Beyond oil proceeds and autonomous inflows of foreign currency, over the past 18 months, Nigeria has enjoyed over $7 billion boost to external reserves from non-routine sources, including Eurobond issuances and Special Drawing Rights of the International Monetary Fund (IMF), yet the external reserve has been on a consistent decline, a trend that shows that we did not save for the rainy days.
Thus far in the year, the external reserve has plunged 4.5 per cent or $1.83 billion and it is not likely that we maintain the current level of $38.69 billion through the year because if we cannot save when there was an avalanche of autonomous inflow, how can we save now that things are getting a bit tighter. Of course, except we want to be reckless and balloon our debt service burden, which is already choking, Eurobond issuance is likely out of the equation for the rest of the year, given the current interest rate cycle in the international debt capital market.
There are no World Bank or IMF drawing rights or bilateral loan supports this time because I don’t think we are ready for punitive loans that come with all sorts of strings from these Breton Woods institutions. Incidentally, the clouds are now heavy, with concerns that the interest rate hikes in the United States and other developed markets may trigger new foreign currency pressure for Frontier and Emerging markets currencies, such as the Naira. If you permit me to say, all things being equal, the higher the interest rate in the United States, the stronger would be the US dollar against most currencies of the world, especially those of highly import-dependent countries like Nigeria.
The World Bank recently said there is a $1.7 billion backlog of foreign currency demand by foreigners seeking to repatriate their funds from Nigeria. Again, the International Air Transport Association (IATA) recently alleged that $450 million belonging to foreign airlines is stranded in Nigeria, a development which has made a number of airlines to review their booking approach, with some requiring payment in foreign currencies. Even for those accepting Naira, you can be sure they have factored in the cost of the delay in accessing foreign currency in their pricing – it’s all about the time value of money.
Interestingly, when we look at the external reserves, we only pay attention to the gross position, which sometimes may be deceptive because it does not take account of the overhang of obligations such as the forward contracts and maturing swaps (especially with Nigerian banks), which run into billions of dollars. So, the question is, if the CBN were to meet all foreign currency obligations as and when due and supply foreign currency to clear all genuine demands, because technically we do not do that now, what would have been the external reserve position.
No doubt, one major reason why the Naira is so volatile and continues to depreciate is because of the way it is being managed. The price of an asset in financial markets, especially foreign exchange market, is based on expectations and that is a market where perceptions are quick in becoming reality. How can the Naira be stable and why won’t there be panic buying and speculative attacks on the Naira when there is news everywhere that airlines cannot access foreign currency to repatriate their sales proceeds? To the best of my knowledge, notwithstanding the decline, Nigeria’s current external reserves of $38.6 billion are one of the highest in Africa, especially when put in the perspective of the fact that it can afford more than seven months of our imports.
However, how can anyone believe we have adequate external reserve and we find it difficult to fund genuine demands such as the request for airlines to repatriate their proceeds? A lot of banks just cannot speak up, they have backlogs of unfunded personal travel allowances, school fees and medicals, which the CBN duly approved but is yet to refund the banks. This is why banks are diplomatically moderating their appetite to process these retail demands for foreign currency and of course, the ripple effect is what we see in the parallel market, where genuine users of foreign currency have to source their funds as alternatives. It’s sad that we continue to delay the supply of foreign currencies to genuine users until it creates either the wrong impression of capital control or sends a negative signal on the will and ability of the CBN to support the local currency.
This recurring situation perhaps justifies the concerns of market participants and the general public on the ability of the CBN to meet the demand for foreign currency. If the demand is genuine and we would still have to supply foreign currency to the airlines and other users, such as foreign investors seeking to repatriate their capital and/or return, why do we have to wait until everybody panics and things blow in our faces before we do what is necessary?
By the way, I am not sure Nigeria can afford a fully liberalised exchange rate market, and very few countries, if any, operate a fully theoretical liberal exchange rate market. However, our current approach to managing foreign currency needs to change and we, of course, need to better liberalise the market, as current system does not only create rent-seeking opportunities but also has the tendency to waste the very scarce resources. Do we need to defend the Naira, the answer is YES, considering the vulnerability of the country to foreign currency volatility, despite the current opaque approach. It also unfortunately prioritises consumption over support for production. It is perhaps wasteful and prioritises the luxury of the rich at the expense of the average poor Nigerian women and men, who bear the real cost of the Naira volatility.
The CBN may not adopt hook line and sinker the IMF or World Bank recommendations on floating the naira, but there is some merit in the arguments and that calls for a total overhaul of the CBN’s current exchange rate regime. Getting our exchange rate policy right is a big step towards taming inflation, especially the imported component of the persistently rising price of consumer goods. The Asian Tigers do not float their currencies, and we do not have to gullibly adopt their measures. Rather, we may learn from both the East and the West in developing a homegrown policy that suits our peculiarity.
This is not as easy, but neither is it rocket science. Definitely, we cannot and should not continue with this current exchange rate regime if we really want to support the naira and progress the economy. There are too many things hanging on the stability of the country’s exchange rate, including foreign direct investments as well as the opportunity to convert local savings into job-creating investment opportunities in the real sector.
Surely, if we must create sustainable jobs, we need to solve this exchange rate puzzle in a way that can be managed sustainably. The more we delay the reform, the worse the situation gets. You don’t help a cow by slaughtering it with a razor!