High forex rate: We are all responsible

AS I write, one United States dollar is trading for about 385 naira in the black market.  A year ago, it was selling for 160 naira. More than double the current rate. As a result of this development, the cost of imported consumer items like tomato paste, toothpaste, lotions, perfumes, electronics, and clothing have almost doubled. People, especially those who patronise supermarkets, shop online, have children schooling abroad or need to travel out for medical treatment have seen a drastic reduction in the purchasing power of the naira.

Now, we all would love to have a situation where one naira could exchange for one dollar. Life will be a lot easy and our naira would buy us more of those imported goods. For instance, N20, 000 would exchange for $20,000 which is money enough to buy a brand new 2015 Honda Accord.

The truth however is, the value of a nation’s currency is not an emotional matter. It is not determined by what the people want it to be. The rate at which a country’s currency exchanges for others is a pure economic issue that depends on the nature of a country’s trade status with other countries. And this is also dependent on the nature of productive activities that a country has. It is not determined by fiat or debate but by interplay of how much of a country’s needs can be met by domestic production, how much of domestic production is being sold to other countries and how much it is also buying from other countries. It is a blend of all these that determine the value of a country’s currency. Not wishes and dreams.

Nigeria trades with other countries and in this global market, countries that produce and sell more are the clear winners. For instance, if citizens of other countries need and buy more of goods that we produce than we need and buy goods produced in their countries, the demand for the naira would be higher and this will lead to a rise in its value relative to theirs. The reason why the dollar is so expensive now is simply, because we have a lot more naira chasing the dollar. We buy more from the international market than they do from us. Just look around and you will see. We buy imported cars, clothes, electric bulbs, fuel, bikes, furniture, kitchen utensils, candles, shoes, perfumes, drinks, just about everything that we need. I am also guilty of this practice. Even now, almost all that I am wearing is imported from the United States: jacket, shirt, belt, boxers, jeans, shoes.

You tell me, what your reality is. The question now is, what are the things that other countries buy from us? Or rather, apart from crude oil and gas, what other products do we produce to sell to other countries? Very little. According to a report by Nigerian Export Promotion Council (NEPC), the country earned a mere about $3billion from the exportation of cocoa, rubber, and other non-oil commodities within the 2014 fiscal period. Compare this to the over $70billion that was realized from the sale of crude oil and gas in 2014 and you will see how unbalanced our trade is with the rest of the world and how vulnerable our currency is to the volatility in global oil prices.

Beyond the organised statistics and given the practical reality of what surrounds me, I can safely put the ratio of our trade position with the rest of the dollarised world at 90 to 10.  In the past when a dollar traded for a naira, the world had a lot to buy from our country. We were the leading exporters of palm oil, ground nuts, cotton, textiles and rubber. But today, the story has changed and we have become net importers of all those products that we exported to other countries. So we cannot in all honesty expect that such a ratio will translate to a balanced foreign exchange rate that should give us the sort of exchange rate that we all want. That will be illusory.

Consistent high prices of crude oil which constitutes 70 per cent of our exports and accounts for 90% of our foreign exchange earnings have for decades been the one dominant reason for the relatively steady exchange rate that revolved within the range of N150 – N160.  The Central Bank does not print dollars to meet the demand for forex. It earns it from remittances from Nigerians that are based overseas; earnings from oil exports; earnings from non-oil exports; and Foreign Direct Investment. In 2013 for instance when oil sold for about $100, the total dollar earnings coming into Nigeria was about $70 billion dollars a year, made up of  $21 Billion from remittances; $40 billion from net petroleum earnings; $3 billion from non-oil exports and about $6 billion from Foreign Direct Investments.

The total demand for exports in that year stood at $54billion. This meant that it had enough to meet the demand and excess of over $10billion to set aside as savings. This is the principal reason why the exchange rate was pretty stable within in 2013. The prices stayed above $100 all through 2014 to early 2015 and helped to keep the foreign exchange rate within the 150 – 160 naira band.

Sadly, the last eight months have seen prices of crude oil in the international market crash by over 70 per cent. This singular development has reduced the capacity of the CBN to meet forex demand. This is made worse given the fact that we had less than $40billion at the start of the crisis in June 2015 to fall back on as a cushion like we did during earlier periods of oil price fall. Just recently, the CBN reported that as a result of the minimal forex interventions in the interbank market, this figure has declined further down to $28billion.

Our reality is that we are in a very bad place and as much as people would like to blame the Government, the Central Bank Governor, the fact is that we are all individually responsible when we chose to buy all things foreign. It is time for us to learn to patronize local substitutes for our imported addictions so that our local industries would also grow.

The fall in oil prices is a huge shock that the successive administrations should have anticipated and prepared for. Sadly this did not happen. We blew our chance to use the golden era of oil prices to build a stronger economic and productive base for a time such as this. We do not have a manufacturing or productive sector that can even boast of meeting 50 per cent of our domestic needs; talk less of exporting to other countries. And there are consequences to be paid during this period of adjustment by all of us.

The country will not overnight grow its export potential to the levels that will adequately balance its trade deficit. It will not happen any time soon. And as long as this fundamental situation remains, our currency, the naira shall continue to be the whipping boy of other currencies like the dollar, pound, yen that are powered by strong economies with matured manufacturing bases. It is as simple as that. No nation that has a strong currency does so by simply contracting its domestic needs to other countries and being a huge market for goods produced in other countries. For instance, the value of the United States dollar and the British Pound Sterling is powered by robust domestic economies that are supported by strong productive and manufacturing bases.

However, it is interesting to note that beyond the refusal to allow the floating of the naira, the Central Bank of Nigeria is making efforts to promote, encourage the real sector to produce more for the domestic as well as the export market.  The Central Bank has made several interventions to encourage growth of the real sector as a response to the economic challenges via the N300bn Real Sector Support Facility; N220bn Micro-Small and Medium Enterprises Development Fund; N75bn Nigeria Incentive-Based Risk Sharing System for Agricultural Lending; and the N213bn Nigeria Electricity Market Stabilisation Fund. The other interventions include the N50bn Nigeria Export Import Bank Fund; and the N500bn Export Refinancing and Restructuring Facility. The era of golden oil prices is gone for good and the only option available for the country is to look towards the real sector to drive economic growth. These interventions are therefore apt and timely as foundations for the future economy of the country.

As the government and the Central Bank take measures to ensure that the country survives this shock, we must as Nigerians, sincerely own up to the reality that our individual actions, decisions on what to buy, wear, eat, where to send our children to school have all collectively helped to put us in this mess. We must realise that if we do not deal with this import addiction and patronize local substitutes of things we import, we will be helping in keeping the high exchange rate of the naira to the dollar. It all adds up.
Adole is a policy analyst based in Abuja