Opinion – Emefiele: Between a Rock and a Hard Place

BALTIMORE, MD (AFRICAN EXAMINER) – I read with absolute interest Simon Kolawole’s article, The Parable of Dollars and Dullards, published on January 17, 2015. I read the article at least five times. If I had any hope that the exchange rate crisis was going to be over soon, I have since perished the thought. He painted a very clear picture of the trouble we have found ourselves as a nation. Kolawole’s major argument is that we are paying for the sins of yesteryears and there is no magic formula to rescue us yet. In other words, we should not expect any magical recovery except the fortune of oil changes in the international market. Unfortunately, there is no such chance for now. Big economies such as China and India are slowing down, thereby affecting the demand for oil. There is also an oversupply of crude oil in the market, which could be further worsened by Iran’s return to business. Oil prices will only continue to fall. The new realities are not too good for us.

Before I read Kolawole’s article, my view all along was that the problem with the Nigerian national currency was the making of Mr. Godwin Emefiele, the CBN governor. I had read an article published in The Economist in which the British newspaper made fun of him for banning the allocation of forex for the importation of toothpicks and Indian incense, among other items. They portrayed Mr. Emefiele as someone who just walked blindfolded into a shop and started picking any imported item to exclude from forex allocation. My view was further strengthened by reactions to the various restrictions placed on the use of Naira Debit Cards abroad by the banks as well as the ban on the deposit of foreign currencies into domiciliary accounts. The ban on allocation of forex to bureaux de change (BDCs) also seemed to have worsened the crisis. All fingers started pointing in Emefiele’s direction as the trouble behind the Naira.

I should think many Nigerians will now have to accept that something has terribly gone wrong with the economy and things cannot remain the same again. If the CBN does not act to protect the foreign reserves, we may sooner than later enter into a major crisis that will require international intervention, including a possible bailout by the International Monetary Fund (IMF) with all its tough and deadly conditions. The facts are not on our side. According to statistics made public by the CBN, the average monthly forex revenue accruing to the bank is $1 billion, while the demand for forex is $4.6 billion. For every $1 that the CBN earns, Nigerians are demanding $4.6 to pay for foreign goods and services. What should the CBN do? Can they print dollars to meet this massive demand? The answer is a clear no. We are not in control of dollar supply. It is oil sale that brings dollars into the economy. If oil revenue drops, dollar supply will drop and the exchange rate will go up.

We currently have $28 billion in our foreign reserves and going by the heavy demand, the reserves could soon come to zero if CBN were to meet every request for forex. Where would that leave us? It would leave us out of international trade. It is when countries are in this tight situation that they begin to run to IMF for emergency loans so that they can still do business on the international level. We have seen even developed countries like Greece suffer this indignity, with citizens unable to withdraw their deposits and foreign companies refusing to sell vital products like medicines to Greek companies because of the poor state of that country’s finances. We must manage our reserves well. It is therefore logical for Emefiele to look at the demand for forex and decide what items are important and necessary and what items are not of utmost importance. It is back to reality.

Imagine this scenario: you have only N1m and your shopping list totals N4.6million. You want to pay your rent, buy a car, travel on holiday to Dubai, stock your fridge with food, pay your children’s school fees, etc. You have to prioritise since you cannot increase your income from N1m to N4.6m immediately. You have to determine what items on your list are urgent and important. You will have to begin to ask yourself if you have to spend your N1m on holiday in Dubai or getting an accommodation. These are choices we make everyday when our limitless wants are placed side by side our limited resources. Even the editors at The Economist make those decisions in their lives everyday. What the CBN did was to exclude certain items from accessing forex — not out of cluelessness but out of helplessness. If CBN has to meet every dollar demand to pay for imported goods and services, the economy would have been grounded completely by now.

Kolawole touched briefly on the BDC issue but I believe there is more to be said about these economic agents. Globally, BDCs are never funded by the central bank. BDCs source their own forex and sell to travellers/tourists. Any Nigerian who has ever travelled abroad will understand how BDCs work. If you travel to Dubai today, for instance, you will hold your dollars. When you arrive Dubai, you go to a BDC, ask for the rate of the UAE dirham and then hand over your dollars to them in exchange for dirham. That is how BDCs get forex. The BDCs will now sell the dollars and add their own margin. That is how BDCs make money. But in Nigeria, the CBN would allocate dollars to BDC at N197 and the BDC would resell at N300. Only in Nigeria would you find such easy money and distorted value chain with so much incentive for abuse. It is not the job of CBN to allocate dollars to BDCs. Let them sweat for their money.

A third issue arising from Kolawole’s article is devaluation. Although he did not canvass it directly, he made a strong case for bridging the gap between the official rate and the black market rate. Any objective observer will be very worried that the same “product” that is sold by the CBN for N197 is being sold or re-sold on the streets for N300 or more. The incentive for arbitrage is out of this world. Even saints will not be able to resist the temptation. If you are a manufacturer or importer who accesses dollar at N197 and you can cheat the system to divert it to the black market, you actually don’t need to go into manufacturing again. All you need do is divert the forex to the black market and make billions of naira. So why waste your time and energy and resources to make in two years what you can make in one week, albeit in a crooked way?

However, devaluation will only solve one problem: arbitrage. If the rates are very close, it will not be too profitable to buy at official market and re-sell at the black market. But, still, it will not increase forex earnings. CBN currently earns $1 billion or less every month. Devaluation will not increase the reserves. Our problem is a supply problem. For as long as oil prices are dropping, forex inflow will drop. If oil prices remain stagnant, forex inflow will remain stagnant. There is nothing any CBN governor can do about this. If supply remains at $1 billion a month but Nigerians keep demanding $4.6 billion a month to pay for imported goods and services, what can the CBN do? The pressure on forex will still remain. So while devaluing the naira will reduce arbitrage to a large extent, it will not grow our foreign reserves. The problem will still persist. The danger will remain.

If we have to face the truth, Emefiele is caught between a rock and a hard place. There is no magic he can conjure to increase forex inflow. For as long as we continue to depend on imports, we will continue to pile pressure on foreign exchange. Unfortunately, he is not in charge of fiscal policy. His job is to manage the three rates: exchange, monetary and inflation. However, it is a very difficult job when you are not in control of fiscal policies, when you are not in control of road construction to stimulate economic activities, when you are not in control of power and other critical infrastructure that can make industry and businesses to flourish. The CBN cannot ban the importation of any product. The CBN cannot stop anybody from sending their children to school abroad. The CBN cannot stop anyone from seeking medical treatment abroad. But since it is CBN’s responsibility to provide the needed forex, it has the duty to manage the little resources at its disposal.

We have seen the CBN governor struggle to solve a problem he did not create. Like Kolawole noted, this is the “wrongest time” for anybody to be CBN governor. The circumstances are beyond any governor’s control. The best any governor can do now is to slow down the rate of depletion of our reserves. I recently read an online editorial in which the writers were canvassing that a CBN deputy governor or a retired deputy governor should be appointed to replace Emefiele. Nothing could be more simplistic. Will the new CBN governor print dollars to meet the monthly $4.6 billion demand? Will he or she help move oil price back to $110 per barrel? Will the (retired) deputy governor build reserves with his or her own blood? So how would the exchange rate be in good health under a new governor? How would Nigeria become more export-oriented?

My conclusion is similar to Kolawole’s take: whatever we do, we are damned. We devalue, we are damned. We don’t devalue, we are damned. We give forex to BDCs, we are damned. We don’t give them forex, we are damned. We allocate forex to toothpicks, we are damned. We don’t allocate forex to toothpicks, we are damned. The sense I can make out of this then is that since we are between the devil and the blue sea, we have to calculate our risks properly. Even if we are going to die, so to say, let us prolong our lives a bit. It is like a man who has a terminal disease: he can choose to treat it and possibly live for one more year or choose not to treat it and die in a few weeks. Both ends are similar. But by giving himself the option of treatment, he may even live longer than the doctors projected. Who knows, he may even be lucky that a cure would be found for his ailment before the one-year period lapses.

Measures taken by the CBN so far are, in my considered opinion, necessary and urgent. Since the bank is constantly reviewing its policies, my understanding is that these are short-term decisions to manage a very bad situation. Action is better than inaction. I understand that there is pressure to devalue the naira — the CBN has devalued twice in the last 18 months — but devaluation by itself cannot solve all the problems. I am hoping against hope that oil will soon recover. Before it does, though, we must manage the little resources at our disposal. The CBN must remain pro-active.