Economy and the siege on the naira

THE central Bank of Nigeria (CBN) is currently being pilloried in certain quarters over its recent release of 41 items which can no longer be imported with foreign exchange sourced by banks from official government quarters. The negative reactions which this policy initiative is eliciting are indicative of the fact that the challenge currently confronting the Nigerian economy (and the Naira specifically) is not being fully appreciated by parties who are well placed to do so.

The charges against the CBN policy initiative include the argument that the new policy is a negative signal to foreign investors in the local stock market; that its impact on the local real sector was not properly assessed apriori; that the list of excluded items includes intermediate goods required as inputs for productive process in the real sector; that the policy will endanger inflation; and that the Bureau de Change and parallel markets are not deep enough to accommodate the foreign exchange demand of those locked out of the official forex sources by the policy

The arguments notwithstanding, the truth is that the economy and the naira are under siege, and the policy directives of the CBN need to be widened, and supported by other measures if we are to get out of the woods. The unfolding events seem to suggest that we have refused to learn from our history.

During the second republic, towards the end of President Shehu Shagari’s first term in 1982, Chief Obafemi Awolowo – Leader and presidential candidate of the Unity Party of Nigeria – raised concerns that the rate at which the country’s foreign reserves was being depleted was unsustainable, and that imminent economic crises faced the country. His concerns were dismissed by the ruling National Party of Nigeria stalwarts and their technocrats. Soon, however, Nigeria began defaulting on trade credit given her by international trade partners. A slump in the price of crude in the international market, excessive consumption of imports, non focus exports, and the abuse of the then current imports licensing regime were factors that brought the country’s economy to its knees.

Locally, firms which were dependent on foreign exchange for imports of materials began experiencing difficulties. The immediate consequence was a cut in production, retrenchments, continued product scarcity and inflation. Foreign linked breweries which were able to modify their machineries to process sorghum in place of barley survived, and have expanded into what they are today via buying up the assets of locally owned breweries which collapsed in the face of environmental challenges. The automotive industry which depended wholly on imports died a gradual death – so too did the textile industry which could not bring back cotton agriculture.

The homegrown programme of the Babangida regime was tagged the Structural Adjustment Programme (SAP). Its key ingredients included: Privatization of government owned companies that were not central to public sector operations (as a means of cutting down the cost of running the government, and getting these assets to operate more efficiently); The deregulation of the foreign exchange market (as a means of efficiently allocating scarce foreign exchange); Liberalization of the granting of banking licences (to induce competition and increase efficiency in the banking sector); the liberalization of import trade (via the abrogation of exchange control regulations and the drastic reduction of the list of banned items); and the encouragement of exports via a new regime of export incentives.

The key positives legacy left by Babangida’s SAP is the banking sector rejuvenation that we have today (This has however come at the cost of two waves of banking sector distresses). Negative impacts include the continuous slide in the value of the naira from N3 to the dollar to the N198/N230 which we have today, and heightened public sector corruption consequent upon the politicization of the top echelons of the public sector bureaucracy.

The continuous slide in the value of the naira and the collapse of the refineries have also worked together to create the problem of petroleum sector subsidy, and the albatross that it is on the neck of the Nigerian economy today. The deprivation foisted on the Nigerian economy by the profligacy of the Shagari years had forced the economy to begin looking inwards. Nigeria was beginning to produce its own food. Factories were being forced to look inwards for their raw materials; technology was beginning to remodel itself to serve the needs of the emerging economy. It was only a matter of time before these factors would lead to a new and self-reliant economy – that is if the environment of deprivation which prompted these developments was to persist.

Babangida’s import liberalization policy combined with a new flow of oil wealth (capped by the Gulf War oil windfall of 1991/1992) to turn this positive trend backwards. Cheap imports combined with weak consumer purchasing power and failing local infrastructure to make the products of local producers unattractive to consumers. The result was the suspension of a new effort at self-reliance.

Between the Babangida years and now, little has changed in terms of the structure of the economy. Key amongst positive changes are: The write-off of Nigeria’s external debt of US $35 billion under President Obasanjo’s watch in exchange for a one lump payment of U.S. $12 billion to the Paris Club of creditors (This debt has however re-emerged in a more virulent form, and to the tune – we are told – of U.S. $66 billion)

The other positive change that can be linked to government is the revolution we are experiencing currently in the information technology sector which took its root from the granting of GSM licences to private operators in 2001. Government had nothing to do with the boom in entertainment.

The key positive changes that took place in the Jonathan years are the creation of a framework for, and the commencement of the deregulation of the power sector, as well as the laying of foundations for proper development of the agricultural and local manufacturing sectors. The petroleum industry bill, if it had been passed into law, would have been another achievement.
Therefore the key challenges of the economy on which the siege on the naira has its roots are deep seated, and have been existing for long. These challenges include: A mono product economy, Infrastructural decay and weakness resulting from the neglect spanning about 40 years; a weak real sector that is unable to meet local consumption needs, or compete effectively with imports; unemployment and weak local purchasing power; a weak currency that has been under pressure of continuous devaluation since foreign exchange market deregulation of 1986. A debt burden that has re-emerged in a more virulent form and at value of U.S. $60 billion; a financial market sector that has become increasingly linked to the international investing community.

Also a public sector that is largely unproductive and consumes the bulk of government resources – with recurrent expenditure at the federal level consistently being above 70 per cent in the last 10 years; and an unsustainable political structure in which the bulk of the federating unit (states) are not economically self-sustaining or viable.

•Onumonu is a Securities and Exchange Commission-registered individual investment adviser.