“A very important debate you've raised here on the economy with regards to the CBN action on our foreign exchange regime. This is a very thoughtful debate bro. The CBN had to defend the naira because as the nation's monetary authority, they were running away from the hard choice of devaluing the naira against the greenback($) and other international currencies. But as we speak, the naira has been devalued by 15% by the CBN sometime in April. The CBN found itself between the deep blue sea and the hard rocks, of course they had to make a choice. I must confess that we have had the most terrible philosophy of economic management in this country since 1982. It was in that year that Nigeria became officially an import dependent economy when Late President Shehu Shagari's administration rather than set up a Presidential Task Force for the production or cultivation of rice, a Presidential Task Force for the importation of rice was set up. What a terrible error under the sun! Again, in 1986 the IBB military administration was hoodwinked into adopting the Structural Adjustment Program (SAP) with complete liberalization of the economy and Nigeria was opened up for free trade with developed economies like USA, China, UK, etc. At this point the naira had to be devalued to encourage more import. Of course, we were producing and exporting absolutely NOTHING while our trade partners were doing the production and we were doing the import. It was voodoo economies, if you ask me.The naira became under undue and unprecedented pressure. Sorry, I had to present this brief background for us to understand the genesis of our foreign exchange problem.  That said. Let me come back to the debate. Remember that we are still predominantly an import dependent economy up to toothpicks, tomato paste, rubber slippers and some other very insignificant items. It is export that shores up the value of a nation's currency.  We import more than 90% of petroleum products for local consumption and pay subsidy for the same product. We are the 6th largest producer of crude oil in the world and the only country in the world that produces crude oil but import the finished product for local consumption. What a paradox! Today in Nigeria fuel import is the product that places the naira under the most immense pressure. So in order not to allow the mechanism of demand and supply to determine the value of the naira against the $ and other international currencies because that would spell doom for the naira because of our weak export status, the CBN had to defend the naira by being the sole buyer of the $ and warehouse it for import purposes and other uses. The idea of CBN defending the naira started when the apex bank initiated and started implementing the policy of Investors' and Exporter's (I & E) FX Window.  Please note that Nigeria runs a fixed exchange rate system where the CBN determines the value of the naira against other currencies per time. We are so weak in export, so the CBN is simply guiding against the free fall of the naira. The fundamental question is: For how long are we going to continue this unsustainable economic management model? The immediate solution to this malady is for the government to muster the political will to completely deregulate the downstream sub-sector  of the oil and gas industry and sell our moribund refineries. This will allow private investment in the local refining of petroleum products and drastically reduce the pressure of the $ on the naira. By default, the value of the naira will be raised against other currencies. The CBN must also work around achieving a single digit interest rate by the Deposit Money Banks (DMBs) to the real sector of the economy to boost manufacturing, enhance export of Nigeria made goods as well as encourage local consumption of the said goods. Of course, this is another important dimension of raising the value of the naira against other currencies. Fix our health sector to curb medical tourism by Nigerians overseas and quickly raise the standard of our educational system to reduce the bulk of Nigerians studying abroad. These are the major areas where we have very high demand for the $ that puts the naira under pressure. If these key areas are not fixed, the naira will continue to buckle under the increasing weight of devaluation and the CBN will continue to spend so much to defend the local currency. Devaluation in itself, is the official lowering of the local currency against foreign currencies within a fixed exchange rate system. Devaluation of the naira means less value of the naira against other currencies. Although under the situation we find ourselves, a devalued naira would save Nigeria the huge chunk of reserves that would have been spent defending the currency at a higher rate, it would simultaneously make import into the country very expensive.So it is a question of opportunity cost or trade off that the CBN has to embark on. This is my 1kobo contribution to the debate. Bro Princewill Odidi, I salute you.

The author of this piece is Missang Oyama an Economist.

Post a Comment

Previous Post Next Post