Foreign Exchange Beyond CBN By Lekan Sote

How far or how long the current Central Bank of Nigeria’s intervention in the foreign exchange market will last is a function of the petrodollar revenue of the Federal Government. The International Monetary Fund thinks the naira is overvalued by 10 to 20 per cent and it is recommending a floating of the currency.

The CBN intervention, no doubt, has “temporarily” strengthened the naira. And now that lucky mascot, Yemi Osinbajo, whose previous tenure as Acting President witnessed an uptick in the value of the naira, is back, the currency may further appreciate.

As the CBN says it has “the arsenal to sustain what is happening in the foreign exchange market,” the black market exchange rate has dropped in favour of the naira, from more than N500 to somewhere north of N300. Former CBN Governor Charles Soludo thinks that the official N306 exchange rate is redundant, as economic entities work with the black market rate.

In addition to providing foreign exchange for tuition and medical fees abroad, Personal Travel Allowance, BasicTravel Allowance, the CBN will also provide foreign exchange for outstanding letters of credits of petroleum products importers. However, it won’t be fair if the foreign exchange is given to the importers at the current rate; it will eat into their profits, if not deplete their capital.

An LC is a document issued by a local bank to an overseas correspondent bank, which is acting on behalf of a creditor abroad, to guarantee payment against credit that is about to be established between the consenting creditor and the would-be debtor in an international business transaction.

The CBN has opened a special window to accommodate small and medium scale enterprises, but it may have disposed of more than $1bn in its latest flurry of activities. At a time, it looked like the banks could not ante up enough naira to purchase the quantum of dollars that the CBN offered.

Foreign exchange is the process by which a person or legal entity settles debts to international creditors. But, in recent times, foreign exchange has been expanded to mean the currency of exchange itself. Thus, the dollar is referred to as foreign exchange.

As several entities buy such foreign exchange to settle their international debt obligations, the interplay of the buying and selling establishes a price, or an exchange rate, between the buying currency and the currency being bought.

Now, the oil sector, which the Minister of Budget and National Planning, Udoma Udo-Udoma, says provides more than 95 per cent of government’s foreign exchange revenue, is a mere 9.6 per cent of Nigeria’s one-time $500bn Gross Domestic Product.

If, as Udo-Udoma has observed, the manufacturing sector, which is 9.5 per cent of the economy, provides a mere one per cent, one can presume that the (recorded) foreign earnings of the agricultural sector, which is 23. 1 per cent of the economy; the mineral sector, which is 0.1 per cent; the service, real estate and utilities sectors, constituting 57 per cent of the economy, earn a paltry four per cent of the foreign revenue.

If 90.4 per cent of the economy provides only four per cent of foreign exchange, you do not need a crystal ball to determine that primary agricultural products, like cocoa, rubber, hides and skin, which are still in demand in the international commodities market, by the way, have been deposed as Nigeria’s major foreign exchange earners.

That explains the immediate adverse impact that a sudden drop in oil revenue had on the exchange rate of Nigeria’s essentially import-oriented economy. The grossly inadequate foreign revenue earning power of the economy, in the face of the nation’s huge import bill, naturally led to scarcity of goods and its attendant inflation.

Someone has said that Nigeria imports about $4bn worth of goods every month. So the $30bn or so foreign reserves that the CBN seems to be crowing about will only finance seven and half months of imports.

Nigeria’s economic policymakers had better be thinking of realistic ways to increase foreign exchange earnings beyond the upstream petroleum sector. And the place to start is for the CBN to redirect the foreign exchange to purchasing infrastructure, plants and machinery to exploit Nigeria’s agriculture.

The resulting agro-allied industry must take advantage of the country’s economy of large scale to produce more consumer goods more efficiently and more effectively. The distribution should start within Nigeria, after which it should include the West African sub-region, and the rest of the world. This must include the export of excess primary agricultural commodities.

A report claims that the Minister of Finance, Kemi Adeosun, is thinking of accepting the prescription of the IMF to float the exchange rate of the naira and let it find its own level. This is an excellent proposition for an economy with a mature real sector, but grossly inappropriate for an economy with a highly unproductive real sector.

The resulting demand for foreign exchange, which Nigeria does not earn enough of, to fund an inordinate consumer import bill, will completely decimate the naira. You will understand this argument if you understand the economic law of supply and demand.

A continued devaluation of the naira is not a very good option either. Economists have argued, ad infinitum, that a non-productive economy that devalues its currency, causes its citizens to lose a significant portion of their savings, as they will also pay a higher price for the same products.

Economists argue that currency devaluation works like inflation, as both reduce purchasing power or effective demand, stall a nation’s economic cycle and eventually lead to a depression or contraction of the economy.

Yes, the real value of the modern currency rests on the credibility of the issuing government. That’s why they call it fiduciary money, or money that depends on trust, and not secured by gold or silver. But, as a store of value, a currency should be stable. This is a tough act for currencies with non-performing real sectors.

Adeosun should, however, muster the will to persuade Ibe Kachikwu, her Petroleum Resources counterpart, to find a way to increase production at the local refineries, to advance the intentions of colleague, Udo-Udoma, to reduce the importation of petroleum products by at least 60 per cent.

The recently launched Economic Recovery and Growth Plan intends to stabilise Nigeria’s macro-economic environment by aligning monetary and fiscal policies, accelerating non-oil sector revenue, ensuring agricultural and food security, ensuring energy sufficiency in electricity and petroleum products, improving infrastructure and driving industrialisation.

These are okay if they will go beyond intentions. Nigerians have been regaled to several moonshine economic plans from the beginning of this Fourth Republic and none has moved them to the El Dorado promised.

One hopes that Udo-Udoma, who has thumped his chest that this new plan will work, has taken judicious notice of the anima called ‘The Nigerian Factor.’ This had better work out, especially in the face of lamentation by housewives who go to buy foodstuffs.

They say that as long as the CBN intervention has not prevented the price of consumer goods from shooting into the stratosphere, all the huff and puff is mere sound and fury that signify nothing.

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