Naira and party primaries: a sad new economic “theory”

The two dominant political parties, the ruling All Progressives Congress (APC) and the opposition Peoples Democratic Party (PDP) are preparing for their primary elections. The drums are rolling for the delegates, who have become the de facto ‘kingmakers’, welcoming aspirants from all 36 states of the country and the Federal Capital Territory, Abuja.

While some say the delegates are just stooges of the governors, who have hand-picked and dictated their tunes, the aspirants who are jostling to be presidential standard bearers for both parties are on the road, peddling south to north and west to east to solicit votes from delegates before the primary elections. After all, say some pundits, winning the first ticket from either of the two dominant parties in Nigeria is synonymous with winning general elections in some states and indeed the whole country, it can be safely said that it is like finishing half of the race.

As always, delegates don’t necessarily have criteria for voting the party flag bearer. After all, we haven’t seen any concrete manifestos from any of the wannabes, be they the so-called serious wannabes or the acclaimed pranksters, as a friend would say. Perhaps, one difference is a drama that one of the aspirants recently released as he showed off his physical training, in a bid to convince delegates of his suitability to be President of Nigeria. This is what politicians have defined as our form of democracy – a selection by a few stooges representing their lords.

Interestingly, the two dominant parties would still claim to have tens of millions of members, but the delegates are, as always, handpicked by a few lords, as some governors and/or godfathers have turned into the ultimate kingmakers, deciding who rules over 200 million Nigerians from the comfort of their living rooms. While we say we run a democracy, the reality is that we are perhaps just a little different from an oligarchy, with very few, largely unpatriotic and incompetent politicians laughing at us. Well, that’s a topic for another day!

An astonishing event unfolding about these so-called party primaries is the growing validation of analysts’ views on the strong correlation between political party primaries and the Naira/USD exchange rate. Over the past three weeks, the Nigerian naira has been unduly volatile, with experts blaming the naira’s surge on the upcoming party primaries. While that sounds absurd, especially to an economist like me, who wouldn’t normally expect to see any correlation between political party primaries and the exchange rate, it seems like a playing out theory, as reality can suggest it.

If quotes from foreign currency traders on the streets of Lagos, Abuja and Port Harcourt can be trusted, the US dollar now commands between 605 and 610 naira, a staggering 4.3% depreciation of our estimated naira in just three weeks. Interestingly, the Naira was under pressure for a similar period in 2014 and 2018, the years leading up to Nigeria’s last two general elections. This seems to validate the opinion of experts that the pressure on the Naira is a seasonal effect of the upcoming primary election of the two dominant political parties.

As unscientific as this perception may seem, it is really difficult for economists to justify the sudden pressure on the naira, especially at a time when the price of oil remains high at $122 a barrel, an all-time high. Likewise, the import bill should be relatively moderate this season. Thus, the current pressure on the naira is foreign to the fundamentals of foreign exchange demand and supply in the country, so experts who attribute this sad event to the party primaries may not be mistaken after all, especially more that it becomes a recurring event that may at some point be established as a new theory.

In that case, the world might look forward to another contribution to Nigeria’s knowledge. For now, it could be called the theory of party primaries and foreign currency markets. The theory should go on to explain how, in a developing democracy, a certain, perhaps inexplicable (call it false) correlation has been established between when the dominant parties prepare to select their standard bearers during an election and the value of the local currency. This would obviously be an interesting extension of the frontiers of knowledge, an elucidation of some of the exogenous factors that impinge on the currency market of a developing country.

While the pressure on the naira appears to be away from the parallel market as the official rate in the window for investors and exporters has been relatively stable around the N415/USD corridor, the truth is that the rate somehow does not reflect demand. and the supply dynamics of this market, with analysts noting the increase in real unmet demand for foreign currency in the official window.

In fact, while writing this column, I received an email from my bank, one of the top five players in the country, informing me, as a customer, that I need to apply for a personal/business travel allowance 14 days before my trip. , while overseas student tuition, rent and maintenance application must be submitted at least 30 days in advance, due to foreign exchange rationing by the Central Bank of Nigeria.

Indeed, the external reserve has lost 4.4% or $2.25 billion since the start of the year, during a period of high oil prices. So, the question is, what exactly is causing the demand pressure in the foreign exchange market? Unfortunately, foreign investors are negative towards naira-denominated assets, whether equities or debt instruments, as they continue to raise concerns about the liquidity of the naira and the currency valuation.

With this depreciation of the Naira, inflationary pressure is likely to be exacerbated. In April, headline inflation hit 16.82% year-on-year, the highest rate of increase in consumer goods prices in the past eight months and a surge of 15.92% in March. Now that the naira is also under pressure and the monetary policy committee has reneged on its support for the growth of the economy, as evidenced by the 150 basis point hike in the monetary policy rate to 13%, the Nigerian masses may have to to tighten one’s belt. further away.

As if the hunger in the land were not enough, these politicians are making the crisis worse with their deliberate and unwitting erosion of value. How would the poor, innocent Nigerian cope with the “triple whammy” of rising interest rates, soaring inflation and avoidable Naira depreciation? How will these voiceless, marginalized and poor Nigerians survive the hardships unfolding between now and the actual moment of voting next year? This is especially true as in most states governance has been disrupted as governors are either vying for office or busy coordinating visits from presidential candidates seeking votes.

As inflation and the depreciation of the naira erode the purchasing power of already low-income people, rising interest rates would limit the funds available in the system, thus undermining opportunities for job creation and ultimately throwing more Nigerians in the poverty trap.

Where do we go from here?

Sharon D. Cole