Forex challenge and policy options
By Arize Nwobu
THE challenge of foreign exchange, forex, in the economy has been recurrent over the years and it is for reasons that are fundamental and obvious. The Nigerian economy is monolithic in structure with oil accounting for 90 per cent of exports, 25 per cent of Gross Domestic Product and 80 per cent of government revenue.
The aberration readily exposes the economy to shocks in a globalised economy with changing perspectives. The economy quakes if the global oil market sneezes, and with a concomitant and substantial reduction in forex earnings and destabilisation of government projections.
The economy is also largely import- dependent. A recent report by the World Trade Organisation, WTO, noted that Nigeria was the number one importer in Africa and the 25th largest importer in the world. In a media report, former deputy governor of the Central Bank of Nigeria, CBN, Dr. Kingsley Moghalu, noted that the import bill in 2021 stood at N6.85 trillion which he said was the highest in 12 years.
The development has a chain of negative effects on the economy. It puts pressure on the local currency, results in greater outflow of forex, creates a trade deficit, weakens local production of imported goods and weakens the forex base of the economy.
Also, the problem of manufacturing is a major factor for the forex challenge. Nigeria has the potential to be a manufacturing hub like South Africa, but it is not. It has been noted that of the products manufactured in Nigeria only three account for 77 per cent of manufacturing output generating the greatest value.
The problem of the manufacturing sector had been linked to the Structural Adjustment Programme, SAP, of 1986. Former Minister of Agriculture and Rural Development, Chief Audu Ogbeh, had noted that SAP was the root cause of the nation’s economic woes. Chief Ogbeh said that SAP was a mistake which facilitated the devaluation of the country’s currency and deregulated interest rate.
Also, in a research report entitled, “Structural Adjustment Programme and its Impact on the Manufacturing Sector (1986-2016)”, Murtala Muhammadu of the University of Malaya, noted that SAP succeeded in making the factories unviable and at the mercy of foreign factories. He remarked that “a survey of the industries was undertaken and it is found that the adjustment policies had negative effects on profits, capacity utilisation, sales, exports and production costs. Over all, the results show that local currency depreciated, prices of goods skyrocketed and inflation increased as a result of the reform”.
Other factors that contribute to the recurrent forex challenge include unpatriotism, pervasive systemic corruption and sabotage by unscrupulous and opportunistic businessmen and privileged elite who circumvent policies and sabotage the economy in various ways, including smuggling and forex round tripping and other such inimical acts.
The forex challenge has been a thorn in the flesh which often challenged CBN. Forex is the back bone of international trade and a key determinant of some critical economic parameters.
Forex management is one of the three components of the “inconsistent trinity” which challenges the dexterity of central banks in the formulation of monetary policies.
Since the mid-1980s, CBN had had to evolve different policy options to manage the forex challenge based on the prevailing market and economic dynamics. The Bank introduced the Second-Tier Foreign Exchange Market, SFEM, in 1986 alongside the First-Tier Market and later merged both into the Foreign Exchange Market, FEM, and in 1995 it introduced the Autonomous Foreign Exchange Market, AFEX. There have been other policies thereafter.
In 2015, the challenge was very tough in the thick of economic recession which caused a drastic fall in global oil price with a resultant forex scarcity which paralysed economic activities, but CBN prevailed over it through a combination of strategies which stabilised and strengthened the naira.
Recently, CBN stopped the weekly allocation of forex to operators of Bureaux de Change, BDCs, in the country in order to conserve foreign reserves in the face of dwindling forex inflow from crude oil sales occasioned by the COVID-19 pandemic and other dynamics.
The apex bank transferred the allocations formerly due to BDCs to Deposit Money Banks in the new regime. It was gathered that managing the BDCs had been strenuous. CBN sold an estimated $5.7 billion annually to the over 5000 BDCs.
It is noteworthy that CBN under Godwin Emefiele has continually evolved numerous innovative policies that could, over time, remedy the alleged damages caused by the Structural Adjustment Programme to the economy, ranging from the agriculture sector to the manufacturing sector and others.
Nwobu, a chartered stockbroker and business journalist, wrote via [email protected]
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