In a recent interview with the BBC, President Buhari said:
“I have asked the Central Bank Governor and others to sit and see if they can convince me to murder the Naira.”
He also said:
“Most of our young people can’t get jobs; one of the biggest dangers we face.”
During the campaign that led to his election, the President’s party highlighted job creation as its major economic goal.
In many discussions, a target to create 3 million jobs was promised, to ensure the bulging youth population is engaged in productive activities. If various estimates are to be believed, approximately 5 million Nigerians come into the workforce annually, yet in the same period, the country struggles to create more than 1.5 million jobs. This is why unemployment and underemployment in Nigeria are now 9.9% and 17.4% respectively.
For Nigeria to meet its job creation target, the Government needs to solve the supply side challenges impacting the exchange rate in order to make the economy more competitive.
How the Naira Lost its Shin
The economic principle of demand and supply is simple. If demand for the Dollar increases in Nigeria, it becomes more expensive to “buy” Dollars, since this demand will create scarcity of Dollars. Also, if the supply of Dollars reduces, even if demand for it stays the same, a scarcity will occur, which will lead to a rise in the price of the Dollar.
How does Nigeria fit into this narrative? In 2015 the official price for buying $1 was roughly N200. At this price, we are made to believe the demand for and supply of Dollars is at equilibrium. Since then, a number of things have happened to the supply of Dollars to Nigeria:
Oil prices have crashed: According to the NBS: “in Q3 2015 Nigeria exported mainly mineral products, which accounted for 86% of total exports.” This means crude oil accounts for over 80% of all exports and remains Nigeria’s foreign exchange earner. So, the drop in oil prices has reduced Nigeria’s foreign exchange earnings by almost $50 billion; ouch.
Non-oil exports are struggling: At a conference organized by the CBN and the Nigerian Export-Import Bank (NEXIM), the CBN Governor said non-oil exports dropped from $10.5 billion in 2014 to $4.4 billion in 2015. If the Naira is over-valued, exporters don’t have an incentive to bring their foreign currency proceeds back to Nigeria. So, non-oil export earnings dropped by $5 billion in one year; ouch.
Foreign investment is shrinking: According to a Nigerian Capital Importation Report recently released by the NBS: “The total for 2015 was recorded at $9,643.01 million. This represents a 53.53% fall on the previous year, when the total was $20,750.76 million. So, foreign capital invested in the Nigerian economy dropped by $11 billion in one year; ouch.
The combination of these events means foreign exchange supply in Nigeria has dropped by over $60 billion in one year. To minimize the impact of the drop, the CBN responded by spending almost $11 billion of its reserves to defend its reserves; and when it realized the ineffectiveness of that decision, it decided to manage the demand for foreign exchange with several short-term policies.
But the laws of demand and supply don’t change overnight. If the supply of a commodity, in this case, the Dollar, drops by almost 50%, then the price of the product will rise. This is why despite the CBN’s best intentions of pegging the exchange rate, most Nigerian businesses now buy the Dollar at N300 on the Black Market, a 50% premium compared to the official rate. This reflects the decline in supply, and follows standard economic principles.
While Nigeria Faces Significant Economic Challenges
The weakening exchange rate is compounded by the challenges facing Nigeria’s economy. Within a decade, Nigeria dropped from 101st position to 124th position in the World Economic Forum’s Global Competitiveness Report. Labour productivity, estimated at $3.50/hour by the NBS, lags comparable emerging markets, whose productivity measures between $10/hour (Brazil) and $29/hour (Turkey). Nigeria also ranks in 169th position out of 180 economies on the World Bank’s Ease of Doing Business report.
These numbers suggest Nigeria will struggle to attract the necessary investment if a different set of policy initiatives are not developed and implemented.
Private Sector Capital Holds the Key to Nigeria’s Competitiveness
Nigeria needs capital to improve its infrastructure stock, with power, transport and housing all in need of critical investment, despite dwindling Government revenues. The Government needs to eliminate its dominance in critical sectors like rail, air, power and the oil industries.
In the oil industry, the JV entities should be incorporated as private companies, with Government retaining a minority stake. We must invite private sector participation in the management of our airports, waterways management and rail operations. Finally, the Government should deregulate the transmission grid and encourage private sector participants in an area that is currently monopolized by Government.
These deliberate acts not only reduce the strain on Government revenues, but more importantly, they encourage an inflow of domestic and international capital to critical drivers of economic competitiveness.
By providing a transparent and best-in-class framework to transfer existing assets, and enabling a new set of laws to govern and protect future investment, we can commence the long awaited journey to becoming a competitive economy and attractive investment destination.
How Our Exchange Rate Policy Can Stimulate Growth and Improve Job Creation
To attract capital, we must create the right environment for those investments. In addition to the oft-repeated political risks and threats to long term growth, if the Naira continues to trade at an artificial rate of N200:$1, rational investors will not consider Nigeria as a destination. This means the supply shortages of the Dollar will probably get worse, not better, unless oil prices improve.
By ensuring the Naira trades at its fair value, the Government also eliminates speculation and perceptions of volatility. For example, MTN Nigeria and GT Bank, who both have foreign currency debt obligations, have explored the possibility of paying their creditors early.
Such moves suggest a belief that devaluation is inevitable, and will further worsen investor confidence. Even individuals are seeking ways to pre-pay school fees, or book holidays in advance. If the Naira is properly valued, such demand side pressures will reduce, while those holding foreign currency in expectation of a devaluation will no longer have an incentive to do so, improving the supply side.
Assuming that our currency is fairly valued, and supply of Dollars increases, it will inevitably mean the price of buying the Dollar will reduce over time from roughly N300. This is important for small businesses that will get the foreign exchange needed to buy their input and machines at cheaper prices, improving the cost of doing business, and making their products more competitive.
A weaker Naira also makes local goods and services more attractive. While Nigeria might not be a major exporting nation, we must not ignore the large domestic market. When a country’s currency weakens, it will inevitably increase the price of imported goods, which will force most people to look for domestic alternatives. A weaker Naira might be bad for those looking to import Honda and Toyota cars, but it will certainly make more Nigerians buy Innoson vehicles. Instead of spending months negotiating lopsided trade agreements, Nigeria can use its exchange rate policy to drive a coordinated trade agenda that makes domestic products more attractive, without adjusting import tariffs.
These are reasons why President Buhari must review his current stance on the exchange rate. A weaker currency does not imply he is “killing” the Naira. However, an artificial exchange rate, which we currently have, might spell the death of many businesses, some of which have started laying workers off.
In a country where 20 million people are either out of work, or in jobs below their skill levels, the Government must do everything to allow businesses create jobs, including an exchange rate policy that stimulates business. While the CBN’s exchange rate policy did not create Nigeria’s economic crisis, the decision to support an artificial value of the Naira is gradually making it worse.
We know the President means well, and genuinely believes the current policy is what best suits Nigeria, but as Saint Bernard of Clairvaux famously said, “hell is full of good intentions.”
By Akin Oyebode