Issues around the value of the naira have once again grabbed the front row in national discourse. Opinions, however, differ on measures to stabilize the fluctuating currency. In this interview with Kunle Aderinokun, a renowned economist and chief consultant at B. Adedipe Associates Limited, Dr. Biodun Adedipe, provides crucial insights on steps to restore the integrity of the naira
Given the shortage in the supply of forex, is there any leverage Nigeria could make of Diaspora remittances?
There was a study done by Bloomberg Economist, it was published February this year. In that global chat, there were only about three to five countries that were outstanding when it came to migrant workers.
Nigeria, they put as number one, our country came first, followed by Pakistan, then Canada. But in terms of five outstanding countries, in addition to the three stated earlier, we had the USA, Australia, and Vietnam.
What they showed there in that study was, for the countries that benefit from migrant workers, Nigeria is on the side of those that have many migrant workers in the rest of the world, and therefore make remittances home.
The estimated remittance from the study and review of literature is that the remittance by Nigerians in diaspora is an average of $34 billion annually. Now, if you look at that study also, the map of the world is what they used there to summarize it.
The summary indicates that if Nigeria is able to manage that remittance effectively, it will add 0.4 per cent to our GDP growth annually. That is very significant.
But you know where our problem is, those remittances, unlike Pakistan and other countries that get remittances, a lot of the dollar don’t come into the FX market in Nigeria. They remain outside there, and this is the pattern.
Someone wants to send money to his or her family here in Nigeria. This person has $10,000 in the US, and wants to give the naira equivalent to his family member here in Nigeria, ordinarily the way it works in other countries is that that $10,000 will come into the FX market within Nigeria, and becomes a boost to supply here.
But the reality is that in Nigeria’s situation, the dollar doesn’t leave where it is. The person that provides the naira equivalent here would rather keep the dollar equivalent outside there, so it doesn’t come into the FX market in Nigeria.
So, we don’t get the full benefit of diaspora remittances here in Nigeria, despite that we are top in terms of benefitting from migrant workers.
So what then happens is that instead of bringing it into the FX market in Nigeria, they keep it outside. That also becomes a leg that supports speculations that we talked about earlier on.
I believe that was part of the reason why the CBN introduced the $1 for N5 incentive. The idea now is to see if the country can harness the most of the remittances.
That now is a policy I think we need to interrogate more. How can we make it more attractive for those foreign currencies generated by migrant Nigerian workers to be remitted home, and become a part of our national supply to our market here? That now is a space for the BDCs.
Is the CBN not aware that oil companies would rather circulate dollars among their subsidiaries instead of remitting the same? Is there no policy that will mandate oil companies that receive dollars to desist from non-remittance? What do you think is responsible for making the oil companies tow this lane?
It even goes beyond the oil companies. The point is that if you operate in Nigeria as a foreign entity, either as a business entity, NGO, or an International Development Partner or whatever it is, there is a regulation in place that says you cannot borrow naira from the Nigerian market here to trade.
You are supposed to bring in foreign currencies into the FX market here in Nigeria. So the law exists. But where we have problems in Nigeria, which is our sad reality, is that we have laws for almost everything in Nigeria, where the problem lies is enforcement.
And if I understand well, what the CBN Governor said while reading out a communiqué at a recent meeting is the realisation that these things are there, but were being violated without sanction. Then CBN is now saying that going forward, if you violate this, we are going to sanction you.
And of course, for those international agencies and development partners, he is saying, ‘I will now report you back to your home office’. That will also bring to the table the disregard for the extant laws in Nigeria and regulations that guide the foreign exchange market.
So, if we find the courage and political will to enforce those regulations and laws, all of these aberrations and arrant behaviours will be checked. And then we will come to a point where what has been kept outside of that market would come into it to boost supply. CBN already has the tools, but they need to enforce it.
What’s your take on the recent suspension of forex supply to the BDCs?
I believe strongly that the Central Bank has gone in the right direction. If we go back to the history of the forex market in Nigeria, when the Bureau de Change was conceived as a concept, the idea simply was that, to create a window for some businesses to buy and sell foreign currencies, and essentially, dealing with those who will not find it easy or convenient to buy from the official window.
Within that concept also, the idea is for them to buy from travelers coming into Nigeria, whether they are foreigners or they are Nigerians who did some things offshore, and were able to make some money, and brought back those foreign currencies.
So, the idea then was, though we sell to the BDCs, that when people are also going out of Nigeria, they can easily buy from there. This was the original concept.
That concept did not include the Central bank selling foreign currencies to BDCs. But because in Nigeria the way we manage forex programs and policies, we often over the course of time, bastardised it in the sense that we completely depart from the original concept.
We got ourselves to a point where the government now, through CBN, will regularly allocate FX to BDCs in certain amounts, and of course receive the naira equivalent from them.
Under that concept also, we were supposed to operate like participative banks in the official market; which means, they deal within a fixed commission, in terms of percentage. This means that each time you approach a BDC, they are supposed to quote for you their two-day rate, which means their buy rate and their sell rate.
This means that when you approach them, you are supposed to ask them first for their two-day rate, then in response to what they have told you, you will now disclose whether you want to buy from them or sell to them.
So, that was the concept originally. Which then means that for any BDC to thrive in such a market, it must be very much in tune with the market dynamics, and therefore also be able to fix its own rate within the recommended commission rate in such a way that is competitive in that market.
Then you will now add to that the issues of customer service and relationship management that will make everyone that choose to buy from you today still choose to buy tomorrow because they bought the foreign currency from you without any stress.
Secondly, your commission was not out of the market range. And thirdly, what we at times call hospitality, bedside manners; it’s about customer service, that you also treated them well. That was the business model.
In the course of time, we got ourselves into a situation where we now began to make allocations to them. In which case, they did not need any longer to market customers that will sell to them, they were now empowered also to sell to those who need FX and are travelling out.
So, that was the stage where we got it wrong. It then became a kind of racket where anyone with access to the Central Bank would do everything possible to get a license for the BDCs.
We now know that once you have a licence, it’s a ticket to a certain allocation on a weekly basis. That means you also have a defined income you can project on a weekly basis without adding any value.
For me therefore as a professional economist, I describe that as a rent seeking system in which case we open a window for rent seeking, in which case a place where people make money without adding any value. And that was where we got it wrong.
We also noticed that in the course of time, the number of BDCs in Nigeria went as high as close to 6,000. So, that was an aberration, which if I were to be the CBN Governor today, I will take us back to where we started from conceptually.
That will also bring me to the issue that some of us raised way back as 2002, 2004, 2005, and 2006. And that’s the fact that if you look at FX it’s a critical component of our economy for a reason that all the while in those early years, Nigeria used to be a net importer of non-oil goods. That was the pattern.
Those were the years when our refineries were still producing refined petroleum products. So we were importing non-oil goods in those years.
But because we were net importers, that brought pressure on the FX market. And like we have also argued overtime, the major worry for the CBN or anyone considering the management of the FX market is the premium.
Premium is the difference between the official rates of the FX rate you get in other segments of the FX market. The other segments will mean, the parallel market, the BDCs, of course in those days we used to talk about export proceeds, and all manner of different arrangements.
But today, the idea simply is that any other market outside of CBN is an alternative. So what is the rate there? How is it as compared to the official rate? So, the difference between these rates is called premium.
So anytime that premium is greater than five per cent, it then becomes an incentive for round tripping. This means that the foreign currency becomes now attractive for those who want to speculate to go and buy, sell and then, they generate more Naira. So they can return to the official market and buy even more dollars, then go back and convert the dollar and get even more naira. That’s why it’s called round tripping. There is no currency anywhere in the world that can survive such an arrangement.
That is why some of us are of the strong opinion that the CBN should have done this long before now. But doing it at all, we see it therefore as a step aimed in the right direction.
The ultimate aim of this policy was to strengthen the naira against the dollar. And before the policy, naira to dollar was below N500. But after the policy, it’s almost hitting N600. What has the CBN gained?
This question brings us to the basic understanding of what drives the exchange value of the Naira. If you are able to answer that question, it will bring us to the understanding of what is happening today.
But ordinarily, in the interplay of demand and supply, what CBN has done is not to reduce the supply of FX to the market. What they have done is to shift the supply from one segment of the market to another, and even doubled the volume; which means, the response of rate is not to the supply coming to the market, which in fact has doubled.
And equally, what could have been the concern is access. The CBN has also dealt with that by not only telling the participatory banks to have desks designated for FX, where members of the public in need of foreign currencies for defined purposes can have access to the foreign currencies required, which you can now also give to them either in cash, or as a credit into their domiciliary account, or into their dollar card. This means the issue is not supply on one hand, and on the other hand also, access is not the problem. It means the real issue is that the speculators knew that this position of the CBN is not something sustainable, which means that it’s not institutionalised.
This means therefore that if another Governor comes into office, after the expiration of Emefiele’s term, there is a likelihood that he or she may go back to the old way of doing things. So we have to come back to look at those factors that cause exchange rates to move. There are about 12 of them in economics.
One of them is the interplay between demand and supply, which as of today does not support what we see happening in that market. That is the depreciation of the Naira in the market as we see now is not supported by the interplay between demand and supply.
The other things we can now talk about are the state of the banking industry, the state of the economy, the interplay between capital flows, that is either we have net inflows or net outflows. The reality today is that Nigeria is still in a position of net inflows. Those are the data of capital importation. That also can help explain the depreciation. We also would look into the issue of exchange rate differentials between Naira and our major trading currencies. What is happening to those currencies, and what is happening to the Naira; this also explains that.
There is also what we call interest rate differentials, which means, what is the average rate of interest here in Nigeria and what is the average rate of interest in those countries of our major trading currencies. There has not been any major shift in that regard also, which means that interest rate differentials have not changed. Hence what is happening right now has nothing to do with the state of the economy, the state of the banking industry, interest rate differential and even inflation rate.
In Nigeria, the inflation rate has been coming down gradually, at least in the last three months. That has been the trajectory of the inflation rate in Nigeria. It’s also not admissible to inflation rate differentials between us and those countries. So when you look at all of these factors, and of course there is what we call expected rate of interest, that is, inflation, expected inflation, expected rate of interest, even those would not explain this situation. Which is why I say, ultimately, the only reason we can admit this is speculation, which is based on the fact that, oh, CBN will not be able to sustain this? So, the question now will be, why can’t they sustain it? If we look at our external reserves, there are two ways to interpret that in this connection.
First is to relate it to our monthly import bill, where we say, how much do we spend on import on a monthly basis? And if you use the latest public data available on Nigeria’s foreign trade, which is for the first quarter of this year, if you convert the over N2 trillion of our import for the first quarter into dollar, you will get about $5.568 billion per month. In that case, we need about $5.568 billion monthly to pay our monthly import bills. The idea now is to divide that figure into liquid portions of our external reserve; you will get about $5.98 billion thereabout based on the latest data available as at last week.
Now the minimum that should ensure the exchange value of your currency is stable is six months, which means as at today Nigeria has enough of the cover expected to ensure that the exchange value of the currency is stable. This means the explanation is not in the position with external reserves as we are going. So if that is not the case, it means it is basically speculation. The question then is this, how do we deal with speculations? I will take that from different perspectives. First is from a study I was involved with way back in 1988 when the General Babangida government then was trying to formulate an industrial policy for Nigeria. It was a Federal Government project with support of the World Bank. The company I was working for then was the Nigerian partner to the foreign consultancy the job was given to. And because I also specialised in Industrial Economics, I became a fit into that project. That was why the company hired me by the way, in 1987. So we went round interviewing manufacturers all over Nigeria.
One thing we got from them, which was a major output of that survey, was that they were not as much worried about how much they will spend to buy one dollar, they were more concerned with the stability of the exchange rate.
So, which means if the rate was stable in the near term, then they can plan ahead in terms of production, planning and the rest of that. That was what they indicated was more important to them. The other side to it is that if you look at the trajectory of the Naira, from let’s say 1970 till date, which gives you records of about 51 years that we have of the trajectory of the exchange value of the Naira against the US Dollar and other major trading foreign currencies. Now when you look at that chart, you then ask yourself for instance where Naira lost its value, either by reasons of depreciation that happened in the market or by way of devaluation done by the CBN, you will find that those occasions hang on to certain decisions made in this economy. One that stood out clearly is that anytime they said we were removing subsidies for refined petroleum products, the Naira lost value. You will see that relationship in that chart. We are talking of a chart constructed for a 51-year period. That’s a long enough period to make sense out of this.
Also, every time we take measures that target to do precisely what the IMF recommends to you. The role of the IMF within the global-economy is to intervene in any country that has currency crises. And usually in doing that, they will come before the core conventionalities. They will preach what they call posterity measures. When you adopt those measures, some of them do not fit very well into your own economy, so it’s expected that you domesticate them. If you just take them and go out and implement, like what we call the Washington Consensus, you know, privatize and monetise everything, we call them the Washington Consensus.
If you run that way, you are likely to end up with more crises, especially for an economy that is largely import dependent, forgetting also that the devaluation of a currency conceptually in economics is designed to make your export competitive. That is what it’s meant to do. The question therefore for Nigeria will be, if you devalue the Naira, it should make our export super and therefore we should be able to sell more to the rest of the world. What then do we sell to the rest of the world? If you look at our exports, disaggregated, it is dominated by hydrocarbons, which is crude-oil, condensing, and associated gas. Those ones, we have no influence on the price. So, the benefit of devaluation therefore doesn’t come to Nigeria.
Our latest data of foreign trade for the first quarter of this year shows that everything related to oil in our foreign trade this year accounted for 85.02 per cent. So it then means what you can play around if you devalue the Naira is just 15 per cent. It then means that if you devalue the Naira, the benefit is just 15 per cent of your export. And like I have also argued over the years, because there is always a demand for foreign currency being a largest world economy that we are, it means therefore that if you devalue the Naira officially today, it’s only a matter of time for the rate in the alternative segment to move away from the official rate. We also have seen in those charts that it affected FX rates since 1978 till date. So every time there seems to be a point where the rate appears to come together, you see in a short moment that the parallel market and other alternative segments that their rates begin to move away from the official rate. In which case, until the structure of the economy changes, where we produce more of what we consume, and consume more of what we produce, we will continue to have that scenario play out, which is what the speculators are banking on.
In that case, to deal with speculations, we must ask ourselves the honest question: What do we consume today and where does it come from? So if most of the food items we consume are imported, the question should now be which of these items can we produce locally? If we can produce them locally, then the foreign currency demand for the importation of such items could no longer exist; it gets extinguished. And let me also mention this: the demand for FX in an economy where everything is normal elsewhere is lived; which means the people don’t demand for foreign currency because they want to hold it as a stored value, but as a financial asset for trading purposes.
But when your currency keeps losing value repeatedly, then a currency like the dollar will become what it is in Nigeria today. One is a stored value because of the rate of inflation, and also a financial asset that people feel if I buy it today, it will lose value eventually, and I can get more Naira when I now sell the dollars, is an aberration. In that case, you must deal with the fundamentals.
And that means, the government itself must provide leadership, and that is what I have canvassed for the last couple of years. The government needs to lead by saying each time we do our budget, that now runs in trillions, the government must then decide for instance to spend 30 per cent of the budget in buying things that are made in Nigeria, especially things that are high with local context. This means that what required FX to import the components, I’ll now say, let’s also not only announce it like we did in 2017/2018, but also have it now institutionalised, which means, whether the current administration is in office or not, those that come after them will have no choice to run with this, so it will be in our feasible responsibility act. That means we will make our amendment there. We would now say, over the next 10 years, for example, we are going to increase the proportion of the government budget that would be spent on things made in Nigeria. Maybe from the 30 that we have now; we would keep raising it annually up until we get 80 per cent.
When you do that, it helps people to keep consuming what we produce, which when we do, the demand for FX on the other side of the coin will reduce. So, until we begin to do that consciously, then we can overcome the challenge. And I will also encourage Nigerians to do the same. That also takes us to a policy that has been a part of the conversation since 1987. That is our tariff structure. If there is anything that will discourage Nigerians from buying an imported item, it is to put a very high import duty on it that will make it very expensive, and therefore discourage Nigerians from buying it. It’s only those with a very deep pocket, who also want to make a statement that they are rich, that will buy such items. So, that is a way of discouraging consumption of imported items that are unnecessary. And I have repeatedly, for the past 30 to 35 years, used three items to illustrate. Nigeria should not be importing safety matches, because the technology for it is so basic. We should not be importing walking sticks because the technology for producing walking sticks is basic.
And of course, I always use other things that are so basic like textiles for example, just to illustrate. We should not be importing textiles and a couple of other things like that.
So, that means we align our tariff structure in such a way that, if we import a fully built vehicle to Nigeria, the duty you will pay on it should be far greater than the duty a company that assembles competing vehicles in Nigeria may pay for components. So that way, the prices of vehicles assembled in Nigeria would be lower than the price of a competing product that is imported. That is what we describe as policy internal consistency, which means, along the line of fiscal policy, managing policy and commercial policy, there will be an alignment. So, by the time we do all this, we will be in a position to deal with speculation.
Rather than cease supply to the BDCs, don’t you think the CBN should have found a better way to manage them?
I don’t believe in that argument and the reason is very simple. Anyone going into business knows that every business has its own peculiar risks, what we call basic business risk, and the aspect we call financial risk. So if you are going into a business, you understand the basic business risk very well, that on one hand.
The other side is the financial risk, which means you need capital to start the business, and you also need to trade in such a way that you will retain that capital. But if in the process of trading, you made serial losses, your capital must be eroded, and if you want to continue in that business, it means you must inject some fresh capital into it.
And if you don’t have it, you must come up with a business case that will make other investors join you to invest in it. That business case rests on the fact that you understand the business, and you know what you need to do to get customers.
But in this instance, the Central Bank has become the sole customer of the supply leg of their business. And that is why people like me will interpret BDC as a no business. It’s not a business. It’s just like an extension of the CBN, that’s what it is. So they were not doing business in actual fact. If you do the proper analysis of it, they were not doing business. So, if I were an operator in that space, I would have seen this sort of thing coming as a regulatory risk. And I would have asked myself, what happens to my business if for any reason, the CBN says we are not going to supply you FX any longer, you have to sort FX for yourself from the market. In that case I would have asked myself, who by the nature of their business, normally generates FX, how do I cultivate relationships with them, such that on a regular basis, I get supply from them that will enable me to serve my own customers. That is the way any regular business person will think.
It’s like saying as of today, what COVID-19 brought into every business space around the world is that it has accentuated the need and relevance for and, respectively, of digital technology. That means that if one would survive an evolving post COVID-19 world of business, then having an effective digital platform becomes very important for your business. So those are the kind of risks you identify when you are in business, and they never bothered to do that because they had ready supply from CBN. Looking at it broadly from a larger economic perspective, I don’t see this creating any problem of unemployment. In terms of managing the economy, the government chooses where priority goes from time to time. There is a principle in economics that says, whatever you want people to do, put incentives there. There is a principle in economics that says, people, companies and entities, respond to incentives. There was an occasion whereby CBN came up with incentives, that was why many people went for BDC license. So now, what will happen is, if they have to downscale in terms of jobs, the way the large economy is managed is that, whatever you lose in one sector, usually would be absorbed in other sectors of the economy.
For instance, if you look at the history of humanity, from the stone age, to agricultural age, to industrial age, to what we call the technology age, and now the knowledge age, the pattern has been that the skills required for survival changes, so people needed to learn new skills to fit into the new age. That has been the pattern historically with human evolution. It’s the same thing with people out here, especially now that we are talking about post COVID-19, everyone here now needs to be digitally savvy to fit into the post COVID-19 world of business. The same thing is going to apply to the BDC operators. Instead of being lazy mentally in terms of strategically planning for business, they will be forced now to do proper business planning. In the process also, it means some may have to let go off some of their employees, while some might even employ more because now they have to look for markets, and not depend on CBN’s allocations.
