By Abiodun Akintaju
Nigeria exists as part of a global community, and the effects of international trends and occurrences are bound to reach our shores.
The magnitude of each international shock on Nigeria is dependent on the state of our economy at that time and the tactical moves made by our economic managers in response. At the current time, the world is grappling with inflation, manifesting as the cost-of-living crisis, which is largely an aftershock of the COVID-19 pandemic and war in Ukraine. The situation in Nigeria is rather more hectic than what obtains in other climes, even in fellow African countries, due to our over-reliance on imports and the unprecedented loss of value experienced by the naira.
Insecurity and managerial incompetence have not helped either.
Thankfully, our situation is not beyond redemption. You see, there are four rates that determine the economic wellbeing of any nation: inflation, exchange, interest and employment rates; and managers of an economy must constantly perform a balancing act to manage these rates for economic growth and stability. Inflation and exchange rates are the older and more erratic twins, while the other two – interest and employment rates – dance to the Afro beats played by their older siblings.
Inflation can be either cost push or demand pull, unfortunately the buying power of Nigerians has been nearly wiped out, so the inflation we are experiencing is driven by a plethora of costs. Our inflation is a flow-through from the increased costs of importing raw materials, finished products, food, clothing and refined petroleum products due to the sustained depreciation of the naira. What the foregoing then further highlights is that our greatest economic problem – one which presents a clear and present danger to our wellbeing, growth and prosperity in Nigeria – is the loss of control over the naira’s exchange rate. If we don’t tame this aggressive exchange rate volatility, our economic situation may not improve, our economic security is threatened and social unrest might ensue.
The Central Bank of Nigeria, CBN, pronounced the convergence of the official and parallel exchange rates without laying a proper foundation or reorganizing the forex market. Expectedly, the market convulsed and the impact has been instant and punishingly painful. To add salt to the proverbial injury, the equilibrium point for the official and parallel rates both shifted up aggressively and convergence was not attained. The price of the naira is now dancing Atilogu-style dance, around N1000/USD. Economics is not voodoo. We need to deal with this exchange rate situation, because our lives and livelihoods depend on it.
I, hereunder, present five actions that must be taken simultaneously and holistically, with the expectation that the forex volatility can be reined in and, maybe, improve the value of the naira.
Nigerians have experienced one of the most violent wealth reductions in history, with over 50 per cent reduction in dollar-adjusted personal and household wealth within a six-month period. It is important to note that the exchange rate is in fact and indeed just a price and like any other tradable item, subject to market forces of demand and supply.
Our present economic goal as a nation must be to increase the supply of forex and reduce the local demand for forex. This is the Holy Grail.
Firstly, the opaqueness in the trading of forex has to be eradicated immediately. This can be achieved by online, real-time, electronic and continuous trading of forex in organized, regulated and guaranteed markets. We have the Nigerian Exchange Limited, FMDQ and NASD with the required technological capacities/platforms. All banks, stockbroking firms and BDCs would be the participants in this market. BDCs would be required to be well capitalized and their number reduced in the process. The goal would be to have a market with at least 1,000 institutional participants with several individual forex traders each. The huge number of market participants would help with price discovery, price convergence within a band and make it difficult to game the market.
Under this new regime, only commercial and merchant banks would be allowed to operate current/checking domiciliary accounts. All other forex market participants would have naira current/checking accounts and trading/non-checking accounts for their forex dealing activities and daily reconciliation.
Clearing shall be done between the checking and trading accounts with trades settling in naira. The checking accounts operated by the banks would be for international operations and trading on the forex markets only. Under this forex regime, the CBN shall act as the counterparty to all trades done on the exchanges, thereby eliminating credit risk and, in rare occasions, intervene as the “unseen” stabilizing hand by boosting demand or supply.
Secondly, transactions in forex and operating of domiciliary accounts must be prohibited in Nigeria. The implication of this is that all balances in domiciliary accounts held by individuals and non-bank corporations must be swapped into naira at the seven-day average parallel market rates – all foreign currencies. Also, the use of forex for transactions in Nigeria after a cut-off date should be prohibited. The use of forex for illicit purposes, corruption, electioneering and more are widely reported. There’s no policy that can work when some folks are simply buying and hoarding forex in septic/overhead tanks and farmlands. This is a no-brainer really. This initiative would result in the capping of the maximum amount of forex that can be in the possession of an individual at $1,000 and institutions at $5,000. Any discovery of forex in excess of this amounts shall be forfeited in its entirety.
An honest whistleblowing scheme would be deployed to ensure the success of this cap and a generous reward of at least 10 per cent of the forex recovered paid to the whistle blower in naira. Let all of us hold only naira in Nigeria.
Thirdly, everybody that has stashed up forex, legally or otherwise, should be given a 90-day window to bank such amounts. Accompanying this directive shall be an amnesty, which shall ensure no punishment whatsoever or disclosure requirement from depositors regardless of amount. This directive must be gazetted. The amounts deposited shall be swapped into naira, using the formula already presented above. On the one hand, this move would help increase the supply of forex in the market, with its attendant forex supply effects; and on the other hand, this move would result in the injection of additional naira liquidity into the economy that can be deployed more productively than sitting idly in tanks and rotting away.
Fourthly, the forex component of federal allocations due to states should be credited into the accounts of the states with the CBN and exchanged for baira in the forex market. In other words, the states would nominate a bank, BDC or stockbroker that would help sell their forex in the open market, thereby increasing supply to the market. States would subsequently receive credit in Naira.
Hope you are seeing where I’m going, it’s all about demand and supply of forex to the market. By extension, banks would receive forex inflows on behalf of exporters and credit their accounts with naira. This shall cover services delivered by Nigerians resulting in forex inflows as well.
Fifthly, the success of this regime is hinged on the readiness and willingness of the CBN and the Securities and Exchange Commission, SEC, to institute and regulate an optimized forex market. The level of coordination must be top-notch, all relevant stakeholders must be engaged on a continuous basis and there must be no “sacred cows,” waivers or exceptions. Increased productivity and import substitution must become our new mantra. We should grow what we eat, eat what we grow, wear what we produce, produce what we wear, improve the quality of our schools, hospitals etc and, definitely, refine our petroleum.
What about Nigerian made cars, TVs, computers, clothes, shoes? Bring it on. We have to set a deadline for the export of raw commodities, beneficiation must become the minimum standard for now, but the long-term goal should be complete processing.
In 2020, Indonesia prohibited the export of raw cobalt and nickel, we can achieve the same within a reasonably short time period. For instance, we should not export our lithium raw, let’s start from there. A state of emergency must be declared on our external reserves. I am wondering who knows what our true external reserve balance is, with conflicting and horrifying reports from Nigerian official sources and Nigeria’s international bankers!
The increase of crude oil production must be given priority, as it would have an immediate positive impact on our reserves and help stabilize the naira exchange rate.
By the way, what is all this we are hearing about oil swap transactions that have encumbered possible receipts from crude sales? I don’t even want to think about this. The overriding objective should be to have a deliberate plan for the reduction of demand for forex and an increase in the supply of forex. Again, the exchange rate of any currency is in fact a price. The equilibrium of supply and demand is the price and all prices obey the laws of demand and supply. As we increase the supply of forex and/or increase the demand for naira, the equilibrium point – exchange rate/price – shall continue to go down and the value of the naira would improve. Who knows how far and how fast this revaluation can occur? For all of these to work, the CBN must guarantee to honour all legitimate forex requests. Should you need to pay for a service/invisible or acquire an asset or make an investment, the CBN must stand ready to meet all forex requests. All bank/payment cards must work internationally and 100 per cent of the time.
However, if some random individual wishes to acquire a house in London or Dubai, or buy a car from the USA, you’ll need to disclose the source of your funds. Your guess is as good as mine. Naira would stay in Nigeria, quietly. All of the solutions proffered above must be done simultaneously, sensibly, expeditiously and in a coordinated manner.
He who is down needs not fear a fall. We need to take our destiny in our hands and take this forex bull by the horn. I submit.
