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Finding a Sustainable Fit for the Nigerian Currency in a Recession By Olusuyi ADARAMEWA

A recession is rather an egregious economic happenstance, wherein the ingredients and basic economic apparatus are akin to a living sepulchre.

Economic agents and even managers of the commanding heights of such economy are often challenged for not being proactive enough to tame recession and its pains as well as pangs. Often time, they are stigmatized as reeling out inefficacious antidotes or prescriptions that sometimes compound rather than abate the sorry and messy economic situation that such a nation may find herself. In some parlance, analysts and commentators had harshly opinionated, and crudely typified recession as a state of socio-economic anomie, wherein all hopes and aspirations of a nation to leapfrog her economy into an enviable pedestal are often thwarted, thereby gravitating into a forlorn hope of some sort. Mayhap, owing to its petrifying nature and the debilitating posture of recession, the period usually sends jitters down the spines of the brightest and best economic managers, operators, and the shrewd investing public: local and international alike.


In specific terms, a recession depicts an economic situation in which economic growth is said to be negative for two consecutive quarters. From this submission, the period is far from being felicitous. It is replete with rising unemployment, falling output level and increasing government borrowing. A country like Nigeria with all her rich endowments and the sinew for praying and fasting, will not wish for a recession. Any thought along that line will be met with stiff opposition and a “back to sender” refrain from the army of prayer warriors in our places of worship. It is often said that if wishes were horses, beggars would ride. In this connection, if it were possible for recession to be banished or ostracized from the Nigerian state, that would have happened long time ago. But alas, there are exogenous factors that make it inevitable to detach our economy from the rest of the world, hence, whatever happens to the other members of the global community; we will definitely partake of it, perhaps, at a varying degree. Hence, the fall in the international price of the crude oil and the reduction in our foreign exchange earnings have largely left the country in dire economic strait.
Factors that affect currency movements in recession
Given the above, how will the currency of a nation (Nigeria inclusive) move in a recession? This poser is germane owing to its overarching influence on this treatise. It must be stated however, that there is no linear relationship between the value of a currency and recession. Put clearly, the fact that a nation’s economy is in recession does not automatically signpost that the value of the currency must go down or decelerate. This has been classically demonstrated during the economic crisis of the 2008 through 2010 which ultimately culminated into a global recession. From available records, analysts had observed that whilst the UK experienced a significant depreciation of about 20% in the Pound Sterling, both the Euro and Dollar were less affected by the great recession.
To buttress the above assertion and according to Tejvan Pettinger, a scholarly economist, “the US dollar index (which shows the value of the US dollar against a trade weighted basket of other currencies, e.g. Euro and Yen) has fluctuated but overall has remained at similar value to the start of the recession”. By the same token, he stated further that in the early 1980, the US went into recession, but during this period the value of the Dollar rose and it was a similar experience in the UK, in the 1980s when there was a rapid appreciation in the Sterling despite the recession at that time.
Effect of Recession on the Nigerian Currency (The Naira).
At the end of the day, what pans out as the effect of a recession on the Nigerian currency (Naira) depends on whether the economic fundamentals are strong or not in order to withstand it. In order words, and consistent with the above stated position, the fact that a country is in a recession does not guarantee that the value of the currency will automatically fall. The effects depend to a large extent on the following economic variables or factors: Firstly, does the balance of payments position remain strong and positive? If the answer is in the affirmative, the recession might not lead to depreciation of the domestic currency. Secondly, and as a corollary to this, can we ask another poser? Is the balance of payments weak and in deficit position? If the answer is in the affirmative, then the value of the currency of the country in question Naira inclusive will decelerate. Given the above scenarios, an evaluation or appraisal of the goings-on in the Nigerian economic horizon today shows clearly, that the country’s economic stance can be pigeonholed or situated within the confines of the latter scenario.
The next question is: why is Nigeria relishing in this group? The answer may not be farfetched. In a mono product export economy, where crude oil accounts for over 80% of the nation’s foreign exchange earnings, and the price has plummeted from over $100 per barrel to an all time low oscillating between $30 and $35 per barrel, it goes without saying that the deficit in the balance of payments position has a symbiotic relationship with this exogenous factor. If the fall in the price of the crude oil persists, the effect may be worse for the economy as well as the currency. No wonder, the foreign exchange inflow has reduced drastically thereby worsening the situation as it reduces liquidity in the foreign exchange market which in turn whittles down the confidence of the foreign investors.

Exchange Rates Movements 2007-2016

SOURCE: CBN Website: Statistics
Like all rational economic analysts that place high premiums on optimism, one can phantom some positivism by alluding to the fact that if the economy remains competitive, Naira will have a strong fit otherwise it weakens. On the other hand, if there is a medium term prospect for growth in the economy, the effect of a recession might be minimal or infinitesimal on the currency.
Finding a sustainable fit for the Naira in a Recession
In the short-term, we need a well-thought out and clear policy direction that sends positive signal about the economy to the rest of the world. In doing this, however, we need to commend the CBN for the steps it took recently on the flexible exchange rate.

Nigerian Central Bank
Nigerian Central Bank

Whilst this was seen as a right step in the right direction, some multilateralists, still believed that we needed to do more by reviewing some policy measures that had stunted importation in order to encourage productivity in the domestic economy. Others opined that we must concertedly encourage competitiveness in the domestic economy by providing the enabling environments for doing business. Furthermore, some had argued that we needed to cut interest rates in order to cheapen and reduced the cost of borrowing to the manufacturers which may engender appreciable growth in the productive sector of the economy.
Beyond the foregoing, in the medium to long term, we need to pursue more aggressively, some structural reforms in the economy via diversification towards non-oil and above all investments in infrastructure, research and development, health and education are essential for the wellbeing of our currency in particular and the Nigerian state in general. .
Conclusion
Put succinctly, a recessed economy, sends a signal that the economic conditions of that country are less desirable, unemployment is likely to rise as businesses may cut back to keep afloat. Additionally, consumers will spend less thereby affecting productivity, investors may lose confidence in the domestic economy, and by extension, cut back investments and may ferry out their capital to other settled and safer economic havens. Unless the economic fundamentals are strong, vibrant and resilient to withstand these shocks, this could weaken the currency as being experienced presently in Nigeria.

Olusuyi ADARAMEWA, is a Lawyer and recently retired as an Executive staff of the Central Bank of Nigeria is also on the Editorial Board of the African Development Magazine.