Stabilising naira through fiscal/monetary policies – Part 2

There are several broad measures the Central Bank and the Federal Government can put in place immediately to stabilise the currency, boost the economy and diversify the economy. Firstly, in the short term, the CBN would have to conserve the country’s foreign reserves by allowing the Naira to find its appropriate value through a free or at least managed float. Although crude oil prices have recovered somewhat to just above $40 a barrel, this does appear to be a temporary situation.

The fundamentals in the crude oil global market have changed for the foreseeable future. The U.S. has ended its 40-year moratorium on crude oil exports and is now pushing nine million barrels of oil into the market daily, thanks to its shale exploration technology. Iran is also back into the market and understandably, has distanced itself from the production cuts now being pursued by OPEC. Saudi Arabia has a history of flouting OPEC production cuts and cannot be relied on to cooperate fully with the new initiative to reign in production anyway.

On the domestic front, pipeline vandalism and crude oil theft are still challenges that are preventing Nigeria from achieving its full production quota of 2.4 million barrels per day. Nigeria is a long way from earning as much as it did from crude in 2011/2012 when the war in Libya was raging. Whatever meagre margins are being added to the foreign reserves cannot be expended trying to stabilise the local currency. Russia spent $76 billion and €5 billion trying to stabilise the Rouble in 2014 and was largely unsuccessful. Nigeria has no such luxury and, therefore, decisive action has to be taken now to allow the Naira to float or at least be devalued.

Devaluing the Naira now will automatically close the current ridiculous rate differential between the official exchange and the parallel market and eventually create a uniform exchange rate for the country. It will, however, have the negative effect of driving up inflation in the short term since it will cost more to purchase foreign goods and raw materials. However, this will also begin to spur some level of readjustment in terms of priorities of what we consume as a nation. While Nigeria will still have to import petroleum products and raw materials for certain industries for some time to come, there are other goods which are being produced in Nigeria and which can be used as import substitutes.

Secondly, we should no longer pay lip service to import substitution. This will, however, take time and the reality is that there are no shortcuts. However, there has to be a conscious move to curtail the importation of items that are at present draining the country’s foreign exchange by promoting the local production of these items. The experience with the import bans on stockfish and wheat have shown that the way to go about curtailing imports is not outright prohibition, but more towards implementing monetary and fiscal policies which will enhance the capacity of local firms to produce these items in quantities that will serve local demand. Higher tariffs may have to be imposed on imports of certain items which will make them more expensive, potentially boost government revenue and provide a phased approach in the transition from the imported varieties of these items to local substitutes of equal or better quality.

Thirdly, a critical look needs to be taken on the importation of petroleum products. At the moment, Alhaji Aliko Dangote is constructing a $16 billion petroleum refinery in the Lekki Free Trade Zone, Lagos State which, when completed, will have the capacity to refine 650,000 barrels of crude oil per day and make Nigeria self-sufficient in terms of production of petroleum products. The Central Bank of Nigeria has already promised to ensure that the project receives foreign exchange needed to import critical components at the official exchange rate. Although laudable, the CBN needs to expand this policy to encourage other local manufacturers of products currently being imported into Nigeria and to export-oriented industries with large employment absorptive capacities. The policy of providing forex at the official exchange rate to manufacturers who are willing to step up local production of items now being imported while seemingly attractive, would be unnecessary when there is a convergence of official and unofficial rates. This would also eliminate a discretionary policy which if unchecked, could provide some with unfair advantages.

Finally, diversification of Nigeria’s economy is now a necessity. Diversification should not be viewed in terms of only expansion into mining and sale of solid minerals. The same collapse in oil prices hit the commodity markets even harder. Diversification should, therefore, be directed towards manufacturing, agriculture, technology and human capital development. Nigeria could look to a country like Norway in this regard. Both countries are oil producing countries and both have vibrant agricultural potentials. The difference is that while Norway saves almost all its crude oil earnings in a sovereign wealth fund and sells its agricultural, fishing and manufactured products to the world, Nigeria has been spending all its crude oil earnings on imports and has allowed its manufacturing and agricultural sectors to wilt. Today, Norway boasts of foreign reserves of just under $58 billion and a sovereign wealth fund worth $882 billion. CNBC has identified Norway’s Government Pension Fund Global as the largest sovereign wealth fund in the world.

It is now painfully obvious that the PDP-led government of the last six years or so failed to plan for the long term development of the Nigerian economy, or at least failed to faithfully implement whatever plans it had. On the other hand, it is equally obvious that despite the rhetoric during the political campaigns, the current APC Federal Government had no discernible, coherent economic development plan before coming into office and still does not appear to have one almost a year after winning the elections.

The path to growth of our economy is going to be arduous and will take time and quite frankly, there are no real short cuts. We must all share the pain. Devaluation alone is not the solution to our economic challenges. What is required now is a well articulated, holistic economic development plan which will then need to be sold to Nigerians to justify the obvious sacrifices that they will have to make to achieve the progress we seek and inculcate a unity of purpose.
Concluded
Olorogun David Edevbie is Commissioner of Finance, Delta State.