Buhari's CBN is fighting a lost battle: Naira's free fall will hit rock bottom

Buhari's CBN is fighting a lost battle: Naira's free fall will hit rock bottom 

I have watched Emefiele struggle to keep the naira on its feet, but I can assure him that he is fighting a lost battle. I pity him. This is the wrongest time to be CBN governor. There are no easy answers to the currency crisis. An import-dependent country is a dollar-dependent country. 

Forex will only flow into the economy based on what we have to sell to the rest of the world. As at today, oil is our biggest product. And oil is $30. And $30 is not good enough. When crude oil averaged $80, official exchange rate was roughly N152 and black market was around N154. Reserves were in excess of $40 billion. Oil at $30 cannot sustain N197 to a dollar because our import bill has gone crazy. There is a connection between oil price and exchange rate. Nigerians must know this. We are depleting our reserves and if care is not taken, Nigeria may be shut out of international trade.

The major measure adopted so far by Emefiele is “demand management”. By that he intends to trim the population of those demanding for forex. To an extent, it makes sense in this situation. If you have $28 billion in reserves (just enough to guarantee imports for at least six months) and the demand for forex is going to overwhelm that, what do you do? You can choose to deplete your reserves until you can no longer import — meaning even essential commodities and pharmaceuticals cannot come in and school fees of foreign-based students cannot be paid. You can also choose to place restrictions on who can access forex at the official market. You can also choose to allow your currency adjust to the market realities and protect your reserves.

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So far, the CBN has banned forex allocation to dozens of imports — ostensibly to encourage local production — but the problem remains unsolved. It is very good to focus on encouraging local industry, but forex ban will not automatically yield result. There are other factors at play — particularly infrastructure and finance. In the long run, we would benefit but let’s hope we would still be alive in the long run. Also, banks have restricted use of naira cards abroad but the problem remains. The CBN first reduced and then banned forex allocations to bureaux de change (BDCs), but things are getting worse. All emergency measures seem to be failing. So why are these measures not helping the naira? Because we have only succeeded in refusing to meet official demand for forex — but the actual demand remains. And actual demand will be met one way or the other since economic activities and life must go on. So unmet demand heads for the black market. Only the privileged have access to dollar at the official rate of N197, while the real value of the naira — as determined by the forces of demand and supply — is now roughly N300. That is a gap in excess of N100. If a “big boy” gets $100 million at N197, he can manage to make a cool N5 billion by diverting just $50 million to the black market. They know how they do it.

A renowned economist noted at a private forum recently that the federal government has moved from fuel subsidy to “dollar subsidy”. The big boys are enjoying a subsidy of more than N100 on every dollar. But the government is being short-changed. The three tiers are sharing oil revenue at N197 to a dollar, and in real life they pay for goods and services at N300 to a dollar. Meanwhile, if oil revenue for December was $1 billion, the three tiers would share N197 billion, whereas the open market value of the revenue is about N300 billion. By sharing N197 billion instead of N300 billion, they are losing N103 billion at the real market value of their oil income. What, then, is the way out of this crisis? I have only one suggestion: the time has come for the president and his team to have a frank conversation on this exchange rate meltdown. I don’t think there is anywhere in the world where the difference between official rate and that of the parallel market is up to 50%. Buhari and his team must sit down and paint all the possible scenarios with an open mind.

Certainly, there is no decision that will not hurt us. Something has to give. The pertinent questions should be: what option is least harmful to the economy? What option is more realistic and sustainable? What option can lead to recovery? One thing that is very glaring is that the foreign exchange policy is Buhari’s baby. He said in France last year that he was the one who directed the CBN to stop giving forex allocation to finance certain imports. He has also said you only devalue your currency to encourage exports and make your products cheaper abroad. Very good points. But that is one view. In truth, you can also be forced to devalue out of necessity, when you don’t have the means to meet the forex demand. In O’Level Economics, if demand is high and supply is static or dropping, price will go up. The demand for forex is high and our reserves are dropping. Do the math. This is no Quantum Physics. Government says the masses will suffer from price increases if the currency is devalued. Again, very good point. But are the masses not suffering already? Are prices not on the rise? Are we buying things at the same prices we bought them two months ago? Do the favoured importers who get dollars at N197 price their goods at that rate? Does the government have a mechanism of monitoring and enforcing that the benefits get to the “masses”? In fact, the favoured manufacturers also incur costs that are priced at N300 to a dollar and which they can do nothing about. In truth, most traders source forex at the black market and price their goods accordingly.

O, poor masses! When Buhari won his election, it was like a new day for Nigeria. Many investors were eager to pour billions of dollars into the economy. If former President Goodluck Jonathan attracted an average of $6 billion foreign investment in his time, Buhari had the goodwill to attract $12 billion. But the initial enthusiasm and confidence have evaporated as the new administration stalled on key decisions. No serious investor wants to be in a market full of distortion and moving goalposts. We need to refocus and re-strategise. I plead with Buhari to have a frank talk with his team. I don’t claim to know the perfect solution, but I don’t think we have chosen the best option.

- Simon Kolawole