Naira in Free Fall: How Tinubu and CBN Can Save the Economy

Patrick OdeyAugust 14, 2023

2 minutes read

The naira is plunging to new lows in the foreign exchange markets, reaching a record high of N955 to US$1 on Thursday, and causing panic and anxiety among Nigerians.

The government seems to be distracted by the coup in Niger Republic, while the Central Bank of Nigeria is struggling to stabilise the currency and the economy. President Bola Tinubu and the CBN need to act fast, creatively, and pragmatically to avoid losing control of the situation.

The naira’s decline has been rapid since Tinubu pushed the CBN to merge the exchange rates two months ago. The aim was to achieve a “realistic” rate and eliminate the wide arbitrage gap between official rates and informal market rates. But this has backfired, as the gap has widened from N100/ to almost N200/. The official exchange rate of N767.76/$ is far from reflecting the market reality.

The naira’s fall is not surprising, given the weak supply and artificial demand of forex. The supply is constrained by low non-oil export earnings, while the demand is driven by speculators, hoarders, and money launderers. Politicians, public officials, bandits, kidnappers, and connected contractors are flooding the market with ill-gotten naira, not genuine producers or businesses.

The IMF has warned that the existing “loose fiscal and monetary policies” make it hard for the naira to stabilise. The Economist Intelligence Unit’s forecast of a N1,000/$ rate up till 2027 now seems too optimistic. Things could get worse well before then.

Tinubu must shift from his unfocused, ill-planned, and uncoordinated decisions to strategic, well-planned, and comprehensive economic policies. He urgently needs an economic management team and more economists and technocrats on board than the motley politicians he has nominated as ministers.

To avoid losing control of the naira and hyperinflation, the CBN should take some urgent steps. First, it should fund the forex market for a few weeks to boost supply and confidence. Second, it should restrain the bureaux de change and errant banks from round-tripping and illegal arbitrage. Third, it should collaborate with other regulators and law enforcement agencies to monitor operators and punish infractions and offenders.

An economy battling high unemployment, inflation, production contraction, and dwindling public revenues needs strong stimulus to achieve recovery. These should target protecting strategic sectors such as agriculture, pharmaceuticals, transportation, and small businesses. Special attention should be paid to SMEs; how to subsidise their power supply, access to low-interest credit, and overthrow crippling taxes and levies.

Hard decisions lie ahead, but should be taken only after rigorous diagnoses and preparation. Shortage of dollars is leaving supply to the market in the hands of black-market operators, thereby subverting the goal of reducing the gap between official and parallel market rates. A temporary bolstering of the market could help restore stability and confidence.