Just as COVID-19 kills more people with underlying health challenges, its emergence has made our litany of socio-economic problems more precarious. With worsening foreign exchange revenue and demand, it seems that further devaluation of the Naira is inevitable.
However, while there is no doubt on the negative consequences of Covid19, the problem is the way we (Nigeria) directly or indirectly contribute to our economic problems and then turn around trying to solve the same problem. A very good example is our foreign exchange challenge.
Precisely, the problem we have is not of devaluation, it is one of limited foreign exchange revenue source and weak foreign exchange management. I will dwell on the latter in this piece with solution to the limited foreign exchange sources examined next week.
To be clear, all these calls and demands for further devaluation of the Naira are flawed and clearly derive from our reactive approach to all our socio-economic problems. If a currency that is officially exchanging at N360 to the $1 (the global currency) is not devalued, I am at a loss on what further devaluation will achieve in a mono-economy such as ours.
If we cannot achieve a higher export at this rate, even a further 100 percent devaluation will not create the miracle. The USA, UK and Germany with the most valued currencies have continued to maintain their global export competitiveness.
Quote: To test its workability, it can be agreed that all beneficiaries of the Federation Account should get their allocations 50 percent in dollars and 50 percent in Naira for at least one year for a start
Just as our problems are clear, the solutions are not far fetched. All that is required is a courageous and committed leadership with proactive, innovative solutions to our problems. How can we be talking of further devaluation when inflation is above 12 percent and unemployment above 35 percent and these problems have remained a major challenge for both the CBN and fiscal policy providers for the last 45 years.
In the UK with the most valued currency and whose policies we often adopt, inflation is below 1.5 percent, the unemployment rate is 3.9 percent and interest rate is 0.25 percent from the Bank of England and below 5 percent from the UK commercial banks.
As earlier stated, while Covid 19 and consequent fall in oil prices have contributed to our foreign exchange problems, a further contributory factor is the way the CBN (not started by Emefiele) has managed our foreign exchange earnings. In the current Federal Allocation approach, the CBN substitutes the accrued dollars with printed naira which are then shared to states and other beneficiaries in line with the agreed sharing formula.
As the Naira-substituted Dollars form our so-called external reserves, this approach is inherently faulty and counter-productive as it contributes significantly to our exchange rate problems. Given our high import dependence and other factors such as corruption, this approach creates and sustains a kind of internal pressure on the Naira due to the exchange of most of the allocated Naira back to foreign currencies (Dollars) by the initial beneficiaries.
It is this internally created problem that the CBN then tries to address by selling back some of the withheld dollars (foreign reserves) as dollar injections. Through this flawed process, the CBN therefore creates an economy that will continuously under-perform with persistent excessive fiscal deficits and inflation. We are, therefore, creating and sustaining our problems through induced demand for dollars and reactive supply in the form of regular dollar injections into the economy by CBN.
Therefore, one of the real solutions to our foreign exchange problem is the need for CBN to critically rethink the way our dollar-bearing Federation Account is managed. As a suggestion, it might be better for the CBN through a carefully managed and supervised system to allocate part of the dollars directly to the concerned beneficiaries (federal, state and local governments) through their special accounts either with the CBN or banks.
Arguably, this will be more proactive and appropriate to our situation. It will also help address another major monetary problem of the CBN which is the persistent excess liquidity in the system. The banks will be better stimulated to rightly intermediate the economy rather than their current rent-seeking and limited intermediation contributions.
Although I appreciate that the CBN main mandate is to protect and defend our legal tender, the Naira, the truth is that our exchange rate and economic situation require some innovation which sometimes might sound unpopular. While some might argue that this will be illegal as it will amount to dollarisation of the economy, the truth is that our economy is already dollarised, and possibly “poundanised” and “euronised.”
It is a matter of being practical or merging theory with reality to achieve a better and sustainable outcome. If legislation is required, it should be sought and received to effectively jumpstart the process. As they say, special situations require special solutions.
To test its workability, it can be agreed that all beneficiaries of the Federation Account should get their allocations 50 percent in dollars and 50 percent in Naira for at least one year for a start. Moreover, if we are truly practicing a federal system of government, I do not think that the states will not be allowed to generate foreign exchange through the export of their products.
The pressure on the Naira will be reduced through which a more stable exchange rate that is market determined can be achieved. It will reduce or eliminate the persistent excess liquidity in the system through which the banks have continuously made unmerited profits. Further cost reduction and elimination of waste will be achieved through the limited use or lack of the need to issue treasury bills that are normally used by the CBN to mop up excess liquidity.
As some of the treasury bills are sometimes turned into treasury bonds, the government and the economy will benefit from the saved interest payments and debts. It will make Nigeria a better economy and country!
Dr. Ngwu, is an Economist/Associate Professor of Strategy, Risk Management & Corporate Governance, Lagos Business School and a Member, Expert Network, World Economic Forum. E-mail- [email protected],
