Nigeria’s dream of having a stable exchange rate for its local currency can only be achieved if the country can earn enough foreign exchange to support the level of demand for it, analysts have said.
Under the current condition of declining export earnings, the country has to step up its drive for foreign direct investment, they said. Thus far, efforts by the Central Bank of Nigeria, including the use of various auctions systems to sell foreign exchange among users have proven ineffective due to inadequacy of supply, they said.
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Nigeria’s Oil Industry Still In Poor State Despite Reforms
The auctions that the CBN has adopted for pricing in the nation’s foreign exchange market, such as marginal, weighted average, and Dutch systems, and the Retail Dutch Auction System, were applied in different market structures, with various terms defining conditions for accessing foreign exchange by those who need it. The market structures included the Second-tier Foreign Exchange Market, introduced in 1986, and later replaced by the enlarged Foreign Exchange Market (FEM). A policy reversal in 1995 led to the establishment of the Autonomous Foreign Exchange Market (AFEM), while in October 1999 the central bank introduced the Inter-Bank Foreign Exchange Market.
In one of its moves, CBN in June 2016, introduced what it called the managed floating exchange rate regime. This method, it explained in a statement on its website, is designed to enhance efficiency and facilitate a more liquid and transparent foreign exchange market, “due to increased demand pressure in the foreign exchange market coupled with low accretion to reserves, arising from declining receipts from crude oil sales.”
The various iterations by the bank were simply searches by the monetary authorities to find or establish some measure of stability in the nation’s foreign exchange market, but industry analysts say they failed because they did not address the fundamental questions.
Over the years, the naira has been at the receiving end of the butt, and has been more under pressure for a greater part of the period. The naira currently trades in the black or parallel market at about N700 to a dollar, and N441.46 on the Investors and Exporters window of the Central Bank.
Both represent a deep loss of value in the currency that in 1984 officially exchanged at a rate of $1 being equivalent to N0.765. Progressively, the loss of value has continued till now. By 1986, the naira had fallen to a value of N2.02 to a dollar, and since then the local currency has continued to weaken against international currencies.
It is a question of demand and supply forces being at work in the marketplace, says Dr. Ayo Teriba, an economist and Chief Executive Officer of Lagos-based Economic Associates, a consultancy.
“You have to recognize the fact the exchange rate does not exist in isolation. It is actually the result of the interaction of demand forces and supply forces. So, talking about changing from auction type to the other without reference to demand conditions relative to supply conditions, is to take the issue out of context,” he said in an interview with Daily Trust on Sunday.
Teriba says one cannot explain exchange rate outcomes by the mode of an auction, stressing that “you can only exchange outcomes by looking at the balance of demand versus supply forces.
“If your supply is more than your demand, your exchange rate will strengthen; but if your demand is more than your supply, your exchange rate will weaken.
“You do not print foreign; it is other countries that print foreign exchange. If your people need to hold more foreign currency than you hold in reserves, your currency will weaken. But if your people need to hold less foreign currency than you hold, your local currency will strengthen.”
In other words, a country needs to meet a reserve adequacy for its currency to either remain stable or become stronger, he says. “Where you do not meet the adequacy threshold in terms of the reserves the country has, then demand will exceed supply and devaluation of the national currency will be inevitable.”
Oil revenue has played a dominant role in Nigeria’s foreign exchange policy formulation. Being the major foreign exchange earner for the country, the rate and level of oil revenue flow determine how much foreign exchange Nigeria has to meet the demand for the importation of goods and services, which range from the mundane to complex industrial machines and equipment.
In the ten-year period from 2011, Nigeria experienced one of its finest moments in oil revenue inflow, with the highest of $62.84 billion being recorded in 2012, while the lowest of $17bn was recorded in 2016.
Revenue flow in 2015 was N24.79bn, while $54.55bn was achieved in 2014, and $58bn in 2013.
The central bank should have seized the opportunity offered by such a period of high oil money to strengthen its management of the foreign exchange regime by floating the naira, says Prof Bongo Adi, an economist at the Lagos Business School.
“Some right-thinking economists advised the Governor to let the naira float, for simple reasons,” he said.
Floating the naira would mean letting its price be determined fully by the forces of demand and supply. Adi argues that the period when Nigeria’s oil export revenues were high was the best time to adopt that exchange rate policy when there would have been enough foreign currency to support the naira.
Dr Teriba believes that the naira can be floated when adequate foreign exchange earnings are assured.
“As long as you have adequate supply to meet demand, you can float the naira and it will appreciate. So, it’s up to you. Open the opportunity to the rest of the world,” he said.
“And because we didn’t do that now we have an accumulated pressure. Now the oil revenue has dissipated. With oil theft, Nigeria’s oil revenue has dried up, so we have nothing to defend the naira any longer in the forex market,” said Adi.
Such a foreign exchange policy would be better than the auction-based system, says Adi. “You know in economics that there is nothing that causes inefficiency and distortion like rationing. The question is what criteria will you use to determine who is eligible and who is not eligible?”
The current pressure on the naira, according to him is from a backlog of unmet forex demand in the system because of the rationing being applied.
Nigeria can never solve the problem from the retail end by blaming this person or that person or banning items, says Teriba, in obvious reference to one of the measures of the CBN that excluded about 43 items from being eligible for foreign exchange allocation for importation. “The best solution to foreign exchange stability is to increase foreign exchange reserves If you have more reserves, the naira will be stable.”
Foreign Direct Investment to the Rescue – Teriba
He believes that foreign direct investment holds the key to increased foreign reserves that will in turn stabilize the naira or even cause it to appreciate. However, Nigeria has to take the steps first.
To increase reserves, the global economy offers only two enduring alternatives, says Teriba. It is either a country earns more from exports, or it attracts more foreign direct investments. In the case of Nigeria, he pointed out that from 1999 to 2010, both global exports and global FDI stocks presented equal opportunities, and our peer countries got foreign exchange inflow from both.
He laments, however, that “From 2010 to date, particularly since 2015 to date, global exports have stagnated and even declined because of weak commodity prices. Global exports have stagnated and have been in decline. So most countries today rely heavily on large inflows of foreign direct investment for getting an adequate supply of foreign exchange”.
While Nigeria has historically relied only on exports and now that the country’s export revenue has dropped compared with what we were enjoying between 1999 and 2015, we need to do more to attract foreign direct investment, but we are not doing that,” he says.
That option is open to the country, he notes, adding that there is money abroad. According to him, the only thing that the world has in surplus today is foreign direct investment. But it would not go to countries that do not invite it to come.
“Foreign Direct Investors will not come to Nigeria in the absence of offers to invest equity in public assets. They will return to their country with their money.”
Teriba recalls that when Nigeria offered foreign investors opportunities to invest in the Nigeria LNG project, they accepted the offer. They invested US$2 billion for 51 per cent equity stake in the first two Trains of the US$4 billion NLNG project in 1994. They have stayed to date, and the project is now on the seventh train. “So we are not talking about $2b anymore. But it would never have happened if Nigeria had not offered them equity investment opportunity if Nigeria were not ready to let them own 51% of the NLNG.”
Similarly, when Nigeria liberalized the GSM sector for private investment, foreign investors came jumped at the offer and they have sunk investments to connect more than 200m GSM lines. He notes however that the point is that it started with Nigeria offering the opportunity to own equity own national assets. “When you offer opportunity, deals will happen, and the forex will arrive,” he stresses.
It was the same response that came when Nigeria liberalized its pension sector, with pension administrators, and pension custodians, arriving with significant foreign direct investment.
However, in 8 years, the preference of the current government has been to offer only debt issuance opportunities, at home and abroad, he notes. “We issue Treasury Bills; we issue FGN Bonds, we issue Eurobonds. And these get over-subscribed, he points out that the Treasury Bills, FGN Bonds, Eurobonds are debt instruments, IOUs, or promissory notes issued against future revenue
It is not a secret that our revenue has disappointed in the past 8 years, with Rating agencies red-flagging the country’s debts. Recently, Standard and Poors watch-listed Nigeria’s bonds, expressing concerns about the country’s capacity to honour its obligations on outstanding bonds. Moody’s has also downgraded Nigeria’s credit risk outlook.
On the budget proposed by President Muhammadu Buhari for 2023, he notes that it contains a deficit of N10.78 trillion, the bulk of which will be financed only by issuing N10.5 trillion more debt, at home and abroad, “when we could easily issue equity of N10.5 trillion at home and abroad to finance the deficit”.
He declares that the government has no intention to offer equity investment opportunities to foreign direct investors, preferring to continue to borrow, rather than invite them to come and invest in the rail sector, the way we invited them to invest in LNG.
“Nigeria’s foreign exchange situation could have been better. Our reserve position can be better. But unwittingly we make choices that are not in our best interests, by shunning foreign direct investment. We should make efforts to attract foreign direct investment, because exports have been disappointing, and will continue to disappoint,” says Teriba.
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