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How much forex does Nigeria need?




The sharp fall in crude oil prices that has resulted in a substantial drop in Federation Account (FA) forex receipts is a blessing that has lifted the veil of official deception regarding the performance of the economy. This has revealed the fruits of long years of mismanagement of the naira, the intentional dissipation of the country’s forex earnings and the sacrifice of the national interest on the altar of greed of the unpatriotic few. A country’s currency is its economy’s lifeblood: a mismanaged currency begets poor economic conditions.

The downward movement of crude oil prices beginning in the second half of 2014 was in no time over-balanced by rising calls on the Federal Government to diversify the economy and so open up other sources of forex earnings. But what does the demand boil down to? One, for obvious reasons, the FG is not being asked to undertake direct investments in other economic sectors than government is already engaged in. Hence ‘diversification of the economy’ is an alternative and mellifluous term for the decades-old federal objective of creating conducive conditions for the private sector to invest in diverse economic sectors and thereby drive increased job creation. Two, there is no doubt that the realization of the congruent aspirations of various public commentators and the government could widen the sources of forex earnings. But such forex inflows would be contingent on achieving the initial government goal.

Nonetheless, non-actualisation of the common objective after several decades casts doubts on the sincerity of government and the organized private sector (OPS) to resolve the lingering economic problems. That is so because, firstly, both parties consult constantly before any measures aimed at removing perceived economic obstacles are put into effect. Secondly, major OPS players particularly the heads of its umbrella associations have routinely been appointed government ministers and heads of key public agencies. Thirdly, in reaction to the usually rosy official reports on the economy, government in the past 15 years has incessantly been made aware of the root cause of some seemingly intractable challenges contained in the reports and the solutions to them, but all to no avail.

While the FG and OPS apex associates dissemble, the economy continues to be racked by the throes of excessive fiscal deficits brought about by the mismanagement of FA dollar accruals. The attendant high inflation, exorbitant lending rates and a persistently sliding naira have given rise to a perennial hostile production environment, thereby impeding profitable private sector investments in spite of the fact that over 70 per cent of the financial sector lending capacity remains unutilised. And so perished the FG objective of facilitating a private sector-led job creation drive (a.k.a diversification of the economy).

Additionally, following the excessive fiscal deficit-induced steady decline in the value of the naira, public confidence in the domestic currency as a store of wealth correspondingly waned while dollarization waxed strong. According to the CBN, individuals and firms in the country held US$20 billion in domiciliary dollar accounts (down from $34 billion about a year ago). Top government functionaries are deeply involved in the economy-wrecking predilection. Even the Buhari administration is not an exception as the declared assets recently made public have shown. The other day, the CBN governor charged that bureau de change (BDCs), many of which are owned by top flight politicians, were and are waging war against the naira and the economy: this charge applies equally to all domiciliary dollar account holders. They all derive Shylock-like gains from the persistent depreciation of the naira and its serial devaluation at the expense of the generality of the people.

Besides foisting a largely thieving and unpatriotic and unproductive group at the helm of national affairs, the excessive fiscal deficits also paved the way for foreign direct and portfolio investors to unduly drain away the country’s forex. These investors exercise considerable clout at the Manufacturers’ Association of Nigeria and the Lagos Chamber of Commerce and Industry, which support the call for an emergency economic conference. The former is unhappy with the naira exchange rate at the parallel market and the official N197/$1, “which you cannot even get”, while the latter favours a flexible naira exchange rate fixing mechanism. Yet, as noted earlier, for 15 years the OPS has dallied with the FG and deployed contempt to torpedo the exchange rate solution that best serves the country.

Fortunately, however, even in the face of reduced crude oil receipts, the country today earns and possesses more foreign exchange than is needed to overcome the acute poisoned harvest of economic difficulties associated with decades of unrelieved excessive fiscal deficits. All it requires to terminate that blighted era is to begin to properly manage the country’s public and autonomous supply of forex. As at end-February, some $50 billion was available in the banking system alone.

Towards resurrecting the economy, therefore, there should be a single deposit money bank-operated forex market (FM) where supply and demand forces determine the day-to-day naira exchange rate under the managed float exchange rate fixing system. BDCs buy forex from small holders and sell only at the FM-determined rate but play within a two per cent spread. For eligible transactions, there is guaranteed access to forex at flexible rates.

Forex supply sources to the market include FA beneficiaries, individuals, firms and domiciliary dollar account (DDA) holders. In this regard, any forex amount lodged in DDAs should have a ‘shelf life’ of not more than six months from the lodgement date. Within the shelf life, the DDA holder may use the funds exclusively for eligible transactions or sell same in the FM as and when desired. However, on the shelf life expiry date, the affected forex amount should be mandatorily sold, again, only in the FM. Forex demand should be based on a carefully selected eligible list (backed by law) of goods and services that may be imported to complement what is available or should be produced domestically. Imports outside the list funded not via the FM should attract both relevant tariffs and punitive multiple levies.

A very important consideration in all this is to engineer forex demand to fall below supply in order to guarantee sale of surplus forex to CBN to steadily swell external reserves. Nigeria’s external reserves belong to the federal government and should be construed as FG’s internally generated forex revenue (IGFR). At least two policy implications arise therefrom. One, FA dollar accruals should be shared by secure means in full for the beneficiaries to transact in the FM. Two, the currently wrongly styled CBN external reserves should be immediately absorbed as federal IGFR. International best practice instructs that three months’ import cover be made handy to take care of possible dips in the balance of payments. Outside that limit, the federal administration may approach the National Assembly to appropriate a part of the external reserves from time to time to execute infrastructural projects and to settle duly verified joint venture cash calls, thereby foreclosing any debt financing arrangement that would practically dilute Nigeria’s stake in the oil operations as well as to supplement the sovereign wealth fund (which should be fully FG-owned) and to meet other sundry external commitments.

And so, the country’s essential requirements of forex are well within what is available or can be easily generated inside a Nigerian economy whose finally freed real sector will be in full bloom.

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