was caused by debt repayments and other standard financial obligations.

National currencies usually strengthen when the economy experiences some positive outcomes like increased production, rise in the volume of exports, drop in inflation, drop in interest rate, etc. But none of such happened in the case of Nigeria, making some people take the explanation of the CBN Governor with a pinch of salt.

Every patriotic Nigerian looks forward to the strengthening of the Nigerian economy, which will manifest in the strengthening of the naira, increase in job opportunities, reduction in crimes, and so on. But it will be good if this occurs through a clear way that can be easily seen and explained, especially one that relates to a positive change in productivity. That is the change that is sustainable and capable of creating positive vibes in the nation.

The seemingly positive news about the naira is not giving most Nigerians the required feeling of equanimity. The fear is that the matter looks like someone using his or her palm to block a water channel. The flow of water may stop for a while. But any time the person gets tired and moves his or her hand out, the water will come bursting through.

There should be long-lasting actions aimed at keeping the naira from speedy depreciation. Increased production and exportation is one trusted way of doing that. Others are political stability, economic stability, security, tourism, etc. For a long-term result regarding the price of the naira, the Federal Government should explore these measures.

• X: @BrandAzuka