Stabilizing the Naira



Our economy did well in the last decade with the average GDP growth rate between 2005 and 2015 reaching an impressive 5.9%. Notwithstanding, the economy is still in the doldrums as it struggles to cope with a myriad of economic challenges. Lately, global oil revenues have declined due to a fall in prices, which plunged below US$30 per barrel in early 2016 for the first time in 12 years. As the petroleum sector contributes approximately 11% to our economy and oil exports currently constitutes about 90% of our export revenues, the effect on our nation’s income has been devastating. Revenue available to governments at all levels has plummeted with most state and local governments unable to pay the salaries of public servants at the moment.

As a result of the decline in international oil prices and the attendant effect on our foreign exchange earnings, the pressure to devalue our currency is mounting daily. However, we are not alone in this quagmire. On March 14, 2016, the Central Bank of Egypt further devalued the Egyptian Pound by 13 per cent against the US Dollar. This announcement followed similar devaluations of national currencies by Russia, Venezuela, Kazakhstan and Azerbaijan in response to the severe economic pressures that these countries were facing. Several other Gulf States are also experiencing intense pressure on their currencies.

However unlike Nigeria, countries such as Saudi Arabia, Oman and Bahrain have significant foreign reserves which may help them stabilize their currencies without undue strain in the short term.
According to CBN, our external reserves have fallen to about $27.88 billion as at March 2016. This represents approximately a 65% decline in reserves from about $42.8 billion in 2014. At the moment our foreign reserves is equivalent to just five months import cover.

A key reason for the depletion of our external reserves over time is the high rate of domestic demand for foreign exchange which has steadily risen over the years, severely straining the capacity of the Central Bank to meet it. Domestic demand is fueled by importation of petroleum products; auction sales to BDCs, banks and other government agencies to fund foreign exchange requests for imports, foreign school fees, personal travel allowance (PTA), business travel allowance (BTA), medical tourism and international card transactions; Joint venture cash call payments; Public sector uses and infrastructural development.

As demand exceeds the supply of foreign exchange and the CBN continues to maintain a narrow fixed exchange rate band for the Naira to US dollar of between N197-N199, it has had to use its external reserves to meet the excess demand and defend the value of the naira. Suffice to note here that several countries have either experimented with fixed rate regimes or have tried at one time or the other to exert artificial influence over the exchange rates of their national currencies and failed. Japan and Switzerland are classic examples.

These failures are also a clear indication that adjusting monetary policy only without corresponding action on fiscal policy is unlikely to produce the desired effect of exchange rate stabilization. Indeed, fiscal policy must be adjusted to shift the fundamentals of the economy in the intended direction.

The Central Bank announced a number of measures in June 2015 in a bid to introduce stability in the nation’s currency in response to the effects of dwindling foreign exchange earnings. Several administrative controls were put in place. One of these was the removal of 41 imported items from the list of commodities for which foreign exchange could be obtained from the CBN for the purpose of importation. February 2015 saw the stoppage of foreign exchange sales to BDCs by the apex bank and the closure of the Wholesale and Retail Dutch Auction System (WDAS and RDAS) windows in a bid to curtail arbitraging or the so-called round tripping and speculative activity. These measures have failed spectacularly as the excess demand has poured into the parallel market, widening the exchange rate differential by as much as 100% at some point and thus expanding the incentive for arbitraging.

Many experts believe that the Naira should be devalued while others argue that the time has come for the CBN to abandon the fixed rate currency regime and allow the Naira to find its equilibrium levels which is believed will be somewhere between N250 to N260 as policy coherence replaces current uncertainties and enables the return of private sector foreign exchange, foreign direct investment and portfolio inflows to the official market. However, President Buhari has clearly stated that this is not an option for his APC government with its “change” mantra.

I sympathize with the CBN Governor and the President because they are caught between the devil and the deep blue sea. While the current official exchange rate is largely artificial does not reflect economic realities and the true value of the Naira, a sudden devaluation in the short term is likely to lead to even higher inflation, greater unemployment, more hardship for Nigerians and a significant risk of political unrest. The opposition would argue that this is not the sort of ‘change’ Nigerians voted for.

In any case, devaluation is only a temporary measure which does not fix the fundamentals. There are several fundamental factors that have contributed to the downward pressure on the Naira, and are still exerting a massive influence on the currency. Nigeria is undeniably an import-dependent economy. According to the National Bureau of Statistics, Nigeria’s import bill in 1984 was N167.88m, but in just the 2nd quarter of 2015, Nigeria spent N1.493trillion on imports. CNBC Africa also reported in an opinion write-up on its website on January 20, 2016, that Nigeria spends N1.3trillion importing food annually! Nigeria’s food import bill is said to be rising at a rate of 11% annually, according to data on the website of Doreo Partners.

The National Bureau of Statistics reported that the Federal Government spent about N1.82 trillion on importation of petroleum products between January and September 2015. Petroleum product imports accounts for 45% of the consumption of foreign exchange earned by the CBN, according to a recent interview granted to Silverbird TV by Comrade Peter Esele, former President of the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN). Some experts believe that the true figure is much higher. The Chairman of the Senate Committee on Tertiary Institution and Tertiary Education Trust Fund, TETFund, Senator Binta Masi, stated in January during the commissioning of a project at the Federal University Lafia that Nigeria spends over $2 billion annually on foreign education.

It is obvious that as long as Nigeria continues to spend colossal amounts of its foreign exchange earnings on consumption of foreign goods and services, there will always be a massive excess demand for foreign exchange to settle these transactions. Therefore, while devaluation of the Naira may eventually reduce the pressures on the external reserves held by the CBN and reduce round tripping by narrowing the exchange rate arbitrage gap; it will not solve the demand issue in the long term.

The CBN should work hard to encourage harmonization of its monetary policy with the Federal Government’s fiscal policies to encourage a shift in the nation’s status as an importing nation to that of an export-oriented country. No economy can operate on independent monetary or fiscal policies alone. There has to be a synergy of both monetary and fiscal policies for the Nigerian economic fundamentals to shift towards true, inclusive growth. For effective harmonization, there should be a more cordial relationship between the CBN and Ministry of Finance. The relationship should emphasize information sharing, cooperation and coordination of policies and more crucially, eliminate uncertainties that adversely affect investments.

With regard to monetary policy, economists are aware, there is an intricate link between interest rate, exchange rate and the general price level and the challenge is to establish optimum levels of these consistent with internal and external balances. Policy choices must be made as the three variables cannot be controlled simultaneously as it appears that CBN is attempting to do at the moment.

There are several broad measures the CBN and the FGN can put in place immediately to stabilize the currency, boost the economy and diversify the economy. Firstly, in the short term, the CBN would have to conserve the country’s foreign reserves by allowing the Naira to find its appropriate value through a free or at least managed float. Though crude oil prices have recovered somewhat to just above $40 a barrel, this does appear to be a temporary situation. The fundamentals in the crude oil global market have changed for the foreseeable future. The US has ended its 40-year moratorium on crude oil exports and is now pushing 9 million barrels of oil into the market daily, thanks to its shale exploration technology. Iran is also back into the market and understandably, has distanced itself from the production cuts now being pursued by OPEC. Saudi Arabia has a history of flouting OPEC production cuts and cannot be relied on to cooperate fully with the new initiative to reign in production anyway.

On the domestic front, pipeline vandalism and crude oil theft are still challenges that are preventing Nigeria from achieving its full production quota of 2.4million barrels per day. Nigeria is a long way from earning as much as it did from crude in 2011/2012 when the war in Libya was raging. Whatever meagre margins are being added to the foreign reserves cannot be expended trying to stabilize the local currency. Russia spent $76bn and €5bn trying to stabilize the Rouble in 2014 and was largely unsuccessful. Nigeria has no such luxury and therefore decisive action has to be taken now to allow the Naira to float or at least be devalued.

Devaluing the Naira now will automatically close the current ridiculous rate differential between the official exchange and the parallel market and eventually create a uniform exchange rate for the country. It will however have the negative effect of driving up inflation in the short term since it will cost more to purchase foreign goods and raw materials. However, this will also begin to spur some level of readjustment in terms of priorities of what we consume as a nation. While Nigeria will still have to import petroleum products and raw materials for certain industries for some time to come, there are other goods which are being produced in Nigeria and which can be used as import substitutes.

Secondly, we should no longer pay lip service to import substitution. This will however take time and the reality is that there are no short cuts. However, there has to be a conscious move to curtail the importation of items that are presently draining the country’s foreign exchange by promoting the local production of these items. The experience with the import bans on stockfish and wheat have shown that the way to go about curtailing imports is not outright prohibition, but more towards implementing monetary and fiscal policies which will enhance the capacity of local firms to produce these items in quantities that will serve local demand. Higher tariffs may have to be imposed on imports of certain items which will make them more expensive, potentially boost government revenue and provide a phased approach in the transition from the imported varieties of these items to local substitutes of equal or better quality.

Thirdly, a critical look needs to be taken on the importation of petroleum products. Presently, Alhaji Aliko Dangote is constructing a $16bn petroleum refinery in the Lekki Free Trade Zone, Lagos State which, when completed, will have the capacity to refine 650,000 barrels of crude oil per day and make Nigeria self-sufficient in terms of production of petroleum products. The Central Bank of Nigeria has already promised to ensure that the project receives foreign exchange needed to import critical components at the official exchange rate.

Though laudable, the CBN needs to expand this policy to encourage other local manufacturers of products presently being imported into Nigeria and to export-oriented industries with large employment absorptive capacities. The policy of providing forex at the official exchange rate to manufacturers who are willing to step up local production of items presently being imported while seemingly attractive, would be unnecessary when there is a convergence of official and unofficial rates. This would also eliminate a discretionary policy which if unchecked, could provide some with unfair advantages.

Finally, diversification of Nigeria’s economy is now a necessity. Diversification should not be viewed in terms of only expansion into mining and sale of solid minerals. The same collapse in oil prices hit the commodity markets even harder. Diversification should therefore be directed towards manufacturing, agriculture, technology and human capital development. Nigeria could look to a country like Norway in this regard. Both countries are oil producing countries and both have vibrant agricultural potentials.

The difference is that while Norway saves almost all its crude oil earnings in a sovereign wealth fund and sells its agricultural, fishing and manufactured products to the world, Nigeria has been spending all its crude oil earnings on imports and has allowed its manufacturing and agricultural sectors to wilt. Today, Norway boasts of foreign reserves of just under $58bn and a sovereign wealth fund worth $882bn. CNBC has identified Norway’s Government Pension Fund Global as the largest sovereign wealth fund in the world.

It is now painfully obvious that the PDP-led government of the last six years or so failed to plan for the long term development of the Nigerian economy, or at least failed to faithfully implement whatever plans it had. On the other hand, it is equally obvious that despite the rhetoric during the political campaigns, the current APC Federal Government had no discernible, coherent economic development plan before coming into office and still does not appear to have one almost a year after winning the elections. Unless this cluelessness changes, some may argues that they are planning to fail.

The path to growth of our economy is going to be arduous and will take time and quite frankly, there are no real short cuts. We must all share the pain. Devaluation alone is not the solution to our economic challenges. What is required now is a well articulated, holistic economic development plan which will then need to be sold to Nigerians to justify the obvious sacrifices that they will have to make to achieve the progress we seek and inculcate a unity of purpose.
•Edevbie is the Commissioner for Finance Delta State