Vice President Yemi Osinbajo stirred up a hornet’s nest recently with his public comment on the rapid fall of the naira, which impacts on the unstable, high exchange rate that is ravaging the economy.
Speaking during the midterm retreat of President Muhammadu Buhari’s second tenure in office on Monday, October 11 2021, amidst ministers, captains of industries, diplomats and civil servants, Prof Osinbajo noted that the ruling-rate of our foreign exchange market is artificial.
He did not mince words when he said that the Central Bank’s demand-management strategy of the foreign exchange market needs a rethink as the rates do not reflect true market realities.
“As for the exchange rate, I think we need to move our rates to (be) as reflective of the market as possible. This, in my own view, is the only way to improve supply.
“We can’t get new dollars into the system, where the exchange rate is artificially low. And everyone knows how much our reserve can grow. I’m convinced that the demand management strategy currently being adopted by the CBN needs a rethink and that is just my view,” Osinbajo said.
The Naira currently trades at N414 per US dollar at the official market against N570 per dollar at the parallel market, a gap of N156 or 37.69 percent, which promotes arbitrage.
Prof Osinbajo later issued a clarification on the statement, stating categorically that he does not endorse the devaluation of the Nira.
While we do not wish to join the debate that the Vice President’s statement has generated, we must reiterate our stand that the strength of a nation’s currency is a function of the health of the economy. Foreign exchange, as a commodity, is earned through production of export goods and services.
Strong currencies stem from healthy and productive economies embedded in a conducive, operating environment that promotes wealth-creating and value-added enterprises.
The major factor that determines the value of any currency is how productive its economy is: What is it producing? What are the investment, consumption and export levels? This is because when a nation exports a diversified range of value-added products, it earns foreign exchange in different ways and meets its foreign exchange demands sufficiently.
Generally, the main sources of foreign exchange supply to a country include foreign currency receipts from exports of goods and services, monetary gifts, inflows of capital from abroad, such as loans, investments and Diaspora remittances. These are the backbone of the nation’s foreign reserves. Incidentally, these do not rub-off positively on our economy at the moment.
Nigeria, whose currency is not convertible or serves as international currency, must necessarily earn foreign exchange through high productivity and export of goods and services. This will boost foreign reserves, which ensures the stability of the exchange rate while low levels will weaken the naira.
Therefore, the fundamental challenge to our nation is how to tackle an unproductive economy. Nigeria’s economy is not productive; it is adding little value and creating little wealth. It is a mono-product export economy that is predominantly based on oil whose price is also beyond our control at the international markets. When there is a price shock, the domestic economy crumbles.
While it is the role of the Central Bank to manage the nation’s foreign exchange and maintain price stability, the bank does not produce foreign exchange. Usually, it is what is earned by the country that the bank strives to manage and use to stabilise the exchange rate. The various policy and monetary interventions conducted by the apex bank are aimed at achieving a stable exchange rate.
As it stands, the exchange rate is necessarily high because the quantity of foreign exchange available in that market is very small in relation to the demand of the desperate economic agents that want to buy the commdity at any cost. This is why the parallel market, which feeds on the arbitrage fueled by unrepentant speculators, thrives. In all, foreign exchange is a commodity that is subject to the market forces of demand and supply.
In order to improve supply, stabilise the foreign exchange market and reduce the pressure on the Naira, there is a strong need to move away from the country’s flawed pattern of economic management. The country must focus on export diversification, which emphasises value-added manufactured goods that are competitively produced in the country, traded in the international market and bring foreign exchange back into the country.
Government should prioritise investment in infrastructure, mainly power, roads, railway and the seaports. With Nigeria’s power sector generating less than 5,000 megawatts of electricity for about 200 million people, no meaningful industrialisation can be contemplated.
The flawed power sector reform, which now generates more cash than electricity, is a misnomer and should be revisited urgently. Government should embrace private sector partnership to boost infrastructure and reduce the high debt burden being plunged into non-revenue generating infrastructure.
Government should build a robust private sector, which is the engine of every economy, through vibrant micro, small and medium enterprises. The key privatised enterprises that are strategic to industrialisation need to be revisited, especially in the areas of iron and steel, which are the bedrock of industrialisation.
The ease-of-doing business parameters should be re-assessed and strengthened. This will help to reduce the high cost of doing business which Nigeria has become notorious for. It is counter-productive to be mouthing diversification when the environment is not conducive for investment.
Therefore, achieving an adequate amount of foreign exchange earnings and stabilising the exchange rate require developed domestic production structures, a diversified economy and export-driven economy that is supported by an effective trade policy, as well as a conducive macroeconomic environment.
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