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Opinions of Monday, 6 September 2021

Columnist: Olugbenga Jaiyesimi

Stop borrowing dollars, borrow sense

File photo to illustrate the story File photo to illustrate the story

Naira on its way to a N1000 to a dollar: suddenly the naira shot through to N525 to the dollar at the unencumbered parallel market after the announcement that the Central Bank of Nigeria would no longer sell dollars to Bureau de Change operators. No doubt, owners of BDCs have been enjoying the arbitrage between CBN rates and parallel market rates.

The President, Major General Muhammadu Buhari (retd), said he saw no benefits in currency depreciation or more precisely, devaluation and he was applauded. The CBN governor proclaimed he would defend the naira and that received applause too. Suddenly, there was to be a Yuan Naira swap and a largely Chinese produced Samsung Galaxy phone would soon be selling at a ridiculously low price because the dollar had been circumvented. That was six years ago, all types of shenanigans and charades. Another one for the gallery; let’s ban 41 items from importation and it was applauded.

Yet, the naira is on its way to N1000 buying a dollar in two to three years by simple projection. If in six years it scaled from N165 buying a dollar to N500 which is a 200 per cent increase, then a 100 per cent increase to a N1000 will be in two to three years. What will hasten this is the new foreign debt load on the nation. This rose from around $10bn in 2015 and is projected to go beyond $50bn by 2023 (much more than the $30bn debt we had difficulty in paying off for over two decades)

Am I harsh in calling CBN efforts a charade knowing that the value of a currency judged against the dollar is determined ultimately by the supply of the dollar matching or exceeding demand for the dollar by that nation’s economy? Yes, there was a time when we were aflush with dollars after winning a jumbo lottery in oil income and the dollar exchanged for 55 kobo. I submit that that was when we planted the seeds of our current economic crises because that was the perfect recipe for Dutch Disease from which we are afflicted by to this very day. By pursuing a strong naira’ policy we embraced Dutch Disease (subject for another day). Let’s return to reasons a N1000 will buy a single dollar willy-nilly.

This is because we refuse to address the solution side of the forex problem and just attend to the demand side of the dollar to the naira by government actions, policies, and pronouncements. Meanwhile, the solution lies solely in the supply side of the price equation. For a long time now, our balance of payment problems have been a dollar supply one, a crash in oil prices and then the whole economy starts reeling. The authorities bring in policies that are to curb imports especially of consumables.

Being an import substitution industrial policy driven economy wishing to produce those 41 banned items and others we will have to bring in new machinery and plants, spares, chemical reagents and locally unavailable raw material like wheat or barley etc. All the above and others need much injection of forex meaning added pressure on the value of the naira.

This also plays out in our efforts to diversify the economy or become more productive. It’s a mantra given out whenever the economy is in trouble. So our import bills will simply move from consumables to capital goods including combined harvesters and pesticides to boost our agricultural production. No way you are getting away from imports and the demand surge on the dollar. Meanwhile, what the fiscal and monetary authorities do is ‘demand control’ and other cosmetics.

China, the world’s largest exporter, is the world’s second largest importer, almost matching US imports in 2018. India with the world’s fourth largest foreign reserves imports more than it exports up until 2020. In no serious country does imports really go down for long. The nature of imports might change from consumables to capital goods so the demand for forex goes up.

Meaning, managing the naira value from the demand side is a lost battle and it’s a war we have been losing since the 1980s when 55 kobo purchased a dollar and we later went into our first recession. Yet we refuse to change strategy hence a N1000 to dollar is inevitable.

Supply side. Is it rocket science? No, then why have we refused to adequately address this side of our forex market? As I have explained this is the side of the equation that can stem the fast declining value of the naira. We can see that all the gibberish science on defending the naira has not worked any magic. It is time to move to this side of the equation by diversifying our exports away from crude oil, by encouraging higher value non-oil exports.

I have used harsh words on the CBN because their policies apart from being demand control has also reduced the supply of dollars from other sources such as Foreign Direct Investments, remittances and the reparation of the little non-export proceeds back to the country. This means we have been struck by double whammy CBN policies.

Efforts were made in the Structural Adjustment Programme to address the supply side of the equation with the setting up of Exporting Processing Zones and Nigerian Export-Import Bank to no avail because Nigerian business elite refused to buy into the export programme. This is after many, including top-notch economists, had said we should peg the naira because we had nothing to export. This is 40 years later and we still have very little to export. This needs to be investigated and expunged from our psyche.

Another reason I am confident the dollar will trade for a N1000 is that if we decide to join the global supply chain as suppliers and move from ISIP to Export Led Industrial Policy, we will craze for a drive towards a N1000 exchanging for a dollar because it drives exports and reduces imports, especially of consumables thus killing two birds with one stone. It also helps iron out all the other inadequacies of the economy like industries having to provide their own power and other infrastructural deficiencies. This time round, we will be subsidising exporters as it were, drawing more people into exports. Our industrial goods will edge into global markets keeping our factories at fuller capacity thus creating more jobs. What economics is this? It is called Emulation Economics by Erik Reinert, author of “How Rich Countries Got Rich and Why Poor Countries Stay poor.” Whom are we emulating by this? The Chinese and Asians of course and there is enough empirical data to back this up. The Chinese RMB/Yuan depreciated three fold over 10 years when they started to conquer the world, from Three Chinese Yuan buying the dollar in 1985 to eight Yuan in 1995.

Toyota, Honda, Panasonic, Sony et al conquered the world on the back of a weak Yen, 300 Yen to the dollar in the 70s until they reluctantly acceded to Yen appreciation only after Japan had moved to Hi-Tech goods leaving the low end toys to China. Later, Japan also accepted to float the Yen. China, despite having a war chest of close to $4tn reserves, is not allowing the Yuan to strengthen up back to three Yuan buying the dollar. Meanwhile, Nigerians are yearning for N1=$1.00

I have postulated that there are two ways to the inevitable N1000 dollar, it could be by strategic choice or be thrusted on us by dire economic situations. If we get there through the latter, we will not reap the benefits that accompany such a decline in the value of our currency. It is not all gloom on the supply side as we see polished sesame seeds export from Nigeria knocking cocoa beans off the pedestal of leading non-oil exports.

Another windfall from depreciating the naira to beyond a N1000 to a dollar is that it forestalls Dutch Disease. Interestingly we had a period when this scenario was in play, 2000-2014. The currency was allowed to depreciate from around N80 to N140 in 2014 even as we had rising reserves from rising oil prices (it also helps government revenues). Yet, this was the period in our history when our economic performance was at its best with 6-8 per cent GDP growth for most of those years.

In my estimation, getting to a N1000 per a dollar should not be the issue for much discussion at Nigeria’s current level of development, only mature developed countries have the luxury of appreciating currency. The issue at hand is how we get there, is it by accepting it as a policy strategy to drive the supply side of the forex market or by having a N1000 per a dollar thrust upon us by dire economic circumstances that bring periodic devaluations. It is time to break the hold of the import substitution industrial policy only on our industrialists and policy makers. This policy has been at the heart of our inability to export from our industries thus limiting our exports to primary raw materials.