Of Bans, Foreign Exchange Earnings, and a Strong Naira

Today, confronting evidence of the cackhandedness of our management of our foreign exchange resources until very recently, the question turns back to why a country in dire need of investment such as ours should keep such resources away. Two answers really. First, is that despite its need for investment, there is only so much that the economy may take without severe distortions showing up. Second, the best way to allocate such resources, if and when we finally attract them, is via transparent markets.

The only reason that the so-called “ban” in June 2015 by the Central Bank of Nigeria (CBN) on access by importers of some 40-plus items to the official foreign exchange market made sense, was because the management of the foreign exchange market was topsy-turvy. First, because the restriction allowed importers to continue bringing these goods in, so long as they could source their foreign exchange needs from outside the CBN’s multiple windows, the apex bank simply acknowledged via the ban, the perverse incentives that its subsidy regime was producing. Even today, after experiencing the full consequences of the CBN’s “follicies”, most Nigerians argue that there was no subsidy under the old foreign exchange arrangement.

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We simply had multiple official markets where the naira’s exchange rate traded way below what obtained at the non-official market. All who argue this point concede that the possibility of those who got access to dollars at the official rate being able to resell their allotments or portions thereof at the unofficial markets was all shades of wrong. Indignation at this arbitrage opportunity ran the full gamut of possible responses. Perpetrators were morally bankrupt, unpatriotic, or downright criminal — if not all three at the same time. Yet, we all are familiar with the precept that a business can only breakup its markets into segments with different prices only if there are strong barriers to goods moving across the different segments.

Beyond this, the insistence on full disclosure of all relevant information and the breakdown of barriers to exit and entry in the design and operation of markets is to prevent price gouging on the part of sellers, and price arbitraging on the part of middlemen. The CBN and most Nigerians missed this point. The bigger problem with the CBN’s management of the nation’s foreign exchange earnings was never its “uncountable” leaky windows. It was to have conceded that we had to introduce to the market via sundry agents all that we earned from exporting crude oil. Today, we are in awe of the US$1 trillion in Norway’s sovereign wealth fund. We are amazed at the investment initiatives that countries in the Middle East are powering with their own funds.

Arguably, the most significant effect of a “stronger” domestic currency was to drive imports up (we have not always loved foreign goods, at least, not until they became incredibly cheap). Worse, was that this “stronger” naira raised the cost of domestic inputs, especially labour, and as a result, of domestic output generally. Net effect?

Still, we fail to ask ourselves why countries as dependent on the export of hydrocarbons as we are, seem in finer fettle. In the 1970s, geopolitical crises in the Middle East drove oil prices up. Nigeria suddenly found itself awash in cash. More than enough, apparently, for a sitting head of state to declare that money was not our problem. How to spend it productively, obviously was. Those were the good old days that most Nigerians above 50 today hark back to. In truth, those days marked the onset of the country’s current crisis. All the petrodollars that came into the country did was push up the naira’s exchange rate. Plenty of dollars running after few naira, in other words, inflated the naira’s value. Nigeria was strong in the eyes of most patriots who beheld it. At a point, one greenback was all of 75 kobo.

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There were other unintended effects, unfortunately. Arguably, the most significant effect of a “stronger” domestic currency was to drive imports up (we have not always loved foreign goods, at least, not until they became incredibly cheap). Worse, was that this “stronger” naira raised the cost of domestic inputs, especially labour, and as a result, of domestic output generally. Net effect? The uncontrolled influx of petrodollars into the economy, beginning from the 1970s, reduced the price competitiveness of primary produce exports and doomed the development of a domestic manufactured goods industry.

When, in 2004, the Obasanjo government adopted the oil price-based fiscal rule, and in 2007 President Umaru Yar’Adua signed the Fiscal Responsibility Bill, we seemed finally to have grokked the importance of warehousing parts of our foreign exchange earnings outside the economy and driving external investments through them.

The likes of Norway started salting away their dollar earnings in offshore investment vehicles when The Economist newspaper described as “Dutch disease” this economic pathway in The Netherlands, after that country discovered large natural gas deposits in 1959 (about the same time as our Oloibiri started pumping out both crude oil and natural gas). When, in 2004, the Obasanjo government adopted the oil price-based fiscal rule, and in 2007 President Umaru Yar’Adua signed the Fiscal Responsibility Bill, we seemed finally to have grokked the importance of warehousing parts of our foreign exchange earnings outside the economy and driving external investments through them.

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Today, confronting evidence of the cackhandedness of our management of our foreign exchange resources until very recently, the question turns back to why a country in dire need of investment such as ours should keep such resources away. Two answers really. First, is that despite its need for investment, there is only so much that the economy may take without severe distortions showing up. Second, the best way to allocate such resources, if and when we finally attract them, is via transparent markets.