EREGHA: We Need More Than Ban On Dollar Deposits To Strengthen Naira
Dr. Bright Eregha specialises in economic theory and econometrics and is a lecturer in the Department of Economics at the University of Lagos (UNILAG), Akoka. In this interview with IKECHUKWU ONYEWUCHI, he argues that the Central Bank of Nigeria (CBN’s) ban on deposits into domiciliary accounts, though momentary, is crucial to salvaging and restoring confidence in the Naira.
There has been fervid outburst trailing the CBN’s ban on deposits into domiciliary accounts, with most critics describing it as cosmetic and draconian; how do you think the policy would impact on the Nigerian economy?
A LOT of people feel that the Naira is weakened by the day and they can’t put much trust in it. The best they could do is to convert the Naira to Dollar and then transfer to their domiciliary account for keeps.
This gives more strength to the Dollar and weakens the Naira. The thing is, a man who has money stocked in his domiciliary account, would be depriving others of foreign currency.
It is capital flight, though it is their money, but still is capital outflow. They feel the Dollar is more secure. In effect, their action reduces the supply of Dollar in the economy.
The policy is such that converting the Naira, transferring to or hoarding Dollars in accounts is no longer possible. It is so that the Dollar would be available — the demand is more than supply.
The parallel market is in high demand for Dollar too. With this scenario, there is supply, and with the reduction of pressure on the Dollar, the Naira gains.
It is a good policy. I just pray that it is sustained. But the question is, is this a sustainable policy? What we need is much more than such a short-term policy.
What the CBN has basically done is to restrict people from depositing into their domiciliary account. One can withdraw, but can’t deposit. They are trying to make the Dollar available. This is so that at the short-term, they can bring down the pressure on the Naira.
At the long run, they have to look for policies that would encourage production for export. But they need to get rid of corruption and high cost of doing business to pave way for investments.
By implication, it means the policy won’t stand the test of time and might be reversed in a short time; Nigerians shouldn’t panic? It is policy to salvage the situation for now; it is short-term.
The long-term policy is for us to take our economy to a state where we have more export than import. That is why I support the policy of restricting 41 commodities’ importers from assessing Forex. Some of these products can be made in Nigeria, why give these much room to import bill? If the bill is huge the demand for foreign exchange is also huge for us and the supply is lower than demand.
The price for exchange rate would always be at a disadvantage. In other words, for now, the policy is okay to salvage the situation. A lot of people believe more in the Dollar and it is not good for the Naira.
With this case, the Dollar would be available because no one can deposit it. The best thing to do, because of security, is to exchange it for Naira. What do you think this portend for money laundering, as one of the driving motive for the policy? The crime is perpetuated through the banks, not the one we experienced the last time, where money was flown to South Africa.
Policies such as this restrict money laundering and discourage crime. In fact, it is capital flight — capital outflow. That is one of the reasons why the Dollar was in high demand against the Naira. This can, in short-term, be a solution to money laundering. But it is not the only solution. We need laws adhered to and transfers monitored to be able to reduce the incidence of the crime.
It is in rear cases that money can be taken out in bags. In most cases, it happens through banks. Policies such as this restrict money laundering and discourage crime. In fact, it is capital flight — capital outflow.
That is one of the reasons why the Dollar was in high demand against the Naira. This can, in short-term, be a solution to money laundering. But it is not the only solution.
We need laws adhered to and transfers monitored to be able to reduce the incidence of the crime. One thing with policies is that someone from the ruling political party can come and say that a certain policy doesn’t favour him and ask for it to be jettisoned. But, for now, we need a policy that can salvage the situation.
Do you think the personality and carriage of the present government can allow for the sustenance of this policy? Yes, I believe so. At least, with the little we have seen, it should be sustained.
We need somebody who is selfless, visionary and has no selfish interest to amass wealth to allow policies to thrive. If somebody with ulterior motives takes the saddles, good policies might not thrive and the monitoring of those policies would be played down.
The CBN goes for all kinds of bank examination, the same banks that are used for money laundering and still violate laws. The question is if monitoring and examination really happens.
These are some of the questions that come to mind. Emefiele is on the hot seat, especially with his policy directions, so much so that he was caught up in an exchange with The Economist; do you think the arguments against his panicky war to sustain the naira are legitimate? The CBN shouldn’t have replied the article.
The response only makes those on the other end think that they have something at stake here. If one comes up with a policy and can defend it, the only thing is to explain its effectiveness to the Nigerian economy.
There is no need to start answering everybody from every corner. Besides that, let’s take the 41 items, for instance. I see no reason why Nigeria should be importing most of them.
Emefiele came up with the policy not necessarily because we are producing the items to meet local demand, but because it is mounting more pressure on our foreign reserves.
Foreign exchange is needed to import those things and the import bill is on the rise, which puts more pressure on foreign reserves. Oil revenue has dropped; hence the inflow of foreign revenue has reduced.
It takes export for foreign exchange to come in. Export has reduced in terms of crude oil price, but not necessarily in quantity; there is an almost 50 per cent drop in price from about $100 to $50. Imagine if 50 per cent foreign earnings have dropped and the demand is still on the increase, because it is the amount of Dollar that comes in that is used to trade and import.
Those who import have to access it through the foreign reserves and the import bill is on the increase every day. One can only imagine what it means for the exchange rate and the economy.
What the CBN governor did was to identify certain items that shouldn’t be imported. He didn’t say that they shouldn’t import, per se, rather he restricted access to forex at the expense of the foreign reserves. The importers can source their foreign exchange from anywhere else to import.
It makes the cost of importation higher for them, so that, in turn, it would encourage them to consider local production. Importation bears down on local production; it is dumping. Such a policy should make importers look inward.
Another side to this is if one decides to produce in the country because the import bill is high, the question of the state of the local business environment arises? Most people import because the business environment doesn’t encourage production. For example, there are a lot of taxes that hamper business growth in Nigeria.
The law is not transparent enough. The cost of doing business, apparently, is on the high side; shouldn’t government be strategising to loosen up the business space alongside policies such as this? We have a government that is trying to cover up loopholes before it sets up crucial policies. Since this government came on board, almost everybody is now working.
The State Security Service (SSS) and the Economic and Financial Crimes Commission (EFCC) are arresting people almost every day. These are things that were not so common before.
It is coming because someone who has the political will to have them operate is at the work. When all of these loopholes are covered, the environment would start taking shape.
But for now, we need to salvage the way our economy is going. The normal thing would have been to provide a business climate that would encourage these people to invest here and discourage them from import.
At the moment, the pressure is too much on our foreign reserves. The CBN has just restricted the importers of those commodities from accessing the foreign reserves to other items that are germane to the economy.
As regards to having a business environment, it would be in place if we have a government with the right political will and I believe we have such in place.
As we progress, I pray they do that and not derail. Manufacturers are most likely going to feel the pain of this policy, how do you think this would impact on productivity? The question we should be asking is if the items identified are input to manufacturing. Manufacturers, in the real sense, do not need most of those items; they are mostly finished products.
Cement is a finished product, and not an input to production. It is when an item is an input to production and a manufacturer needs it for local production and it is excluded, that it is going to be expensive. If it is a finished product, it is not an input to production for any manufacturer in this country.
I believe that, if the items are not input to their production, it is even better for manufacturers, because if one can produce locally and another imports at a higher cost, there is a huge difference. In fact, it encourages local production because the demand is the same and the importer cannot cope because of the high cost of importation.
He would be forced to import less. Then, we would only need local production to meet up with the demand. It gives room for more manufacturers instead of discourage them. But if we identify the 41 blacklisted items as input to production, then the policy has a problem.
As the exchange rate depreciates every day with regards to the Naira, manufacturers, who import input such as capital and machines, would be discouraged if the cost of production increases. What the CBN is doing would consequently reduce this cost if the policy succeeds.