For the Central Bank of Nigeria (CBN) it has become obvious that further use of its monetary policy measures to stabilise the exchange rate and rein in inflation have become less effective because it may have reached its limits as demand management strategies.
Consequently, the only option left is the deployment of fiscal policies and actions that could complement it.
Government should also roll out other appropriate fiscal measures to close the supply gap in the economy, rather than using administrative fiat to tackle the embarrassing state of the exchange rate that has made non state actors and black market operators more prominent.
More worrisome is the fact that
while the federal government of Nigeria on Wednesday approached the Supreme Court to seek an extension of the validity of old naira notes beyond the current deadline of December 31, 2023, the purchasing power of the same currency is fast dwindling and on the daily basis.
This is because the cost of depreciation of the local currency is the scarcity of hard currencies, an action that can be checkmated by complimentary monetary and fiscal policy measures.
For instance, Naira fell against the U.S. dollar at both the official and parallel market on Tuesday after the local currency recorded a gain against the dollar in the official market the previous day.
Specifically, Naira depreciated 9.73% to close at N830.97 to a dollar at the close of business on Tuesday, data from the NAFEM where forex is officially traded, showed.
This represents an N80.83 loss or a 9.73% decline in the local currency compared to the N750.14 it closed on Monday.
The intraday high recorded was N1121/$1, while the intraday low was N600/$1, representing a wide spread of N521/$1.
Similarly, the naira at the parallel forex market where forex is sold unofficially depreciated by 0.44%, quoted at N1140/$1, while peer-to-peer traders quoted around N1146.08/$1.
Some analysts agree that despite series of measures including raising interest rates and restricting access to foreign exchange and even attempted unification of rates by CBN to stabilize the exchange rate, their effectiveness on the economy are yet to be felt.
Consequently, the analysts say that a multi-pronged approach is necessary, encompassing measures to boost domestic production, enhance market confidence, and implement sound fiscal and monetary policies.
They noted that a crucial step towards alleviating the forex demand is to enhance domestic production, particularly in the petroleum sector. This involves enabling private and public refineries to operate at full capacity, reducing reliance on imported petroleum products.
Additionally, fostering domestic manufacturing and agriculture will further reduce the need for foreign exchange to acquire essential goods, even including machines and their parts.
They single out the major cause of the imbalance as pressure from the excessive importation and the major part of the importation is petroleum products imports.
Amid these challenges, activities of speculators as well as heightened insecurity ocassioned by ransome payments and hoarders brought about the Naira redesign with its attendant negative consequences on Nigerians, particularly, the middle and lower classes.
The Supreme Court had earlier in the year nullified the ban on using the old N200, N500, and N1000 banknotes as legal tenders.
Now, the government wants the apex court to lift its March 3 order that old naira notes should remain legal tender along with new notes till December 31.
It added that an extension of time is necessary because, due to the economic crisis, it has not been able to print the volume of new notes that would enable it to phase out old currency before December 31, 2023.
The Federal Government further explained that should the Supreme Court decline its request to extend the period of circulation of old notes, the country stands the risk of descending into another national, economic and financial crisis as witnessed in the first quarter of the year when the naira redesign policy was being implemented under former CBN Governor Godwin Emefiele.
The government further expressed concern that the hoarding of both old and new naira notes, driven by the impending deadline, has the potential to destabilise the economy. To prevent this, the government believes that the old notes should continue to be legal tender alongside the new notes until the necessary measures are in place to phase them out.
It admitted that it has been engaging the 10 plaintiff states in their capacities as members of the National Council of State and the National Economic Council (NEC).
It also admitted that it has been engaging the 10 plaintiff states in their capacities as members of the National Council of State and the National Economic Council (NEC).
The 10 aggrieved states are Kaduna, Kogi, Zamfara, Ondo, Ekiti, Katsina, Ogun, Cross River, Lagos and Sokoto.
The respondents in the case are the Attorney-General of the Federation, Edo and Bayelsa states.