When Oluyemi Cardoso received his mandate to head Nigeria’s Central Bank, he gave himself the task of entrenching macroeconomic stability and to induce economic development. His focus therefore, he said would be on monetary and price stability as well as financial stability.
Refocusing the apex bank by giving primacy to price stability and building confidence in the Nigerian economy through the maintenance of stability in consumer prices and the foreign exchange market is another target of his leadership.
However, achieving the above targets is not for the dillitantes. Barely a few months into the job Cardoso’s mettle is now being tested ,.His ideas ,though beautiful, are being confronted with serious challenges ; translating the above agenda to reality ,no doubt ,is becoming a hard nut . . Naira went into a free fall and prices of goods and services skyrocketed .The above challenges notwithstanding, Cardoso has developed iron teeth , breaking the hard nut and boosting forex liquidity to meet the meet the ever growing demand for foreign currencies in the economy.
The CBN governor is undaunted despite those challenges; he remains highly optimismistic ,particularly with certain positive trends on the horizon : “I want to emphasize that we are now at a turning point, and the bold reforms underway across different segments of the economy, though initially challenging, are aimed at addressing these challenges sustainably.”
He said positive outcomes were already emerging and would become more apparent in the near future, adding that the dedicated and relentless efforts being made were certain to bring about significant and positive changes for our economy.
Earlier ,Cardoso ,indeed, had raised hopes and highlighted his strategic architectures of achieving monetary and price stability that could give a real-life attention for the well-being of Nigerians .In his keynote address at the 58th Annual Dinner and 6oth Anniversary of the Chartered Institute of Bankers of Nigeria (CIBN) last November 2023,he outlined the CBN’s priorities and economic roadmap .
To achieve this , targeted policies, transparent market operations and coordination between monetary and fiscal authorities ; ensuring a more stable exchange rate, controlling inflation, and creating an enabling environment for businesses and individuals to thrive are some of the conditions that could not be negotiated . ;
He promised to adopt measures to tackle institutional deficiencies, restore corporate governance, strengthen regulations, implement prudent policies and promote sustainable and inclusive economic growth.
Banks would be directed to recapitalize just as the extant ban on 43 items in the official foreign exchange market would be lifted and enable market forces to determine exchange rates. Adoption of a floating exchange rate among other policies, emphasis on technology in financial services with strict regulatory compliance and achievement of a one-trillion-dollar economy in the next seven years, with the CBN strictly focused on its core mandate were among his key focus ..
The above are the readings of the mind of the CBN governor and these are no doubt beautiful.
But the twin challenges of inflation and exchange rate depreciation on the economy are no less daunting, particularly with the mess and acute macroeconomic instability he inherited from his immediate predecessor, Mr Godwin Emefiele
THE REALITIES
The future value of the naira, Nigeria’s currency, remains largely unpredictable. It daily cascades down the value line due to many uncertainties in the economy. As at the end of January , the confusion that set in at the foreign exchange (forex) market where the naira value slumped is yet to subside. Naira continued its free fall on Tuesday, 29th January ,2024 , sinking to a record low of N1,482.57 per dollar following strong demand on the official market, also known as NAFEM. . This represents 9.03% or N133.95 weaker than N1,348.62 recorded at the close of trading on Monday. The latest development is unprecedented and stands as the lowest point in the historical performance of the Naira, as the depreciation exceeded N1,455 quoted on the parallel market .
Laughably, “dollar don cost” has become the buzz word even among commodity traders. The gap between parallel and official markets, crated mainly by speculators who manipulate the forex markets, is too much.
Moreover , inflation too has hit the rooftop . Nigeria’s inflation rate, on the other hand, rose steadily throughout 2023 despite the Central Bank of Nigeria’s (CBN’s) repeated upward monetary policy rate (MPR) interventions. Inflation rose from roughly 15% in January 2023 to 28.82% by December, chucking dirt in the eyes of CBN hawks utterly perplexed by the consistent rise in the average consumer price index (CPI).
The above ugly scenario has been raising heated arguments and critical questions. Is Cardoso and his team sleeping at the switch? Did he just make empty promises ? Has he given up?. These among others are the critical issues bothering every stakeholder .
MIXED FEELINGS OVER CARDOSO POLICIES
For this ,the CBN governor is now being terribly vilified. “What happened to all the promises made by Mr. Cardoso in his first major outing as CBN Governor when he delivered a keynote address, and an economic roadmap at the 58th Annual Dinner and 6oth Anniversary of the Chartered Institute of Bankers of Nigeria (CIBN)?” , Rueben Abati, a journalist with Arise Television outfit , queried in a write-up.
He bemoaned “the menace of insecurity in the land that has been in the news in Nigeria, the economy too, and indeed the latter for obvious reasons as well, with the national currency, the Naira in a very bad shape, inflation at 28.92%, widespread systemic distortions in the economy, a foreign exchange regime gone askew, resulting in a problematic business environment for investors, high unemployment rate, further misalignment between the monetary and fiscal spaces, and gross anxiety among the people for whom the Naira no longer holds as much value as it used to”
“Good ideas, so they seem on paper. It may also be argued that the CBN has not had enough time for its ideas to be fairly assessed, but so far, there have been more anxieties about the Nigerian economy, rather than confidence. Of that, we are certain.”, he added .
To Abati there “may have been a slew of reforms, guidelines, directives and measures by the CBN, still, the economy has taken a dive for the worse, with the floating foreign exchange regime or managed float as they call it, resulting in massive depreciation of the Naira, at a point, the naira was losing its value every 48 hours – an chaotic situation even to non-economists.”, he lamented .
Not only from Abati, to Waziri Adio , another editor at Thisday Newspaper , “the foreign exchange reforms introduced by the administration, clearly necessary but obviously not well-sequenced, has triggered a rapid and seemingly unending depreciation in the value of the Naira against the US dollar and other major currencies”
Some critics are now becoming nostalgic about Emefiele and Buhari days which they had formerly condemned with vehemence. They believed the former and embattled Governor of CBN ,Mr.Godwin Emefiele is better the nation’s monetary policy than the incumbent.
Cardoso is not the only one that has come under caustic judgment of some stakeholders .The President, Bola Tinubu, is another under serious attack. Unfortunately, it is the damage inflicted by the duo that landed the nation into this untold hardship .
The CBN Governor Lamido Sanusi Lamido cofirmed this as much
“I have been, over the years, talking about the pending crisis ahead of the current economic hardship. Any economist who has studied monetary policy in the last eight years knows that Nigerians will fall into this difficult situation.
“The difficult situation Nigerians are facing is just the beginning (if the right decision is not put in place) because Nigeria is not exceptional; such situations happened in Germany, Zimbabwe, Uganda, and Venezuela.
“The previous administration turned adamant about our appeal for corrective measures on the economic policy. “If I am to be fair and just to President Bola Tinubu, he is not to blame for the current hardship; for eight years, we were living a fake lifestyle with huge debt from foreign and domestic debts. The Central Bank of Nigeria owes over N30 trillion, which resulted in debt service surpassing 100 percent.
“I can’t join other Nigerians criticising Tinubu in this current economic situation, President Tinubu is not to be blamed.
“It’s injustice for anyone to blame the Tinubu administration for the current economic hardship because there is no other alternative than the removal of the fuel subsidy. After all, Nigeria cannot even afford to pay the subsidy. In the last eight years, the Central Bank continued to print more money, and the Naira continued to depreciate. There is too much naira in circulation because the CBN is printing the currency without restraint.
“The economy was poorly managed, and they are not willing to take advice; in the last eight years, apart from sycophancy, nothing has been done; those sycophants are those buying the dollar at the rate of N400 and selling it at the rate of N600 to N700.
“A boy who has no record of service has a private jet and owns houses in Dubai and England just because he is buying dollars at so a rate and selling them.I can only plead with the people to endure the hardship, and those who have the means to help the downtrodden should do so.
“I am also pleading with commoners to live according to their earnings; we must not peg our lives above our earnings in this difficult situation where people are looking for what to eat.”
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BEHIND THE FREE FALL OF NAIRA
However , some are thinking differently . To some observers and analysts ,the above criticisms could either be out of political vendetta or absolute ignorance. Most critical challenge confronting the country’s currency competitiveness or value relative to the dollar and other foreign currencies is its scarcity and Emefiele contributed heavily to the current mess .
The current CBN governor is not keeping silent too .To drive this view home , clear and heal the ignorance of the critics of the regulatory authorities and the government in power , the Governor of CBN ,Mr Cardoso at his recent meeting with the lawmakers came with facts and figures on the new fate of naira..He captured the circumstance surrounding the fate of Naira in the simplest term for a better understanding of every stakeholder .“Permit me to say that put simply, the exchange rate is determined by the dynamics of supply and demand for a product or service. In essence, similar to the pricing of cows or cars, the value of the US Dollar in Nigeria is determined by the balance of US Dollars entering the country and the demand for US Dollars among Nigerians.”
Applying this demand and supply principle he explained that the exchange rate in Nigeria had increased/depreciated due to the simultaneous occurrence of two factors: a decline in the supply of US Dollars coinciding with a surge in the demand for US Dollars.
This may not be farfetched . According top him , “with a substantial demand for education, healthcare, professional services, personal travel, importation of goods and similar needs without a corresponding increase in the supply of dollars , the exchange rate is bound to face ongoing pressure.”
Looking at the demand side of the exchange rate, it’s important to note , first , that the growing number of Nigerian students studying abroad and people going for medical treatment abroad have increased considerably together with the amount involved . Over the past decade for instance , foreign exchange demand for education and healthcare ,according to the data from CBN , has totaled nearly US$40 billion. Notably, the governor said , this amount surpassed the total current foreign exchange reserves of the CBN.
As regards Personal Travel Allowances ,these accounted for a total of US$58.7 billion during the same period. Notably, between January and September 2019, the CBN disbursed US$9.01 billion to Nigerians for personal foreign travel,according to the available data .
A major item on the demand list for forex is Nigeria’s annual imports, which require dollars for payment, amounted to US$16.65 billion in 1980. By 2014, the annual import expenditure had significantly surged to US$67.05 billion, although it gradually decreased to US$54.71 billion as of last year. Similarly, food imports escalated from US$2.63 billion in 1980 to US$14.84 billion in 2019.
Unlike in 1980 when more than 75 percent of the vehicles used in Nigeria were domestically produced, presently, available data indicated that over 99 percent of the cars driven are imported, necessitating dollar payments. Similarly, in 1980, the majority of the clothing worn was sourced from Nigerian textile mills in Funtua, Asaba, Kano, Lagos, and various other towns and cities. But today, nearly all the clothing worn is made from imported fabrics.
Cardoso noted that mitigating a significant portion of this demand could have resulted in a considerably stronger Naira today .Even with the rising of demand , the he said it would have been a different ball game had it been there had been a concomitant increase in the supply side of forex .But ,unfortunately , this was not the case .
Data from the supply confirmed thos as much .On the supply side of the exchange rate, to bolster the inflow of US Dollars into a country, the economy must “earn” these dollars through exports, whether oil or non-oil, or by attracting foreign investments. A robust economic foundation is essential to produce goods and services that the global market is willing to pay for in US Dollars. When such supply surpasses demand, the exchange rate appreciates, causing the price of the dollar to fall.
Unfortunately, in Nigeria, the contrary has taken place. Facts and figures support the above view as well . In 1980, the Nigeria’s import expenditure stood at US$16.65 billion, while its exports amounted to US$25.97 billion, resulting in a surplus of US$9.32 billion. In such a situation, the exchange rate (the value of the US Dollar) would not increase because, similar to any commodity, its supply surpassed the demand.
Moreover, from 2003 to 2013, it experienced a surplus of US$331.73 billion in the economy, with oil exports alone contributing over US$798 billion. This surplus of dollars would typically stabilize the exchange rate, leading to a “strong” Naira.
. Regrettably, over the past 12 years, oil exports, constituting over 90 percent of our foreign exchange earnings, have declined from US$93.89 billion in 2011 to US$31.4 billion in 2020.
Sequel to the above points, it could be inferred that the genuine issue impacting the exchange rate is the simultaneous decrease in the supply of, and increase in the demand for, US Dollars. It also seems that the task of stabilizing the exchange rate, while an official mandate of the CBN, would necessitate efforts beyond the Bank itself and indeed to an attitudinal change of all our citizens.
It is the reality of a growing demand for dollars against its diminishing supply that some economic saboteurs are exploiting for selfish advantage and the monetary authorities are managing to achieve macroeconomic stability.
The resultant macroeconomic instability which could be pinned down to the scarcity of dollars relative the demand is what Cardoso led CBN has been battling to save the soul of naira in the past few months . Some of the factors militating the against the monetary and price stability, financial stability, and development finance include speculative forex demand, inadequate forex supply due to non-remittance of crude oil earnings to the CBN, increased capital outflows, and excess liquidity from fiscal activities..
Fighting the Saboteurs ,Boosting Liquidity
Despite the above scenario and challenges , Cardoso appears to be very optimistic . He is highly proactive and busy fighting saboteurs and initiating measures to boost forex supply . Operatives of the Economic and Financial Crimes Commission (EFCC) recently raided the headquarters of the Dangote Group in connection with ongoing investigation into forex allocations in the country.The EFCC operatives demanded documents relating to allocation of foreign exchange to the group in the last ten years. They scrutinised the documents provided by officials of the Group for hours, carting some of them away..EFCC had written to 52 companies directing them to supply documents supporting the allocation and utilization of foreign currencies to them in the last 10 years. The EFCC letter to the companies is part of ongoing investigation into alleged preferential Forex allocations to individuals and organisation by the Godwin Emefiele-led Central Bank of Nigeria. Investigators have in the past months accused the CBN of favouring and enriching some individuals and companies through non-transparent allocation of foreign exchange to them.
CBN has also embarked on key reforms to boost forex liquidity in the country.The shift to a market-driven exchange rate was intended to create a stable macroeconomic environment and discourage currency hoarding. . Although short-term volatilities attributed to arbitrage and speculation are still prevailing ,he has remained un-relented ..
To address the exchange rate volatility, a comprehensive strategy has been initiated to enhance liquidity in the FX markets. This includes unifying FX market segments, clearing outstanding FX obligations, introducing new operational mechanisms for BDCs, enforcing the Net Open Position limit, and adjusting the remunerable Standing Deposit Facility cap.
The governor believed the above decisions would address a lot of fundamental issues bothering Nigeria’s macroeconomic landscape. In his recent address to the members of House of Representatives he said those measures which were aimed at ensuring a more market-oriented mechanism for exchange rate determination, would boost foreign exchange inflows, stabilize the exchange rate, and minimize its pass-through to domestic inflation. This is clearly a departure from the past under the immediate past CBN governor
The question people are asking now is why Cardoso abandoning Emefiele’s mechanism for boosting forex liquidity that gave value to naira .
When Emefiele was confronted with a similar crisis of free fall in naira and recession in 2016 he tried to dodge the reality of exchange rate management . He created multiple exchange rate windows including windows for Small and Medium Enterprises (SMEs) as well as for investors and exporters .The windows referred to as Nafex, the rate for importers, exporters and investors introduced in 2017 and Nifex, the rate the CBN sells to banks at its weekly auction. Emefiele even ejected the call to converge to N360 per dollars since it was the rate already picked by the market. He was not in hurry for complete convergence .
The fear of Emefiele was clear . To do it earlier might mean a weaker naira ,though that was contrary to his avowed position on taking leadership of the central bank.
According to a Bloomberg report his rationale for postponing the naira convergence was believed to be anchored on investments in oil refineries and fertilizer plants by billionaire Aliko Dangote, which he believed would reduce Nigeria’s imports of petroleum products. This was believed would put the government in a better position to stabilize fuel prices.
Although Emefiele succeeded in achieving stability in for the forex market then but this was not achieved on a platter; it involved restriction of certain goods from export. Emefiele also played to the principle of demand and supply by flooding the market with foreign exchange , thus achieving stability for the naira by warding off speculators. It is apt to mention too that the CBN intervention was made possible due to rising oil prices, which ensured that the country earns more from oil , a huge war chest to ward off speculators.
Cardoso knows this , but there are certain lapses in this mechanism he couldn’t put up with .
Firtst ,portfolio investors do not appear amused by Emefiele, as they moved in droves in 2015 and 2016.
Moreover , such a policy favour few against majority .This allegedly led to preferential Forex allocations to individuals and organisation by the Godwin Emefiele-led Central Bank of Nigeria.
Investigators have in the past months accused the CBN of favouring and enriching some individuals and companies through non-transparent allocation of foreign exchange to them. It is equally capable of creating distortions in the economy and discourages investment What further compounded the scarcity being exploited by speculators and hoarders were outstanding FX obligations left behind by Emefiele led CBN.The above are the reasons why he decided to go for a market driven mechanism and there are strong reasons for his choice ..
The new governor of CBN is currently overcoming the above lapses . This mechanism has created credibility aroud the new exchange policy and generated optimism over its future success .
In a speech delivered at the National Assembly last week the governor confirmed this .“I want to emphasize that we are now at a turning point, and the bold reforms underway across different segments of the economy, though initially challenging, are aimed at addressing these challenges sustainably”.
He noted that “the positive outcomes are already emerging and will become more apparent in the near future. The dedicated and relentless efforts being made are certain to bring about significant and positive changes for our economy”.
Monetary policy actions, he said “are sometimes inhibited by transmission lags, nonetheless, it is expected that the policy measures implemented by the Bank would permeate the economy in the short- to medium-term”
Re-affirming his commitment to implementing policies that will ensure a stable macroeconomic environment and guarantee improved livelihoods for all Nigerians, the governor assured that the inflation pressures might persist, albeit temporarily, but are expected to moderate significantly by Q4 2024 .Exchange rate pressures too , he noted , are also expected to reduce with the smooth functioning of the foreign exchange market.
The governor is not just beating an empty chest . He has been collaborating with financial crimes agencies to fight the saboteurs .
Signals to the above optimism are already on the horizon .Turnover in Nigeria’s foreign exchange market jumped to $844 million on February 3, the highest level of trades since June 2, 2022, according to data compiled by the FMDQ Securities Exchange Ltd.The amount is three times more than the $266 million traded on February 1.
The spike can be attributed to the latest reforms by Olayemi Cardoso, governor of the Central Bank of Nigeria (CBN), who unveiled a series of measures that enabled the naira to trade more freely against the dollar.
Also ,analysts believed there was better transparency in the official market and banks were mandated to offload excess dollars. The CBN also removed the cap on transactions by the International Money Transfer Operators.
Analysts say there may be even more dollars to come as the banks unwind the liquid portions of their long balance sheet foreign exchange positions. That should spur further gains in the exchange rate.
This view may not be misplaced . CBN last week ordered banks to limit their foreign exchange exposure to curb risks to the financial system, in the latest move to improve liquidity in the country’s volatile currency market. The move is pushing banks to cut speculative bets against the naira, according to Ronak Gadhia, director of sub-Saharan banks research at EFG Hermes.
The increased dollar supply is already rubbing off on the embattled naira, which had suffered wild swings last week.
Some analysts believed to ensure the gap between the official and parallel market rates do not start to widen again, the CBN has to do everything possible to encourage inflows to the markets through foreign portfolio investors (FPIs) and Nigerian
“If supply is sustained, we are not likely to see a widening gap,” one source declared
Recent reports from international rating agencies such as Fitch, Moody’s, S&P and commendations from multilateral banks like the World Bank reflect this positive trajectory, with upgrades to Nigeria’s ratings from stable to positive. These reports acknowledge the potential reversal of the deterioration in the country’s fiscal and external position due to the authorities’ reform efforts.
While recognizing the painful adjustments, they all point to a direction that will unlock much-needed growth and development for our economy in the medium to long term”.
Not only the above , the domestic outlook is inspiring and reassuring too. . The CBN said “the Federal Government of Nigeria anticipates a 3.76 percent real GDP growth in 2024, slightly surpassing the estimated 3.75 percent for 2023. This optimism is backed by key government reforms and the expectation of improved crude oil prices and production, which are set to drive economic growth.
He said while each sector might face unique challenges and opportunities in 2024,. the services sector is expected to thrive due to increased digital lending offerings, while the agriculture sector is projected to grow faster with improved productivity. However , the anticipated growth in the industry sector ,according to him ,is linked to increased crude oil production.
As regards the inflationary pressures , Cardoso noted they are expected to decline in 2024 due to the CBN’s inflation-targeting policy, aiming to rein in inflation to 21.4 percent to be aided by improved agricultural productivity and easing global supply chain pressures.
The CBN’s inflation-targeting framework involves clear communication and collaboration with fiscal authorities to achieve price stability, potentially leading to lowered policy rates, stimulating investment, and creating job opportunities.
Although the economic costs of these developments are tough and not just for the economy but also affecting ordinary Nigerians , the governor noted these costs are temporary, adding the CBN’s decisions would address a lot of fundamental issues bothering Nigeria’s macroeconomic landscape.
He said the measures which are aimed at ensuring a more market-oriented mechanism for exchange rate determination, would boost foreign exchange inflows, stabilize the exchange rate, and minimize its pass-through to domestic inflation.
There seems to be no cause for alarm Nigeria is not the only country battling with the above challenges . The global economy is currently grappling with persistent challenges, including inflation and subdued growth prospects. Despite GDP growth outperforming expectations in 2023, it is projected to further moderate in 2024 due to tightened financial conditions, sluggish trade expansion, and reduced business and consumer confidence. The International Monetary Fund (IMF) initially projected a mild slowdown in global economic growth to 2.9% in 2024 now reviewed upwards to 3.1 with Asia driving the majority of the projected global growth in 2024, similar to the previous year.
The near-term outlook is clouded by downside risks, including heightened geopolitical tensions such as the Israel-Hamas conflict and the ongoing Russia-Ukraine war. Broader escalation of conflicts could disrupt energy markets, trade routes, and financial markets, leading to a slowdown in growth and increased inflationary pressures. Additionally, rising trade barriers, protectionist policies, and global value chain restructuring could exacerbate uncertainties in global trade.
In this challenging landscape, key policy priorities involve ensuring durable inflation reduction, addressing fiscal pressures, and fostering sustainable and inclusive growth. The global monetary policy environment is expected to remain restrictive until sustained inflation reduction becomes evident. Governments must grapple with rising fiscal pressures, necessitating credible medium-term fiscal frameworks to effectively manage debt burdens.
Key Options Nigeria For Boosting Forex Supply ?
The first option is to diversify and increase our export base. The oil and gas sector still accounts for more than 80% of our exports. This necessarily exposes us to the volatility of the oil market and other issues. But clearly, we need to sell more things to the world to improve our balance of payments, expand our reserves and increase forex flows. The challenge, however, is that increasing exports is not like a switch that you can just flick on. It takes time. And here and now, there is a forex supply challenge to address.
The second option is to attract foreign investments, both direct and portfolio investments. The administration has introduced some reforms (including forex reforms) and the president and his team have been on the road to market Nigeria as a desirable and safe investment destination. All these moves are necessary and commendable.
But there is usually a time-lag between commitments and actual investments for direct investors. Portfolio investors have a global view and are constantly looking for where they can maximise returns.
So even when you provide them the most favourable terms, there is no guarantee that they will come or that they will stay if they come.
The devaluation of the Naira was premised on the assumption that forex would flood in. However this has not happened yet or in the quantum desired, and understandably because investors are adopting a wait-and-see posture and constantly scanning competing investment domains. The government needs to continue to remove the constraints to domestic and foreign investments, but we should have no illusions.
The third option is to take some foreign loans at commercial or concessionary rates. One example of a commercial loan is Eurobonds, which we binged on at a point. Another is the recent $3.3 billion Afrexim Bank loan facilitated by NNPCL. When stripped of all the financial and legal jargons, this is a commodity-backed loan, a tribe of loans renowned for opacity. Besides, at 11.85%, it is expensive. We can get longer-term loans for under 3% interest rate from the World Bank and the International Monetary Fund (IMF).
The fourth option for boosting forex supply is related to the third. We can seek placements or deposits from countries awash with forex, such as the petrostates of the Gulf. This could come in different forms: currency swaps, direct deposits and strategic investments in state-owned companies. In July 2023, the United Arab Emirates signed deals worth $50.7b with Turkey. On its part, Egypt has attracted long-term deposits and short-term debts above $30 billion from Saudi Arabia, UAE, Qatar, Kuwait and even Libya.
The Federal Reserve of the US also provides dollar swap lines to central banks to boost dollar liquidity in other countries. This facility has been extended to central banks in Canada, Mexico, England, Australia, Japan, Brazil, Singapore and others. We should be realistic that Nigeria might not have the same strategic and systemic significance to the US as these other countries. We may stand a better chance with some of the Gulf states. My sense is that some of these discussions are ongoing with the recent visits by the president and his team to UAE and Saudi Arabia, but we need to offer reassurances and step up formal and informal contacts with those countries as well as prepare internally for potential charges of religious agenda in some quarters.
To make any difference on the forex market, we need loans and deposits in the region of $20 billion. This is the quantum that will calm the market and reassure players in the forex market about adequate liquidity. We actually don’t have to draw down on or use the forex loans/deposits. Their existence will serve as psychological boost and take the heat out of the forex market. But loans (whether commercial or concessional) have to be repaid, and at a cost. So, taking on loans in whatever guise has implications for our external debt, for the increasingly crushing revenue/debt-service ratio, and for the debt burden we are imposing on future generations. However, we may have little or no options but to seek some significant but reasonable loans/deposits.
The fifth and last option is to ensure that Nigeria returns to earning forex from its main export: oil and gas. In 2010, flows from the oil and gas sector accounted for 94% of total forex flows to the CBN but dwindled to 24% by June 2022 (and is probably much lower now). A ready explanation for this is the decline in oil production. But it is more than that.
Yes, there has been a precipitate decline in Nigeria’s oil production since 2020 as our production fell from an average of 2m barrels per day to between 1.2-1.4m barrels per day. The reason favoured by government officials for this major decline is oil theft (and it is a favoured line because the oil-theft narrative will involve spending money and awarding contracts). But other reasons for the decline include the stagnation of investment, the aging oil and gas assets, the divestments, and the failure to close new deals.
As said earlier, reduced oil production doesn’t fully explain why oil forex flows more or less dried up. Nigeria is still producing oil, prices of oil have remained consistently high since Russia invaded Ukraine about two years ago and oil still accounts for more than four-fifth of Nigeria’s export. The reason why the oil exports are not translating to commensurate forex flows is because of the effect of the policy that assigns a portion of the Federation share of oil to domestic consumption, called the Domestic Crude Allocation (DCA) and paid for in Naira.
As indicated in a recent policy memo by Agora Policy, crude oil apportioned for domestic consumption constituted only 8.57% of the Federation share of oil in 2004, meaning the remaining 91.43% went to Federation Export, which fetched the country dollars. Fast forward to 2023, DCA accounted for almost 100% of Federation share of oil because oil production declined and the Federation share as a percentage of total oil produced also declined on account of shift in oil production arrangements. The crude oil due to the Federation was still exported, but bartered for petrol for local consumption through the direct sale, direct purchase (DSDP) arrangement, and was paid for in Naira (note: the Naira payment itself is not guaranteed as NNPCL makes sundry upfront deductions from the DCA and this explains why the national oil company failed to make remittances to the Federation Account for a long time).
The DCA represents multiple whammies for Nigeria and has been overtaken in the context of deregulation. Agora Policy rightly called for the scrapping of this opaque and suboptimal policy, asking for the Federation’s share of oil to be sold in dollars whether it is on offer within or abroad.
Earning forex from all of Federation’s share of oil is Nigeria’s surest path for addressing its lingering forex supply challenge. While other options for unlocking forex supply should be pursued, cancelling the DCA or earning dollars from Federation’s oil is a necessary complement that will yield immediate and continuous result. It is fully within the control of the country, and it will provide constant flows that will guarantee liquidity in the forex markets. It is the way to go .
