Inflation and foreign exchange problems are not new or peculiar to Nigeria, both problems are universal and well documented in economic history of many nations. Amongst the countries that had similar problems in the past are Argentina, Columbia, Venezuela and Ghana. In these countries mentioned different approaches were used, while some approaches failed, some succeeded in improving foreign exchange and inflation problems. This article is a scenario solution to managing Nigeria foreign exchange crisis.
In Argentina, foreign exchange (fx) crisis arose due to failure of successive government to do structural reforms that will encourage capital flows. Instead of developing an austere economy during the 1970 oil boom period, the country opted for rescheduling their foreign debt.
The Columbia fx crisis of 1999 was triggered by indebtedness of households, firms and extravagant public sector spendings similar to what Nigeria political and public sectors are currently doing. Ghana used to be a mono product economy with heavy dependence on Cocoa for fx earnings until her recent commercial oil exploration. Ghana agriculture accounts for more than forty percent of her export earnings and provides almost ninety percent of the food needs of Ghanaians. However, Ghana government failed to invest in solutions that can increase output in the agricultural sector. Hence, less attention was placed on increasing Cocoa output which would have increased foreign exchange earnings to drive economic growth and employment.
Nigeria problems are a combination of some of the identified reasons attributed to countries mentioned above and our solutions must derive from a holistic review of existing economic policies that are germane to growth of Gross Domestic Product. In this regard, it is my opinion that our fx management approach should adopt the followings.
First, there is an urgent need to suspend all administrative and regulatory policies relating to exports of goods from Nigeria. This solution will provide incentive for exports to have competitive pricing and cost advantages in global markets to drive earnings. Current multi layer agencies of government at our export terminals must be removed except those responsible for national intelligence. Government must create an open operational field for all export companies and manufacturers. The idea of waivers for some and none for others should be cancelled.
Second, government should review the foreign exchange allocation policy being adopted by Central Bank of Nigeria (CBN). Under the proposed new policy, fx should be allocated exclusively by Letter of Credit (LC) for capital goods and equipment. Licensed banks should be embargoed to grant import finance for non capital goods and any financial institution that violates this condition should be suspended from fx business for a period of two years. FX allocation for raw materials by small and medium scale enterprises should be exclusive to raw materials with no local alternatives. For instance, manufacturers of alcoholic beverages should be compelled to use maize and sorghum or any other input from Nigeria agricultural sector without exceptions.
Furthermore, as an administrative policy, full embargo should be placed on fx allocation for foreign school fees or medical tourism for five years to encourage local educational institutions and health facilities to grow. Our educational sector should be creative to attract international students, who will by necessity pay fees in foreign currency. In essence Form A transactions should be totally canceled except with discretionary approval of Governor of CBN for select items.
Third, there is a need to review downward the tariff and levies especially on imports. All imports under Unconfirmed Letter of Credit (ULC) should be given a rebate on all charges and fines of at least 50% on subsisting amount. This will encourage capital inflow from diaspora investors to the economy. Imports under ULC arrangement should only qualify for CBN interventions fund provided it falls under capital goods mentioned above. Non capital goods imported through ULC should be allowed unhindered to use autonomous foreign exchange sources to meet obligations that may be due with limited documentation requirement. Outstanding Form A and forward contracts obligations should be cancelled and affected companies and individuals be refunded their naira deposit for reinvestment in local capital and money market bonds to reduce pressure on government on foreign exchange.
Finally, in order to control the unregulated foreign travels of political and public sectors office holder, approvals for fx and per diem should be given through the Department of Foreign affairs in the office of the President with subsequent approval from CBN.In essence, for political office holder to get per diem for travels, such officer should obtain these approvals subject a limit of $20,000 per office holder per annum.
In conclusion, Nigeria must adopt a multilayer phase approach to solving and managing her foreign exchange problems. The initial phase should endure for medium term of about four years in a controlled supervisory environment under a public private sector initiative.
Dr. Johnbrown is a public policy advisor based in Canada and currently the President of Ogbomosho Recreation Club, Oyo State, Nigeria