The insistence by the International Monetary Fund (IMF) that the Naira be further devalued as part of efforts to overcome the challenges of a weakening economy and significant losses in oil revenue, is a clear indication, if one was need that the Central Bank of Nigeria (CBN) urgently needs a change of strategy in exchange rate management. It also shows that recent measures by the CBN to limit access to foreign exchange (forex), including the ban on certain imports as a way of restricting the demand for forex, falls short of the structural reforms needed to boost the Nigerian economy, which, it must be said, is now on life support.
Speaking at the 2015 World Bank-IMF Annual Meetings in Lima, Peru, the Director of African Department at the IMF, Antoinette Sayeh, reiterated the Fund’s stance that Nigeria devalues the Naira, adding that prioritizing and improving efficiency of public spending is crucial in enhancing Nigeria’s economic sustainability. But any further devaluation of the naira against the 9.4% consumer inflation rate announced by the National Bureau of Statistics (NBS), amounts to economic sabotage, given the manner in which the exchange rate of Naira to the US Dollar (USD) volatility went hay wire when the naira was devalued 8% in November 2014; and another indirect devaluation by fixing the official exchange rate at N198 to USD
Given the downward pressure on naira from the decline in forex accruing from oil, the CBN further devalued the naira in February 2015 when it suspended the dollar auction system and set a new target of N197/USD for the interbank rate. This did not ease the pressure off the naira so in April and May, CBN issued warnings against pricing and payment of goods and services in foreign currencies rather than the naira, which is the legal tender in Nigeria. In June, another CBN directive excluded certain transactions from eligibility to access forex; listing 40 prohibited items, including rice, cement. The directive clarified that prohibited items cannot be funded through interbank, exports proceeds and Bureau de Change (BDC). In July, the CBN added furniture making it 41 items on the “Not Valid for Forex” list.
The focus in all these macro-economic tinkering was on payment rather than pricing; and this highlights the CBN catch-22 of defending the naira and maintaining access to finance at affordable rates which is likely to lead to high inflation, or low interest rates leading to a weaker local currency. It’s like digging a hole to fill up another hole. The jury is out that these measures contradict the prescriptions of economic theory for dealing with exchange rate and currency fluctuations. The fact of the matter is that the Foreign Exchange Manual in respect of repatriation of export proceeds is very weak. It states “Proceeds of oil and non-oil export proceeds are to be repatriated into the domiciliary accounts of their respective exporters’ account within 90 days for oil exports and 180 days for non-oil exports, failing which the collecting banks will be liable to a fine of 10% of the FOB value of the transaction, including other appropriate penalties as provided by Banks and Other Financial Institutions Act 1991 as amended.” This other penalty is to bar the company from participating in the forex market.
The weakness in this regulation accounts for the CBN losing track of oil and non-oil export proceeds. Most of the exports, especially, non-oil exports are through FOB contracts, not Letters of Credit. The only evidence of shipment is the Inspection Agent’s report of quality and quantity and the bill of laden issued to the importer abroad. Because local Nigerian banks are not a party to FOB contract, the exporter is 100% in control of the transaction; and will be at liberty to advise the importer abroad the account abroad where money will be paid, not necessarily their domiciliary account in Nigeria.
Giving them 180 days to repatriate the money is sheer nonsense, because most exporters of non-oil products, especially agricultural products are Asians especially Indians. How do you expect foreigners to repatriate their export proceeds to Nigeria? Even the Nigerian exporters default in repatriating the money, sell it at black market rate from their accounts abroad and gladly pay the 10% default penalty to their bankers. Another area of CBN laxity is the inability to sanction payment for domestic services like hotel bills in US dollars. From where are the dollars sourced when those paying for these services in dollars do not earn US dollar incomes? These are some of the leakages that put pressure on the Naira through unnecessary demand for forex.
Nevertheless, saving the naira demands a holistic approach starting from CBN monetary policy. CBN should reject the IMF prescriptions which are doomed because the economic infrastructure where market forces drive micro-economic policies and determine efficient allocation of resources, like forex, does not exist in Nigeria. Nigeria is not a credit driven economy. For efficient allocation of resources under a market economy to succeed, all parties must settle their debts as and when due. In other words, there must be no break, or break within tolerant limits, in the circular flow of income. In Nigeria, parties do not settle their debts as and when due. People do not pay water and electricity bills and taxes as and when due so revenue accruing to government is either delayed or lost. Even governments at all levels do not honor their obligation as and when due to public servants and contractors.
Also, Nigeria’s economy is a cash-based economy. There is more money circulating outside the banking system than in the banking system. This is because the informal sector is about 70% of the domestic economic units. The balance 30% is the formal sector and these are the people who bank their money. Added this to the heavy spending by government to finance deficit budget through funds raked in from naira devaluation and ways and means advances and the inability of CBN monetary policy to drive economic development becomes inevitable. The CBN must abandon its present strategy on monetary management and explore the possibility of fashioning an economic model for managing an economy that is largely informal in which businesses and economic operators do not trust banks and electronic payment platforms.
With respect to managing naira/dollar exchange rate, the CBN should adopt the foreign trade approach since Nigeria operates an import-substitution economy. Since there is high demand for forex which makes the foreign currencies in international trade, CBN should make forex to pursue the Naira. The way to achieve this is to invoice our exports in Naira. It will not stop Nigeria from earning forex and the new demand for Naira for foreign trade will achieve two things. First, it will kill the speculative forex market that leads to massive devaluation of Naira at the forex market; second, it will eliminate the vexed issue of excess liquidity that occurs during the monetization of dollars in the Dollar to Naira intermediation. In this way, the phenomenon of excess liquidity will end because what caused excess liquidity is the monetization of petro-dollar receipts under the present substitution method.
When exports are invoiced in Naira, it will stimulate economic activity in Nigeria due to increased demand for Naira which will become scarce and command an enhanced value in the international foreign exchange market. After all, demand for Naira is equal to demand for goods and services Naira will buy. In addition, tourism, hospitality industries will receive a boost. Just as Nigerian importers travel to Asia, Europe and America, to supervise their imports. They will stay in hotels and buy other made in Nigeria goods and services which will be mutually beneficial to all parties.
