By Johnson Chukwu

We suspect that ordinary folks and foreign residents have joined this flight to safety and may be converting their Naira assets into dollar to mitigate additional loss in value. The danger of an unmitigated progressive depreciation of Naira is that our national currency may lose one of the most critical attributes of money, which is “as a store of value” and should this happen, the concerns about the dollarization of the economy will become real.

Beyond the above drawbacks of the current exchange rate policy is the fact that it focuses only on demand management. At best it ignores supply improvement and in worst case scenario discourages alternative sources of supply. Because inflows for investment and other legitimate transactions would be converted at official price as against the ruling rate on the street, which will serve as the transaction rate, investors feel shortchanged to sell their inflows at the official rate hence their decision to stay away from the market pending when the official rate is reflective of the market situation.

We should also recognize that in today’s society it is almost impossible to eliminate consumption of imports. Nigeria’s population and demography makes it all the more inevitable for the country to have a base level of imports. A classical example is that 16 years ago, personal consumption of telecommunications bandwidth in Nigeria was insignificant, but today almost every high school educated Nigerian is consuming bandwidth virtually every minute of the day and these bandwidth is not manufactured anyway in Nigeria. The providers be they local or foreign have to pay for these consumptions via foreign exchange.

2000                            2010                                       2015

Exports (FOB) NGN   2,745,102,210,000.00     12,011,475,890,000.00   8,871,595,980,000.00

Imports (CIF) NGN    591,325,600,000.00        8,163,974,580,000.00     10,167,844,040,000.00

Population     122,876,723      159,424,742      182,201,962

According to the Central Bank, Nigeria’s current monthly import bill is about $4billion while earnings is less than $1billion, it then means that if we limit ourselves to the current sources of inflow, which is principally crude oil sales, the price of crude oil in the international market must rise from the current level of about $30 per barrel to about $120 per barrel before we can balance our international trade. In effect, the focus of Policy makers should be rather on encouraging the expansionof sources of forex supply against the current focus of demand management.

ALTERNATIVE POLICY OPTIONS

Expanding the Sources of Forex Inflow.  Flexible Exchange Rate Management

A flexible exchange rate is like a silver bullet that can be effective for both demand management and supply expansion. When the price of a currency is adjusted to reflect the earnings capacity, the citizens capacity to consume imported goods is automatically reset at a lower level as they can no longer afford many of the non essential imported items. Irrespective of the so called inelastic demand of Nigerians for imported goods, once the currency is devalued and their Naira income is not adjusted in the same ratio, citizens will reorder their priorities and eliminate items that they can no longer afford.

In many instances, citizens will look for local alternatives to the imported items and shift their patronage to such local substitutes. The increase in demand for the local substitute will spur increase in production and possible improvement in quality. With improved quality and lower export cost, Traders may consider exporting such improved local products to neighboring African countries and may be from there to Europe, Asia, America and other parts of the World. For emphasis, we have a proof of concept of this model in the 1980s during the Structural Adjustment Program when made in Aba shoes, bags and other leatherwears became export commodities to Ivory Coast, Ghana, Togo, Gabon, Cameron Congo Democratic Republic, etc.

Concessioning of Infrastructure

The government has already indicated in its intention to borrow about $4.5billion from the international market to fund the budget deficit, which is basically going into infrastructure development. News have it that the government may have already started exploratory talks with AfDB and World Bank for concessionary budget loans of $3.5billion. While we support these efforts, we are convinced that the government does not and will not have the financial resources to fund the infrastructure gap in the country.

Without efficient infrastructure, the country would never become a competitive market for manufacturing. We therefore believe that the way to go is to concession some of the critical infrastructure that are commercially viable such as transport infrastructure – Rail lines, Highways, Seaports, Airports, etc. and invite private sector capital to build these infrastructure under Build Operate and Transfer (BOT).

This will create a veritable channel for inflow of long-term capital into the country. A good example is the 1,342 KM standard gauge rail line from Lagos to Kano which was awarded to a Chinese company by the Obasanjo government in 2006 at a cost of $8.3billion but canceled by the Yar’ Adua government in 2007. At present, the Federal government obviously does not have money to fund such ambitious project, which is critical to the economic development of the country.

Should this rail corridor be concessioned, the country will receive foreign direct investment of about $8.3billion (assuming that the cost is still the same) and still enjoy the catalytic benefit of the infrastructure toeconomic development. Several projects of similar nature that are bankable can be left in the hands of the private sector to develop. A proof of concept – virtually all the shopping malls in Nigeria were funded with foreign private equity capital.

Deregulate the downstream of the Petroleum Industry.

A proper deregulation of the prices of petroleum industry will trigger investment into that sector. The current modulated pricing system has clearly not attracted investors and would not likely attract investors. A shift from a finished products importing nation to local refining will reduce Nigeria’s monthly import bills from $4billion to $2.4billion based on CBN statement that refined petroleum products importation account for 40% of the total demand at the official foreign exchange market.

Beyond that, the domestication of our downstream petroleum industry will create employment and possible earn the country foreign exchange from export.

Use trade policy to stimulate specific sectors

The government should adopt policies similar to the Cement industry policy to stimulate investment in specific sectors of the economy where Nigeria has comparative advantage. The policies should be such that will encourage value addition instead of production of raw materials. For instance, the government should renew the previous government’s drive towards the implementation of the Cassava policy, Sugar policy and Automobile policy.

Similar policies should also be enacted for petroleum refining, palm oil/produce and vegetable oil refining, Sesame seeds, Cocoa, Cotton, Granite, furniture, leatherwears, etc. Should we grow these sectors to the point of producing globally competitive final products from the abundantly available raw materials, we would have succeeded in achieving the much desired import substitution, conserve our foreign reserve and possibly earn some foreign exchange.

CONCLUSION

While we clearly support a more flexible exchange rate management, we strongly believe that devaluation alone will not address the problems of the economy. We need a cocktail of policies which will include exchange rate adjustment, creating windows of investment for long-term funds through concessioning of commercially viable infrastructure, full deregulation of the downstream petroleum industry and stimulating investment in sectors where Nigeria has comparative advantage, as well as investing heavily in social infrastructure such as health, education, security, etc. It is such holistic approach to economic management that will change the structure on Nigerian economy and wean it from dependence on Oil for export earnings.

The concerns of the government have been that these routes will inflict pains on the citizens; unfortunately, there is not easy route out. We however believe that it is better for the citizens to take this pain once and have the economy restructured so that we will not be exposed to another crude oil crises as we suffered in the 1980s, 1990s, 2008 and 2015/16.