Nigeria: Floating Forex Model and the Way Forward

If you are Nigerian and live in Nigeria, but think that everything happening in the economy does not concern you, think again. I am not asking you to become an economist or activist overnight, but if we must progress as a nation, all hands need to be on deck. We need to discuss the issues with a view to find solutions.

I remember when the floating forex policy was announced, Femi (you'll meet him in a minute) said to me, this is not the solution. I was looking at him like a pessimist at the time, until the dollar started to become scarce again! See yawa. What are we going to do ooo... people! Lol. 

With all the brilliant people we have in this country, surely we can come up with solutions. By the time we challenge ourselves and drive discussions that help us think, I am hopeful that we will find a way out of the myriad of problems our Facebook commentators remind us of daily (as if we do not know already! shio).

Enough with the highlighting and amplifying of the issues. We need a plan and we need it fast! Femi has come on board to take us through from the root of the matter. He is not an economist neither am I, you know this already :-), but Femi is one of those efikos that like to read and follow trends in economics and politics. He's not here to force his opinion down our throats, but to start conversations that will lead somewhere.

I want to read your thoughts, whether you agree or disagree. Let's start this journey to solutions for Nigeria.

Cheers!

The Genesis......

(This article has condensed reasoned economic structures without boring with percentages and theoretical jargons which often make the broth too thick for ease of consumption)

The CBN’s announcement of a floating foreign exchange model was wildly welcomed in many circles and heralded as the panacea to all our economic woes. The apex bank was hailed for such an obvious and ingenious approach to solving a critical problem. To be fair to the CBN in the light of the prevailing challenges, this policy stance made sense on first look.

However, a deeper look revealed that the floating exchange model was just a mild alternative for forced devaluation. Now while devaluation is not bad in and of itself, such monetary policy positions must be weighed against the realities and conditions required to benefit the economy in both the short term and the long term. 

Devaluation is an economic monetary tool used to “officially lower the value of a country’s currency within a fixed exchange rate system relative to another currency, or group of currencies”. Significantly, this tool is used as a measure of achieving a favorable balance of trade by a country as it favors increased local production capacity for exports and self-sustenance and reduce dependence on imports through an attendant increase in cost of importation.

At the time of the announced floating exchange model, the country was experiencing very challenging circumstances ditto  

- Reduced revenue from crude earnings due to falling oil prices

- Failing and non-existent infrastructure

- Fleeing FDI and FPI  against a backlog of dollar transaction payments

- CBN’s curious monetary policies and summersaults

- Insecurities in various regions of the country

- Budget implementation merry-go-round/ stalemate

- Targeted speculative forex transactions

- Rising unemployment

- War against corruption (which was apparently fighting back) 

- and a generally deteriorating standard of living across the country.

It becomes clearer therefore that inflation was only going up, unemployment will increase and recession becomes prescient. Furthermore, it becomes extremely disingenuous for an import based economy to pursue the path of asura (devaluation) in such testing circumstances to provide temporary reprieve to meet short term dollar mandates, in the hope of successful appeals for FDI and favorable loans. The long term repercussions are devastating.

First off, for devaluation to work we must have an export based structure or provide such environments and incentives as to encourage local production and use of local alternatives to meet local demands for self-sufficiency. In the absence of these foundations, the spectra of recession stretches towards the gloom of depression. 

The much vaunted market forces which would determine the “real” value of the Naira are painfully skewed against any immediate or long term benefit to the people. Further, the anomaly called the BDC would only continue to strain the Naira as it is unfortunately worryingly dependent on speculative valuation. Thus, as the interbank rate seeks to find a balance (whilst dancing to the rhythm of the phantom market forces) and inches towards it, the parallel market will pull away (the clue is in the word “parallel”) further due to the vagaries of demand outstripping supply, remittance constraints and arbitrage. The utopian hope of market forces quickly turns into shades of dystopian nightmares in an import based, revenue starved and recession sunk economy. 

Given that the only way out of a recession (and depression) is massive government spending, it mocks reason to assume that a limp currency would offer any succor. Thus our current reality is reduced purchasing power of the naira, increased cost of goods and a further impoverished standard of living. While the obvious is that your naira can acquire less, the dollar cannot purchase more since the market of source is still external. Therefore, the vicious cycle of continued devaluation, depreciation and recession creates a binding economic vortex with attendant sickening existential vertigo.

However, our current plight also offers some hope if properly managed. To do this we must 

• Abandon the fixation on floating or micromanaged forex and create policies and structures geared towards laying the foundation for self-sustenance and growth. In this belly of the beast which we find ourselves, government and regulatory authorities need to bite the bullet and address the issues head on. 
• Empower the alternatives and grow local capacity even at a deficit budgetary structure as increased cost of importation will ultimately lead to pursuit of alternatives. 
• Also, the mythical salvation by FDI (Foreign Direct Investment) needs to be addressed. With woeful ratings on ease of doing business, infrastructure availability and policy inconsistencies, this is not a surprise. However, these issues should be addressed immediately to create a welcoming environment and further garnished with appropriate incentives (tax breaks, access to funds etc.) to encourage investment. It should be noted that the above should apply to all businesses in the country and not the exclusive of some or patronizing FDIs. 
• The monetary policy oversight and regulatory body(s) should deploy a low interest scheme attached directly to infrastructure development and SME growth. While the previous arguments have been about increased liquidity leading to inflation, the structure should be to attach same facilities to managed support schemes. 
• Government stimulation, with fiscal policies, gross spending and appropriate monetary policies would ease us out of the current shadows. 

Ultimately, if this is properly pursued, our dependence on foreign imports and single source revenue will reduce and we can begin to tap into, exploit and enjoy the wealth we have been blessed with in resources, people and intelligence.

What are your thoughts on this? We would love to hear from you.

Femi Onakanren,

Director Eigenvalue Nigeria Ltd (Business Solutions Providers & Policy Analysts)
Developers of tagChief® Mobile Application and Enterprise Solution & StartRight Entrepreneur Boot Camp