REJOINDER: Understanding foreign exchange, external reserves and Naira exchange rate

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By Nick Agule
Email: [email protected]
Twitter: @NickAgule
Facebook: Nick Agule, FCA

Prof Obadan was my best economics teacher at the University of Benin (Uniben). Soft spoken but highly articulate and intelligent, he was the real deal and made plenty sense always in and out of the classroom and I looked forward to his lectures. Unsurprisingly I scored good grades in his courses as I am someone who relied 70% on my lecturers and 30% on my own reading, thus scored high when the lecturers were sound and low when they were not good enough!

But I can’t help but disagree with the erudite Prof on several counts in his article titled “Understanding Foreign Exchange, External Reserves and the Naira Exchange Rate.” For want of time and not to make it long, I’ll not address all my areas of disagreement. I am often put off reading long write-ups (even though I am a chief culprit) but I read this piece to the end because Prof Obadan wrote it!

The Prof’s article can be accessed via this link:
https://www.vanguardngr.com/2021/10/understanding-foreign-exchange-external-reserves-and-the-naira-exchange-rate/

My first area of disagreement with the Prof is on foreign exchange (forex) management. What Prof describes in his article is exactly what the Vice President of Nigeria (VP) is taking issues with. Currently when we earn dollars mainly from crude oil sales, the Central Bank of Nigeria (CBN) dishes out these dollars to importers and those needing dollars for assorted reasons (the oil dollars thus becomes ‘OUR’ dollars). But when these importers and exporters earn dollars, they keep it as ‘THEIR’ dollars! e.g. to pay school fees, the CBN doles out ‘OUR’ dollars to parents but when the students graduate and start sending dollars to the parents, they take it as ‘THEIR’ dollars and don’t drop it in the ‘OUR’ dollar pot to fund fees for others but take it to the parallel market to sell! This CBN policy of issuing out ‘OUR’ dollars to strengthen the value of the naira has rather crashed the NGN from N0.70/$ to N570/$ today. The Prof and his colleagues on the board of the CBN must listen to the VP who is saying, let the Federal Government (FG) keep her dollars for government business and allow a free market where those with dollars (and many exist who earn far more than the government in dollars e.g. the upstream oil companies) trade the dollars with those who need dollars. So instead of the CBN doling out ‘OUR’ dollars to buyers to pay school fees, medical bills, travel costs, imports etc, let these buyers approach those with dollars and buy from them and this will reveal the true value of the naira and the CBN will no longer have to put pressure on the foreign reserves to defend the value of the naira! Unfortunately, Prof Obadan prefers a continuation of the old way that has led us to this N570/$ point. We don’t hear of the Bank of England doling out dollars or Euros to Bureau De Change (BDCs) in the UK or the Federal Reserve Bank doling out pounds sterling in the same way. Neither do we hear of these central banks allocating forex to their nationals who want to pay school fees, medical bills, mortgages, tourism etc abroad! The BDCs in the UK serve as intermediaries between those with pounds needing dollars and those with dollars needing pounds! It’s the same with BDCs in the US and elsewhere! The CBN must stop becoming a BDC and focus on its core job of monetary policy and maintaining financial system stability!

Prof calls the parallel market an illegal market! Haba! This is wishful thinking. Currently the CBN maintains a list of approved items for allocation of forex. Something like cars is not on the list. Could Prof please tell how an importer of cars is to source for US Dollars (USD) to pay for his goods as the CBN will not issue dollars to him? The parallel market is the only source for this importer and it’s confusing why Prof will derisively refer to it as an illegal market. Is Prof suggesting that this car importer is engaging in an illegal activity by sourcing his dollars from the parallel market? Policy makers must not live in such denial. For so long as the CBN does not have ALL import items on its list of approved items for forex issuance, there will continue to exist a parallel market! Even for items on the approved list like Personal Travel Allowance (PTA) which the CBN restricts to $4,000 per quarter, how else can a traveller source for more if their needs exceed what is issued by the CBN? It must be the parallel market except the CBN mandates that no traveller in Nigeria will spend more than $4,000 on their foreign travels in any given quarter else they are engaging in an illegal activity by sourcing for dollars elsewhere.

Prof suggests a revival and rebuilding of the productive sectors of the economy but the question is how? And here Prof like all other policy makers has ignored the elephant in the room – electricity – which is what’s needed to revive and rebuild the productive sector. In fact, Prof gave kudos to the Govt for genuine efforts to develop domestic production structures but has failed to realise that this Govt in the nearly 7 years of its existence has not added a single MW of electricity to the supply chain! What then does the Prof take to be genuine efforts? Is it the deteriorating insecurity that has closed farming and other productive activities or the unpoliced unproductive sit-at-home orders in the East?

I am pressed to ask where has Prof been that he says increased oil prices leads to a stronger naira? Does he not know that the entire dollar earnings from crude sales are used to import petroleum products and gas? Empirically Prof can see that oil is currently at above $80/bbl but naira is depreciating so Prof’s theory has failed empirical test!

Prof proffers as a solution the use of moral suasion to encourage Nigerians to patronise homemade goods but then why is the CBN at whose board he sits encouraging Nigerians to patronise foreign schools, medical facilities, travel, mortgages etc by draining foreign reserves to issue them dollars to pay for their choice of foreign over Nigerian made? How can the Prof be saying one thing and doing the direct opposite at the CBN boardroom?

Lastly did the Prof deliberately leave out his board membership of the CBN in his short profile at the end of his piece? If so, for what reasons?

Bottomline is that we have been doing the same thing Prof narrates in his article for over 60 years with colossal negative results with the naira depreciating from N0.70/$ in the 70s to N570/$ today. How can we then be doing the same thing and expecting different results, it is said this is a tell-tale sign of insanity!

As for those analysts who fear that if the VP’s apt suggestion is implemented, there will be Armageddon, let’s understand that the Nigerian economy though virgin and weak is very resilient! If someone said 7 years ago when exchange rate was N150/$ that it’ll hit N580/$, I am sure these analysts would have said the economy will collapse but here we are managing with it and moving on. Same way we are holding on with nearly 20% inflation and nearly 50% unemployment rate! Therefore if the VP’s suggestion are carried and the naira experiences a temporary devaluation, the ever resilient economy will carry it but in the end things will correct more fundamentally and we will be the better for it. Sometimes surgeons amputate limbs to save lives and make them better! The scaremongering about devaluation that has trailed the VP’s deep-rooted suggested solution to more permanently and sustainably tackle the forex debacle in Nigeria is highly unnecessary!

There are some analysts who think the naira will go on a free fall if the VP’s suggestion sees the light of the day, but I can confirm to them that there will be no sustained free fall of naira instead people will begin to look inwards, suddenly our schools and hospitals will be good enough. Innosons motors will just be fine and Obudu cattle ranch will be a choice over Disney world! Local rice will magically begin to taste better than imported rice! Local tailors will be chosen over foreign brands etc! When these choices change from foreign to local and demand for dollars crashes, the exchange rate will correct by itself!

We have been living a false life for too long and I hear the VP saying let’s get real by taking tough decisions! Hard, difficult and painful decisions but the end result will be great for the nation and all of us!

So far, the CBN and the Govt of Nigeria are fighting to strengthen the naira at far downstream and it’ll only be a losing battle! If they want to arrest the flood drifting the naira away, they need to take the fight upstream by:

1. Fight power cuts to energise the economy (an economy needing 200GW of electricity being fed with 4GW is a non-starter!)

2. Energised economy will boost production

3. Boosted production will end imports

4. No more imports means no appetite for the dollars

5. Low appetite for dollars means fall in value of the dollar against the naira! Naira wins! Nigeria wins!!

It’s not by fighting AbokiFx or draining the external reserves to artificially shore-up the value of the naira!!! Unfortunately, and tragically, nobody in leadership in Nigeria is taking step 1! Even state govts have taken their eyes off the ball of step 1 else they could be commissioning independent power plants fired by gas or renewable energy for their states! But nobody in Nigeria including the CBN Gov, Min of Finance, the President etc understands the importance of step 1 without which the economy will NEVER do well!!!

The FG understood that COVID-19 was a risk and a high-powered presidential taskforce is in place that meets every weekday and reports to the president on a regular basis.

However, and tragically too, power cuts (insufficient electricity) pose a greater danger to Nigerians and our economy far much more than COVID has and will ever do! To date COVID has killed less than 3,000 Nigerians whereas insufficient electricity (power cuts) kills millions of Nigerians and businesses every year!

So really what is needed is a powerful presidential taskforce on electricity! There are two bottlenecks with electricity in Nigeria – transmission which is still in the hands of government and distribution which was handed to politically exposed persons with no pedigree, funding and technical expertise to run a power business. Once the FG exercises courage and debottlenecks these two inhibiting factors, Nigeria will take off and the Naira will achieve parity with the Dollar in under 5 years!!!