The Central Bank of Nigeria’s (CBN) current policy of consistent defence of the naira against weakening, is adversely affecting the contribution of non-oil exports to Gross Domestic Product (GDP) and budget.
This is at variance with the prospect of diversifying the nation’s economy, and whittles efforts at putting an end to total reliance on oil as revenue source, according to BusinessDay investigations.
The biggest policy issue yet to be addressed, according to economic watchers, is the role of the currency (naira) in aiding non – oil exports and whether the naira needs to be devalued to boost exports.
A weaker currency typically raises import prices, which discourages imports, while making Nigerian-made products cheaper overseas.
“Nigeria is unusual for not having a vociferous exporters’ lobby to argue the case for (controlled) exchange-rate depreciation to give a competitive edge to exports,” FBN capital analysts led by Gregory Kronsten, said in a research note released February 14.
“However, the CBN’s exchange-rate policy is designed to support its objective of single-digit inflation.”
Commentary from the CBN for the fourth quarter of 2012 put non-oil exports at $987m.
Non – oil export figures on a balance-of-payments basis were $3.2bn in 2011 and $2.2bn in January-September 2012 according to the CBNs quarterly external sector development report.
The Nigerian Export Promotion Council had a full-year target of $3.9bn for 2012.
According to FBN Capital, “the push to expand non-oil exports appears to have stalled.”
Nigeria’s predominant export (oil) is a dollarised commodity which is produced with negligible local currency inputs, unlike for example, cocoa, which makes it more difficult to make a case for devaluation to boost exports, say analysts.
The CBN is currently targeting a nominal exchange rate of N155 to the dollar, plus or minus 3 percent.
“If you really wanted to say where the Naira should be to compete against China, it could anywhere maybe N400 or N500 versus the dollar, but it is not going to go there if the CBN has any say,” David Cowan, Africa economist at Citibank, said in a response to questions.
The non-oil sector contributed only 3 percent of Nigeria’s non-oil exports and 24 percent of the budget in 2012, while debt service obligations to non oil revenues was close to 68 percent.
The CBNs decision to make the naira the de-facto monetary policy anchor in its fight against inflation means that there is a tension between the CBNs policy of a strong naira and the need to grow non-oil exports.
Most nations desire a relatively weak local currency to protect domestic industry and help them remain competitive in the face of potentially cheaper imports.
Japan triggered global talks of a ‘currency war’ this year when it chose to intervene heavily against yen strength.
When a country’s currency appreciates, it often reduces its competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for local businesses, especially in the context of a globalised world economy.
The naira appreciated by 3.9 percent versus the dollar in 2012, the best performer in Africa, according to Bloomberg data.
Bismarck Rewane, chief executive of Financial Derivatives Company (FDC) a Lagos based investment firm, in a September 2011 presentation said that based on Purchasing Power Parity (PPP), the naira was overvalued by 11.81 percent.