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Need to address the root cause of continuous drawdown on external reserves

Nigeria’s external reserves management came under the limelight recently when the Central Bank of Nigeria (CBN) adjusted the exchange of the naira from the old official rate of N379/$ to the new exchange rate of N410.25/$. The move was made by the nation’s monetary authority with a view to closing the gap between the official exchange rate and the rates in the parallel market.

Expectedly, public discourses focused on why the CBN ought not to have followed that path. It is on record that Nigeria has witnessed several naira devaluations to the point that her citizens have lost count. This policy sneaked into our consciousness in 1986 when the then military president, Ibrahim Badamasi Babangida (IBB) accepted the IMF package specifically designed to wriggle Nigeria free of the economic mess it found itself.

IBB left the country’s exchange rate at N17/$. The naira has since been on a downward spree to its latest rate of N410.25/$. Other currencies are also affected. The British Pound Sterling now exchanges at N700. The Euro exchanges at N600. Since May 2020, Nigeria’s external reserves have averaged $35 billion which may not provide more than six months of import cover.

The challenge before every Nigerian now is not to keep attacking the CBN but rather contribute in their little way to address the root cause of the continuous devaluation of the naira.

The foreign reserves are kept for so many reasons which include to keep the value of a country’s currency at a fixed rate, to maintain liquidity in the event of an economic crisis, stabilize markets, boost confidence in the economy, and may also be used to support the provision of infrastructure.

The root cause of the continuous devaluation of the naira is no other than the collapse of the real sector of the Nigerian economy. Decades ago, Nigeria exported refined petroleum products, which means the nation’s refineries were in good condition. Then, most of the vehicles on Nigerian roads were assembled either by Peugeot in Kaduna, Volkswagen in Lagos, Leyland in Ibadan, and ANAMCO in Enugu.

In addition, household appliances such as radios and TV sets were assembled in Ibadan; freezers assembled in Lagos, plus clothing materials made by textile mills in Lagos and Kaduna. It should be noted that other items such as shoes and sandals were equally made by Bata and Lennards in Nigeria. All these saved the nation a huge amount in foreign exchanges. In other words, the external reserves were not under undue pressure, unlike today.

The reverse is the case now. As of the end of the first quarter of 2021, petroleum oils and oils obtained from bituminous minerals, crude constituted 66.38 percent of Nigeria’s export. On the import side, motor spirit ordinarily constituted 10.04 percent of Nigeria’s imports.

Based on the foregoing, Nigeria’s external reserves depend on the strength of the Nigerian real sector. Therefore, we need to revive the country’s real sector now. One of the ways to get out of this logjam is to increase local sourcing of raw materials. Nigerian businesses import virtually all the raw materials used in producing their products. This call has been made severally, but doubt remains why this policy has not recorded much success.

Nigerians must patronize made-in Nigerian goods if this problem must be addressed. If Nigerians keep buying foreign goods, we would keep empowering foreign producers at the expense of local manufacturers who create the jobs we yearn for and pay taxes that empower the government to perform their basic functions.

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