On Friday, February 25, the Central Bank of Nigeria, through a circular titled ‘Operating Guidelines for RT200 Non-Oil Export Process Repatriation Rebate Scheme’, surprised Nigerians and perhaps the global audience, announced a new subsidy regime of offering N65 bonus for every $1 repatriated to the country and sold at the Investors and Exporters window in respect of proceeds from export of non-oil goods.
However, exporters who seek to use the repatriated funds for their own use would get N35 per USD. The scheme’s objective is highly laudable, as the apex bank aims to raise $200 billion in foreign exchange earnings from non-oil proceeds over the next three to five years. What an ambitious target! It’s good to be ambitious and the CBN means well in leveraging its development finance role in seeking to complement the fiscal authority in diversifying the economy away from the volatility of crude oil price. More so, igniting the possibilities of the non-oil sector is a sure way of industrialising the Nigerian economy and stimulating job opportunities, especially as the real sector is relatively more labour-intensive, with huge value chain opportunities.
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That being said, no matter how laudable an objective is, the approach must also be practical and efficient. This is not the first time the CBN would be offering cash incentives to redirect foreign currency inflow to the official window. Last year, we had the N5 per dollar incentive on remittance, a policy which I doubt achieved any serious positive result. It is easy to blame banks for the presumed failure but the policy was destined to fail because it did not address the fundamental problem. Paracetamol does not cure malaria; it only relieves the pain in the interim and that is exactly why a policy anchored on dishing out cash subsidy to a segment of the market can never be a sustainable solution to a structural economic problem, it can only at best create another problem.
Incidentally, such an approach may inadvertently create the tendency for rent-seeking, especially in a market like Nigeria, renowned for its inefficiency in managing subsidies. If at all it works in the short term, it can never be the solution in the long run.
As much as I am excited about the determination and commitment of the CBN to sustain the inflow of foreign currency into the economy, this new strategy does not exude much confidence. The concern of the CBN is understandable. At a time when the oil price is at the highest level ever seen in the past eight years, Nigeria’s external reserve is falling, weakening almost about $1bn or 1.7% in the past two months. However, with about N160 per USD spread between the I&E window rate of N415/USD and the parallel market rate of N575/USD, the subsidy of N65 per USD would not be adequate enough to incentivise non-oil exporters to do the “right thing” of repatriating the proceeds of their exports through the official window.
Interestingly, the incentive is limited to export proceeds from semi-finished and finished goods, isolating exporters of raw commodities, who are the major non-oil exporters in the country. Using the realities of the third quarter of 2021, barely $0.7 billion exports would have qualified for this incentive, hence reinforcing the limitation of this policy measure in driving the CBN’s ambitious target of raising $200 billion within 3-5 years.
Understandably, the strength of the Naira depends on the amount of export proceeds Nigeria is able to achieve and this is justifiably why the CBN has consistently taken measures that will not only ensure that those who earn foreign exchange in Nigeria are encouraged – in fact, enticed – to repatriate them back to the country. Whilst the CBN has disbursed over N3 trillion through various intervention funds aimed at stimulating local production and diversifying the economy, the results have been relatively weak, hence the country has very limited exportable goods on which this policy measure can be anchored.
More importantly, the CBN needs to get rid of the inefficient gap between the I&E window and the parallel market rate for foreign currency and that can only be done through efficient market-oriented policies that remove the deadweight loss. The country cannot be seeking to develop local production whilst also subsidizing imported alternatives through the foreign currency market. The appetite of Nigerians for foreign goods cannot be tamed via fiats, which only creates corrupt tendencies across government institutions. Nigerians would only agree to consume local alternatives when the market dictates so.
Let’s even assume the measure works, and rational exporters are excited at receiving N65 per dollar to route the sale of the foreign currency proceeds from their non-oil exports through the I&E window. But how long can the CBN sustain this? Why should the CBN incur 16 US Cents for every dollar it attracts, through a measure that just seeks to incentivise exporters to do the right thing, in line with the extant regulations of the market?
What happens when the CBN stops the incentive? This is how we started the fuel subsidy and today it has become a monster that has destroyed all opportunities to rehabilitate our refineries. It has become a monster that is too powerful for anyone to dare. It has become an instrument of power and negotiation for both the political elites that profit from the opaque and inefficient system and the poor who are the ultimate losers of the inefficiencies of the subsidy system.
Addressing the foreign currency challenges of Nigeria is truly complex and there is no single solution to the problem. More importantly, all solutions would have transitory pain points and Nigerians must be ready to take the bull by the horn. When you slaughter a ram with a razor blade or blunt knife, you are not being empathetic to the poor animal, rather, you are prolonging its suffering.
The CBN needs to decisively deal with the exchange rate problem, by coming up with transparent and clear measures to address the underlying issues over a period and tracking the progress of each element of such coordinated policy to ensure effectiveness. Random approaches may not achieve much and indeed the bank does need to take note of its balance sheet and direct subsidy levels to avoid creating even bigger problems down the road.
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