by Simon Kolawole

After decades of paying lip service to economic diversification, we are finally paying the price. We never really believed we could get into this mess — despite several reminders of a similar meltdown in 1982-83.

 You begin to sense trouble when the Central Bank of Nigeria (CBN) issues a statement banning the sale of forex to importers of toothpicks and Indian incense. You then sense bigger trouble when the bank follows up by insisting that even the bureaux de change (BDCs) cannot fund 41 “blacklisted” imports. You finally conclude that the trouble is far bigger than you thought when the CBN further declares that even if you earned forex through exports, you cannot use it to import those items. What the CBN has refused to tell you in simple English is that Nigeria is running out of gas. It would take a combination of magic and miracle to refuel this wobbling bus.

Mr. Godwin Emefiele, the CBN governor, has come under fire over his forex “supply containment” policy. The Economist of London recently criticised his methods. One, the newspaper said the CBN should allow the naira to devalue rather than keep the national currency on its feet by curtailing forex supply. Two, it said rather than exclude private jets from official forex supply, government officials should simply be banned from flying in them. Three, it wondered why Nigeria is “banning” imports of rice and sardines when it does not produce enough to feed itself. Four, it said unlike our CBN, central banks usually prop up their currencies when they are worried about inflation.

I think The Economist was working with certain assumptions about Nigeria. It thinks the CBN can ban government officials from flying in jets. It also assumes that rice and sardines imports have been banned by the CBN, but the bank does not have such powers. Meanwhile, the CBN has actually been trying to prop up the naira, depleting the currency reserves by about $5 billion since January, so much so we can now only guarantee six months of imports — compared to 18 months just a couple of years ago. On devaluation, the CBN has, in fact, already done that: our currency has officially lost more than 20% in value since November 2014.

The prescription of floating the naira as advanced by The Economist — so that it can find its real value without official meddling — would be in line with the principles of free market. As it stands, the official rate is $1=N198 while it is $1=N230 in the black market. Since it is market forces that determine the black market rate, the “real value” is evidently N230 or thereabouts. Abolishing the official rate and leaving market forces to sort themselves out is, for all intents and purposes, the best policy in an ideal world. But there will be heavy socio-political consequences for an import-dependent country like Nigeria as prices of goods and services will go gaga.

Devaluation, therefore, is not the ultimate answer. Our problems are bigger than what devaluation can solve. Agreed, it could address some issues. At least, with no official exchange rate, we would stop wasting our reserves trying to defend the naira. Also, chances are that only those who really need forex will buy it since there will be no black market for round-tripping. That will take care of the arbitrage menace. However, devaluation will still not solve the real problem. We export only oil and import everything, including toothpicks. If we were an export-oriented country, devaluation would actually improve our forex earnings and reduce import dependence. But we’re not.

Logically, therefore, our policies must be geared towards domestic manufacturing. Emefiele says the containment of forex supply to importers of the blacklisted products is intended to encourage or protect local industry. I love his optimism, but my sense is that this alone will not solve the problem. It has to be combined with other factors — good transport infrastructure, good regulatory environment, good incentives, stable power, etc — before local industry, the real sector, can really grow. Sadly, while the CBN is empowered to devalue the naira, it is not empowered to provide infrastructure. We know whose responsibility that is.
An economy with a warped structure like ours cannot deploy devaluation or currency-propping alone to get out of jail. Emefiele’s recent actions, in my opinion, were more like “first aid” treatment and a self-defence tactic to protect our foreign reserves in the face of dwindling oil revenue. It is much better than doing nothing. Unfortunately, he can only control forex supply — he cannot control the demand. Since we will continue to import toothpicks and Indian incense, the pressure on forex will only shift to the black market. The naira will, therefore, continue to fall. We are in a total mess and only a miraculous recovery in oil prices can give us some breathing space.

After decades of paying lip service to economic diversification, we are finally paying the price. We never really believed we could get into this mess — despite several reminders of a similar meltdown in 1982-83. Any CBN governor in the circumstances we have found ourselves today will struggle. The CBN is charged with stabilising the exchange rate in a country dependent on crude oil price — which is completely beyond the bank’s control. If oil price rose to $125 per barrel today, there would be enough forex to go round and enough to “protect” the naira. But oil is $50 and we have become helpless, having failed to adequately prepare for days like these.

By just building refineries, which we can do, we will save billions of dollars in forex demand. And by exporting petroleum products, which we can do too, we will earn extra billions of dollars. Imagine that we spend, let’s say, $10 billion on fuel imports yearly. If we stop fuel imports, the $10 billion demand for forex is automatically off the list. Now imagine that we actually start exporting petroleum products, we could earn $5 billion (this is for illustration purposes only). Not only would we be saving $10 billion in forex demand, we would be getting an additional supply of $5 billion! That would help the foreign reserves and the exchange rate better than devaluation.

We have to live with the fact that there is no alternative to diversifying our economy. Produce more, export more and import less. There was a time we banned imported furniture. Those who had the misfortune of investing in local production of furniture must be regretting by now: the federal government suddenly woke up one day and lifted the import ban. Demand for forex to import furniture went back on the roaster. Also, all the reckless import duty waivers being granted for goods that we should be producing at home are harming domestic industry. These things hurt terribly; devaluing or floating the naira will not get anywhere near solving the problem.

By the way, I do not suggest that the CBN should never devalue the naira. Sometimes these things are inevitable. Defending the naira would require robust external reserves to cope with the massive demand for forex. What we have seen in the last six months is a massive drawdown on these reserves just to keep the head of the naira above water. Indeed, if we had $900 billion in our reserves, we can afford to keep the exchange rate at even $1:N1. The CBN would have enough war chest to keep it tight. But, unfortunately, we don’t have such financial energy. Except our situation improves dramatically — by way of higher oil prices — the naira will keep falling.

My point, then, is that it will take more than devaluation by the CBN to clear this mess. The Buhari administration must come up with a comprehensive economic revival plan. Emefiele’s intervention by way of constraining forex supply will, for now, contain the bleeding. It will be good if this policy ends up reducing the importation of toothpick and the like. It will be an even sweet bonus if it succeeds in improving domestic manufacturing and import-substitution. Nevertheless, the policies to diversify the economy must be pursued by the politicians with the same energy they use in pursuing party supremacy. The mission to rescue our economy has never been this urgent.

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 Op-ed pieces and contributions are the opinions of the writers only and do not represent the opinions of Y!/YNaija.