Alternative perspective to fixing the economic and exchange rate conundrum in Nigeria, by Shettima Aji Ali
The Central Bank of Nigeria, under the guidance of the government of President Bola Ahmed Tinubu, GCFR, allowed banks in the country to trade in foreign exchange at any rate, i.e., at market-determined rates, effectively merging the hitherto multiple exchange rates in the country. There are divergent views on the moves on the exchange rate and the subsidy removal. The reactions were largely circumspect.
Understanding the economic reasoning underpinning these government steps is essential to effective communication, the key ingredient to good governance. The ordinary citizen would like to understand what the brouhaha is all about; and, most importantly, how the change, in addition to the recent removal of the subsidy on premium motor spirit, would affect their lives. The public needs to understand what benefits to expect; they need to know what sacrifices to expect of them and the tunnel vision of the whole exercise for the country’s future.
Fundamentally, and in summary, the economic management policies followed by the CBN are the monetarist operation encapsulated in Keynesian thinking, inching towards the neoclassical stream but significantly short of recognizing ethics as an essential component in economic management considerations. The policy seeks to promote a free-market structure for the economy. It assumes the government’s role is to intervene in the market when necessary through effecting changes that affect the money supply in the economy, which in turn is expected to influence investments, savings and spending, and the general price levels of goods and services (including that of the nation’s currency). The principal tool for economic management is thus open market operations and exchange rate management through control of money supply by changes in interest rates and intervention in the foreign exchange market. The operation and intervention’s primary goal is to control the money supply to the system, achieve stability of the currency’s exchange rate, and influence fiscal activities, employment, inflation, and the balance of payments.
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The effectiveness of a free market policy relies on the resource availability and productivity of the economy, the sensitivity of the economy to the money supply in the system, and the capacity of the economy to attract capital for investment both from within and outside. Some critical factors under this economic management thinking thus include the resource endowments (physical and intellectual), the stability of the socio-political and economic environment, and the general attractiveness and the inherent potential of the internal and export markets to free market interventions.
Although the policy thrust in Nigeria since the introduction of the Structural Adjustment Policy in 1986 was realizing the free market economic structure, the economy had remained an admixture of private sector participation and strong government presence.
The history of foreign exchange management in Nigeria since the introduction of SAP is checkered. What started as a currency pricing system under the Foreign Exchange Market (FEM), operated at a fixed rate with a narrow swing band, eventually gravitated to different scenarios. The systems experimented with include the Second Tier Foreign Exchange Market (SFEM) in 1986, the pegging of the foreign exchange rate in 1994, the Autonomous Foreign Exchange Market (AFEM) in 1995, and the Interbank Foreign Exchange Market (IFEM) in 1999. Between 2002 and 2015, the CBN used a variety of Dutch Auction systems and eventually introduced a managed floating system in 2016. Along the line, the CBN had adopted many targeted policies like restrictions on access to the market, limits on volumes of transactions allowed in different categories of transactions, and the requirements for various forms of documentation to consummate any foreign exchange transaction. The CBN also licensed many Bureau de Changes to allow travellers unfettered access to foreign exchange.
It was a long history of experimentation in the bid to have a stable foreign exchange market in Nigeria. The obvious is that the reactions of the CBN and government to the market behaviour were largely reactive, indeed temperamental. For example, during one of the CBN’s weekly Dutch Auctions in the 90s (which ranked bids up to a cut-off rate within a set time), almost all banks delayed submitting their bids until the last minute to outbid each other. The resultant stampede led to the CBN cancelling the process and announcing a whopping devaluation of the Naira in the new minimum rate at which it was willing to sell the US dollar.
On another occasion, the CBN, in a bid to satisfy end users’ demands for personal and business travel allowances, removed all ceilings on the amount purchasable by customers. The result was an unimaginable hike in sums requested by individuals; some asked for up to $250,000 as business travel allowance per person, and others requested $150,000 as personal travel allowance. More disheartening were the instances where some rent-seeking players in the market went to the extent of collecting expired passports from numerous individuals and getting them renewed and then worked with travel agents to issue travel tickets then used to support the purchase of humongous amounts as travel allowances, some considered then as relatively small amounts, ranged from US$50,000 per each passport. After just a few sales, the CBN had to cancel that operation.
Other cases of abuse witnessed include, for example, that of the Bills for Collection operations where importers recirculated already settled bills several times (the bills reissued as new with the connivance of unscrupulous customs officials) to purchase foreign exchange from the CBN purportedly to pay the bills for new imports. Similarly, the effort to simplify access to small foreign exchange for small transactions and travel expenses like business and personal travel expenses through liberalizing the registration of bureau exchanges saw a rise in the number of bureau exchanges from 74 in 2005 to 5,689 by 2022. The whole philosophy behind the scheme created a cesspool of abuse (Source: CBN).
Albeit the CBN’s sincere intention to influence the market by meeting all requests for foreign exchange and establishing the principle of a foreign exchange market free of restrictions, the experimentations failed. To a large extent, the CBN’s policy interventions only created avenues for enriching the economy’s rich and crooked unproductive sectors. Indeed, the experimentations turned the Nigerian investment environment unpredictable with dire consequences. How one would have loved to see the average of about US110 million per annum thrown at the bureau exchanges since the CBN introduced the policy was made available to small and medium-scale manufacturing companies across the country. Such a focus would have led to more benefits in employment generation and creating a reservoir of technical skilled and specialized human resources for development.
Therefore, the CBN’s foreign exchange policy thrust needed to be more optimally advised and a more precise understanding ab initio of the fundamental underlying basis for the demand for foreign exchange in Nigeria. The CBN’s reactions thus benefitted primarily the currency speculators and unscrupulous businesses who were more interested in currency round-tripping, money laundering, and excessive profiteering at the expense of the nation and ensuring the perpetual survival of several financial drain pipes and the parallel market.
Thus, while appreciating the new foreign exchange policy thrust as theoretically upright, given the records of dealing with the challenges in the foreign exchange management in the country, it is implausible that much of the expectations of progress would be realized. Does Nigeria have a stream of independent inflows of foreign exchange that could supplement the reserve capacity of the CBN to intervene in the market to stabilize the Naira when under pressure? It isn’t very likely. Importers of foreign currency into the country would always bargain for the highest rates as the demand in the country is almost insatiable. The country experienced such when we had the export proceed market that allowed banks to purchase from exporters at negotiated rates; the deal rates were consistently much more comprehensively away from CBN’s selling rates and often got sold to people to fund questionable “imports” but actually round-tripped the sums bought into what was an untraceable “free funds” market. The same practice happened with inflows through MoneyGram and Western Union money transfer schemes.
Would there be much capital importation into Nigeria by investors? Perhaps. However, much of the capital inflows in the past were to the secondary capital market, a highly speculative market in which investors played for quick gains. Such investments were the first to flee the country with the slightest speculation about insecurity and socioeconomic policy changes, even if designed to improve the market. Nigeria hardly witnessed many capital inflows for the real sector investment in its recent history apart from the investments in telecommunication and relatively in the banking sector. Is Nigeria able to expand its export capability in the shortest possible time? Doubtful. Nigeria no doubt has a lot of products with huge export potential but mostly in low-value unprocessed forms. Even at that, Nigerian exporters face many challenges from the importing countries, rejecting Nigerian products on the basis of poor quality, pest infestation, chemical pollution, poor safety standards, etc., which excuses are, in most cases, disguised barriers to access to the markets of the strong foreign trade partners.
Therefore, Nigeria needs to shift significantly away from taking the same paths since 1986, conducting critical thinking and restructuring its economic and foreign exchange management policy direction. I suggest the following strategic approach for the country’s general economic and foreign exchange management.
· It is ripe for Nigeria to consider a new paradigm in its economic development thinking. Recent developments in the global economic arena have shown that nations that could scale the fence from underdevelopment to a developed status committed themselves to identify and developing areas of competitive advantage. These countries invested heavily in the realization of competitive strength in one or a few areas that gave them the competitive strength that significantly enhanced their balance of trade and payments favourably, as well as attracted investments and capital inflows. Some of these countries are South Korea, Singapore, India, Brazil, Indonesia, Malaysia, and the United Arab Emirates (UAE). Emulating their strategic moves is undoubtedly a desirable path. The implementation of the strategic shift must be sustainable, and a firm commitment by Nigeria to its execution, irrespective of the government in place. Thankfully, Nigeria’s democracy is consolidating, giving hope that national interest issues would benefit from the continuity of governance. Re-visit the past strategic documents like Vision 2010, Vision 20: 2020, the Economic Recovery and Growth Plan (ERGP), and the National Development Plan 2021-2025 to pick the best ideas and support of the database and combine with new thinking to identify areas of potential competitive advantage.
· Despite our commitment to free trade, as enshrined in the global free trade protocols being a signatory to the WTO rules, ECOWAS and African Continental Free Trade agreements, Nigeria needs to influence the importation of goods and services to its advantage by effectively using taxes and tariffs. It is pertinent to restrain affluent Nigerians’ excessive desire for imported items, especially luxuries (including foreign exchange-based subscriptions to lots of superfluous items), and support local industries to improve quality and packaging for export and domestic consumption.
· Our economic policy thrust should centre on national interest, the welfare of the citizens, and the general level of happiness and well-being. Our economic policies must only impose hardship on citizens with a reachable and sustainable respite. Our policy push should be ethical and demand equity in spreading the benefits of the economic programmes. In living up to the advice of the Bretton Woods institutions, we should remember that our national interest is paramount, as in the case of every country. A lesson to learn from is when President Richard Nixon of the USA, the bastion of the free market world, faced with severe economic challenges in 1971, unilaterally repudiated the convertibility of the US dollar to gold. There is a growing global rethinking on the holding of the US dollar as a reserve currency based just on the capacity of the US market to consume, the influence of the US in global politics, her control of the global financial system as well as her military strength to exert pressures including economic sanctions on countries.
· It is evident that the challenges of resource management faced by the country over the years, especially in the implementation of its foreign exchange management regimes is that of impunity in abuse and uncontrolled economic sabotage (currency trafficking, round-tripping, profiteering, etc.). There must be a firm and grim punishment for all cases of economic sabotage. Also, there is an urgent need to block all foreign exchange leakages like unwarranted foreign trips by government officials and regularising cross-border trading with our neighbours through official channels. The practice of importers coming from the neighbouring countries with foreign currencies, sell them in the parallel market for Naira and buy goods to export to their countries is most inappropriate. The practice denies access to such a volume of foreign exchange that could, if appropriately captured, impact the CBN’s capacity to meet the needs of local manufacturers who must import raw materials to produce (by obtaining foreign exchange from the CBN).
Lastly, we must remind ourselves that all economic management theories and practices are artificial and subject to review at all times in relation to a country’s socio-political and economic predisposition. Nigeria must discover its distinctive challenges and advantages and use those in crafting and implementing its socioeconomic policies.
Shettima Aji Ali (PHD) writes from Maiduguri. He can be reached at +2348023027098
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