From Uche Usim, Abuja
When Nigeria’s Vice-President, Prof. Yemi Osinbajo, declared last Monday in Abuja that Nigeria cannot get new dollars into the system when the exchange rate is “artificially low”, he stirred the hornet’s nest.
Attendees at the two-day Mid-Term Ministerial Performance Review Retreat organised to appraise the progress made towards achieving the nine key priorities of the President Muhammadu Buhari administration were shell-shocked, as no one saw that comment coming.
Osinbajo, who insisted that the artificially low exchange rate was repulsive to potential investors who are totally reluctant to channel foreign exchange into the country, urged the Nigerian economic management team to move the rates to reflect market realities.
He said: I’m convinced that the demand management strategy currently being adopted by the CBN needs a rethink, and that is just my view. Anyway, all those are issues that, when the CBN governor has time to address, he will be able to address in full.”
Osinbajo also suggested that the CBN was competing with the fiscal side of the economy, which includes the ministries, departments, and agencies of government: “There must be synergy between the fiscal and the monetary authority. We must be able to deal with the synergy, we must handle the synergy between the monetary authority, the CBN, and the fiscal side.
“Sometimes, it appears that there is competition, especially on the fiscal side. If you look at some of the interventions, you will find that those interventions are interventions that should be managed by ministries.
“The Ministry of Industry, Trade and Investment should handle MSMEs interventions, and we should know what the CBN is doing. In other words, if the CBN is intervening in the MSME sector, it should be with the full cooperation and consent of the Ministry of Industry.”
Arising from the aforesaid, industry analysts have picked holes in the VP’s assertion, describing it as totally inimical to economic development.
They reckoned that Nigeria’s wobbly economy should not come to anyone as a surprise because a heavily crude-dependent economy would naturally ache when demands are low and there are no sufficient non-oil revenue to absorb the shock.
They insist that building local production capacity and export was a sure way to grow the foreign reserves, rather than allow it come under relentless withdrawals to fund import of goods that can be produced locally.
Reacting to the VP’s suggestion, Nigeria’s first Professor of the Capital Market and former Imo State Finance Commissioner Prof Uche Uwaleke said that the first casualty will be the 2022 appropriation bill if the economic managers kowtows to VP’s assertion by devaluing the naira at this point in time.
He said: “It means the 2022 budget, which is predicated on N410.15 per dollar is dead on arrival. The Vice President obviously means well. But this statement is capable of triggering panic buying and speculation in the forex market (official and parallel) and further complicating things for the CBN. No doubt, devaluation will force down the volume of imports and reduce the pressure in the forex market temporarily.
“But have we thought of the impact it would have on pump price of fuel and the multiplier effects? How about the knock-on with regard to inflation and interest rates especially at a time when inflation rate remains elevated? Is high inflation rate not inimical to investments whether local or foreign?
“The argument that naira devaluation will incentivise foreign investors remains to be seen as other factors such as insecurity equally play a part.To be sure, the naira has suffered several devaluations in recent past. It has neither solved the fundamental problem of helping to diversify the export base nor curbed unbridled imports. Doing so yet again will not change anything. Rather, it’s a recipe for high poverty and unemployment levels.
“Again, suggesting that the CBN should discontinue its forex demand management strategy to the effect that certain items are excluded from accessing the official window has grave implications for exchange rate and the economy. If anything, it negates the import substitution drive of the present administration.
“The good news is that the CBN has sufficient external reserves to meet genuine demands for forex at the Investors and exporters window. This much we have been told. The CBN should continue to manage it while joining hands with the fiscal authorities to create multiple sources of forex beyond oil.”
An economic expert currently consulting for the Federal Government, who pleaded anonymity, told Daily Sun that the toeing the devaluation path as suggested by the VP was a lazy route that will ultimately worsen an already bad situation.
According to him, if the CBN wanted to lazily handle the economy, a naira devaluation would be the easiest thing for the apex bank to do.
“It can follow these sentiments and move the naira to say N550/$1. It is quite easy. But what are its macroeconomic implications? Government debt service is already over 70% of revenue. A devaluation will make it over 100% easily.
“Inflation, though high at 17%, has been trending down in the last five months. A devaluation to N550/$1 will push inflation to over 25%.
“Fixed income earners, which includes all government workers, will see their real wages (take home pay inflation) evaporate into thin air. The same pay they got last month, which they were already struggling to use to make ends meet, will simply buy less than half of what it bought them last month. This could ignite justifiable calls for salary increases and could cause social unrest, in a country where tensions are already high.
“Loans that were indexed on FX will be immediately repriced (higher interest rates) and terms will be made much tougher. This could lead to widespread defaults, higher NPLs and financial system instability. Imports will become much more expensive, translating into higher production costs. Producers who can will pass the higher costs on to consumers, who will pay more for the same goods. Producers who cannot pass on the cost will shut down their operations over time.
“Nigerians who buy FX from the CBN for school fees, medical bills, BTA, PTA, etc will pay much more in naira. Since imports value will rise astronomically and exports won’t (our main export is oil which we cannot control its price or quantity), the country’s current account balance will go into deficit and make our balance sheet much worse!
“Leaving aside these arguments, it is shortsighted to assume that the rates in the tiny parallel market (only 7% of Nigeria’s FX market), which serves many corrupt and illegal activities, should determine the rate of the Naira. How can rates in 7% of the market determine rates in 93% of the market? How can the tail wag the dog? Given all these, it is really difficult to see why the naira should be devalued at this time.
“Rather than the intellectually lazy resort to devaluation, and a politically motivated scapegoating of the CBN, a responsible interrogation of the issues should have been better. We should be looking at the more structural reasons for the sustained pressure on the naira”, he explained..
Other analysts also raised posers querying the devaluation option.
They asked: “Why is it that 80% of cargo ships and planes that bring goods to Nigeria (for which we pay dollars) leave our shores empty (implying we do not earn dollars from potential exports of goods they would have carried)?
“What has been done about the perennial complaint of many potential exporters about the gridlock of the ports and the myriad of illegal charges levied by a multiplicity of agencies at the ports?
“Does the Nigeria Custom Service consider itself a trade facilitation agency or a revenue generating one? If they are a trade facilitation agency, has anyone seen their strategic plans to improve Nigeria’s international trade and ability to earn FX?
“What is the Government’s budget and plans for the Nigerian Export-Import (NEXIM) Bank? A bank that was set up to specifically finance non-oil exports. NEXIM’s balance sheet is less than 10 percent of the balance sheet of the EXIM banks of Malaysia, India, Indonesia or Turkey. What are the country’s plans to improve this?
“Nigerian parents now spend over $10 billion annually to educate their children in all parts of the world and at all grades of education from primary, secondary and university levels. If we could reverse up to half of this huge annual drain, the naira will strengthen to under N250/$1. Even middle class families and entry level civil servants no longer believe in the Nigerian educational system or its quality. What is the government (at all levels) doing to change this? Can we begin by requiring that the children of all government officials at all levels (whether elected or appointed) be educated in Nigeria?
“What is the government doing to improve our healthcare systems and ensure we reverse the need for Nigerians to seek medical treatment abroad even for routine checks? We can save up to $7 billion annually from this and the naira could strengthen to less than N150/$1 if we include the reversals/savings from educating our children here.
“In the 80s and 90s, the typical basket of food Nigerians ate was almost totally made in Nigeria. Our clothes were made here with cotton from our farmers, textiles from our mills and embroidery from our tailors. Our cars used tires made here. The cars themselves were made either in Kaduna (Peugeot) or Lagos (Volkswagen). Today, we spend billions of dollars annually importing anything and everything! What is the government’s plan to reverse this trend? Can we begin by requiring that over the next 3-5 years, all government vehicles be made in Nigeria by Innoson Motors or any other car manufacturers? If we can reverse up to 40%, the Naira would strengthen to N70/$1.
“Over the last three to five years, more than 5,000 men have relocated their families to Canada or other places for “better” life. And this trend has continued unabated with no end in sight. Whilst these men are here earning Naira, their major expenses are in dollars for family upkeep, mortgages, car loans etc. This means we have more than 5,000 new men chasing dollars everyday, every week, every month. Imagine if the country gave them some hope to believe and stay, the Naira would be strengthened to N25/$1.
“From CBN published reports, NNPC used to fund the CBN reserves with over $3 billion per month from sale of crude oil. This contributed immensely to stabilizing the exchange rate. Unfortunately, in the last 7-10 months, the NNPC has not funded the reserves at all, according to the CBN! What is the government doing to reverse this situation and call the NNPC to order/account?
“The country’s problems are significant but fixable. The solutions are staring us in the face. We just have to be honest and work diligently to solve them rather than make cheap political statements aimed at scapegoating”.
However, for Prof Ndubisi Ekekwe of Tekedia Institute said it is not easy to devalue the naira as the apex bank looks at many things to make such calls.
“It has cogent reasons for its strategy. But get it from me: there is nothing the CBN, President Muhammadu Buhari, Vice President Osinbajo, etc will propose that will work if Nigeria does not begin to make things.
“We need to stimulate production for both factories of the old and the modern ones. That is the only way the naira will rise. If not, the paralysis will continue for the naira because the strength of the naira comes from warehouses and factories, and not from the CBN headquarters.
“There is no way you would expect me to invest at N410/$ and cash out at N570/$. Oh yes, you are talking of devaluation which means the naira has to be devalued to say N480/$ – a number I think is a possibility by next quarter. And that will happen and another cycle will come, and come, but that will not fix anything until Nigeria begins to ramp up production”, he suggested.
Also weighing in on the matter, the President of Africa Development Bank Dr Akinwunmi Adesina, said that what is needed for sustained growth and economic resurgence is to remove the structural bottlenecks that limit the productivity and the revenue earning potential of the huge non-oil sectors.