By Dele Sobowale
“We are not looking for a stronger currency neither are we looking for a weaker one. People want to pay fees and investors want to know if they will have returns on investments.
We will use the reserves, we will use interest rates, we have gone through difficult months; hopefully, the next few months will not be difficult. We will not allow the naira to be weakened and we are committed to that”. Governor of CBN, Sanusi Lamido, in September.
A week after, the Central Bank of Nigeria banned the importation of dollars and other foreign currencies by announcing that no individual, group of persons or investors will be allowed to bring any form of foreign exchange into the country without its approval. Right about now, financial and economic policy watchers are asking the CBN in exasperation: “What then do you want?”
Given the realities facing Nigeria, Lamido and the CBN are playing a risky game. The CBN Governor was right in his observation that that “we have gone through difficult times”, but he is building his policy on the vain hope that “the next few months will not be difficult”. Already, the prospects for the next few months are not better than those for the last few months. What analysts have not heard categorically from the CBN is the answer to an obvious question: “what will happen if the next few months are as difficult, or even worse, than the last few?” The factors responsible for the difficult last few months are generally well-known to most people who take the trouble to monitor these matters.
Nigeria is export-dependent and import-dependent. This nation depends largely on the export of crude oil for a disproportional percentage of our national revenue. When the global crude oil market sneezes, Nigeria catches pneumonia. This year, there had been a chill in global demand for crude on account of slow economic growth in some of our major markets and; competition from other competing sources of oil to the global market. Those two would have been bad enough for the country.
Added to our country’s woes was the unbelievably high level of stolen and spilled crude resulting in revenue shortfall of close to 11% of crude revenue. This has already adversely affected future shipments by legitimate exporters who must compete with the crude thieves for the business. Naturally, the thieves have the advantage – they can sell at deep discounts. Approximately 400,000 barrels of crude are involved and the government has no clue yet concerning how to reduce, let alone, stop the activities of the oil thieves.
Given the combination of global competition and internal sabotage, none of which is under government’s control, Lamido’s optimism has assumed the nature of wishful thinking. The safest assumption can only be that crude revenue until the end of the year and in the short term, defined as twelve months, will remain below budget. The CBN will continue to deplete the external reserves in its vain effort to prevent devaluation officially – even when it is already a fact. In September, CBN drew $1.33 billion and might have to draw more in October. The question is: for how long can the CBN continue?
Although the discussion on revenue shortfall has not been exhausted, let us now turn to the import related problems which will continue to drive down the value of the naira – whether the CBN likes it or not. In virtually every major aspect of our economic life, the nation is import dependent. Three sectors, transport, food, and ICT, will serve to demonstrate the degree of our import dependence, meaning exporting the foreign exchange we earn.
Once upon a time, Nigeria actually had two car assembly plants (Peugeot and Volkswagen), two tyre manufacturers (Dunlop and Michelin) and car battery manufacturers. Today, we have none. Today every nut and bolt in every car, truck or bus in Nigeria now has to be imported with dollars going out. Toyota, Mercedes Benz, Peugeot, KIA, HYUNDAI, FOTON, Susuki, HONDA, etc and their local distributors run all the way to the banks everyday, Nigeria gets deeper into a financial mess whenever our foreign exchange earnings don’t match our import needs.
The story had been told so often, everybody can repeat it. About 70 per cent of Nigerians are engaged in farming. What most people don’t know is that only two per cent of Americans are so engaged. That means 112 million Nigerians are busy doing what only 6.4 million Americans do – feed their people. But while the USA is a net food exporter, Nigeria is the largest net importer of food. Dr Adewunmi, the Federal Minister of Agriculture stretches a lot of truths to the breaking point, but on our food import bill he mainly tells the truth. If the Federal government of Nigeria should ban the importation of rice, wheat, sugar, and frozen fish, uncontrollable riots will break out nationwide. Officially and illegally, Nigeria spends close to 25% of its annual GDP on food imports; meaning more crude oil dollars is shipped back abroad.
When the mind turns to ICT, including the hardware and the GSM networks and the billions Nigerians spend on them, while creating very little value, the dollar export involved is simply staggering. MTN, ETISALAT and AIRTEL are mostly foreign owned; only GLO breaks up the solid line up of foreign ownership. And, while we enjoy the rivalry between SAMSUNG, NOKIA, APPLE, BLACKBERRY etc, few of us stop long enough to think that all we are doing is exporting dollars.
While it is true that the CBN is not responsible for the policies that will force us to stop consuming what we don’t produce, there is very little the CBN can do to stop us from doing what we have always done in the next few months. That explains why most analysts are skeptical that the Central Bank can defend the naira for long. Depletion of the external reserves will continue until the CBN cannot continue and then the inevitable will occur – devaluation of the naira. The CBN can only succeed if its efforts are complemented by appropriate fiscal policies. The Federal government recently announced plans to increase import duties on luxury cars; it also will henceforth purchase cars made in Nigeria in a bid to encourage local manufacturing. Those measures have been tried before – without long term benefits. There is nothing to suggest that this government and its successors will have the will to see it through. Yet without it, nothing will work.
The CBN’s ban on the importation of foreign exchange by individuals and groups, as well as investors, would ordinarily have made no sense under the circumstances. Why stop the importation of dollars when the nation desperately needs them? But, that measure was dictated more by security concerns and the need to stop attempts by global money laundering syndicates, as well as terrorists from using Nigeria as a transit pointy for illegal activities globally and especially in Africa.
Finally, there is also a great deal of concern that the sudden upsurge in the importation of dollars might be related to the 2015 elections. Politicians with money stored abroad might be bringing them in to prepare for the elections. If so, government might simply force those involved to engage in electronic transfers and to use more fronts to launder the funds without stopping the flow of illegal funds.
The CBN would probably have made a greater impact if it had monitored the movement of the illegal transfers, through a “Sting Operation, aimed at uncovering some of the kingpins of what is already a global ring of illegal transfers.
Finally, the Retail Dutch Auction System might not work because success does not depend on the system which had worked elsewhere in the world. It might fail here because banks and customers will still find ways to cheat. The Retail Dutch Auction System was first introduced to our economy after the Structural Adjustment Programme was launched and it became clear that a controlled foreign exchange market cannot serve the economy which was becoming more market-led. Instead of the monthly allocation, via the Form M, the auction system was introduced. But, very quickly it degenerated into round-tripping and money laundering. Banks and their customers were demanding more foreign exchange than they needed. Scarcity of foreign currency was still an underlying factor – then, as it is now. Scarcity drives up prices – including exchange rates. And there is nothing the CBN can do about it.
The question still remains: “What does the CBN want?”. It can’t succeed without a supporting fiscal policy. Right now, the Federal Ministry of Finance has not developed one.