Of the Floating Exchange Rate and 40 Years in the Wilderness

Don Etiebet

I am not very excited with the recently announced flexible and market driven Foreign Exchange ‎regime whereby there is an open market for whosoever can afford at whatever the price determined by the interplay and competition in the market for all comers. My problem is that as a developing country with limited sources of FX revenue, the little we have should be judiciously applied to our most pressing and life – saving needs.

Since I came back to this country from abroad in 1972, I have not witnessed prosperity due to the continuous devaluation of the Naira, either economic or social, to Nigeria and her citizens. We started with N1 to US$2 (£1) in 1973 when the Nigerian Pound was converted to Naira. Today that Naira has become three-thousandth of the US$. My problem is, what can we do to prevent it from becoming one-millionth in future?

I have heard of arguments that with this new CBN regime, Naira will find its level.
I say Naira shall never find its ‎level until we Nigerians work to find the level for the Naira either negatively as we keep doing since 1973 to have it being 1.5 thousandth of its original value in 43 years or positively from now on. That’s the challenge because the value of the Naira, to me, has a lot to tell who we are as Nigerians, academically, economically, technologically, industrially, socially, militarily, psychologically and as civilized human beings. They say the new Forex regime will spur growth.

I say in which area? Why has the way, the Forex management over these43 years not spurred growth, that our per capita income today is much worse than in 1973 and there are millions and millions of Nigerians, graduates inclusive, who do not have access to employment, to housing, to health facilities, to good education, to food sufficiency, to unemployment insurance, to good roads and railway systems, etc.

In my secondary school days in the sixties, companies and organizations, even government MDAs in Lagos, would send their representatives, even to as far away as my secondary school in Akwa Ibom State, to interview students for employment and for scholarships to study in universities. Such lucky students would become employees from the date of successful interview. On leaving the university one was given well-equipped and furnished accommodation. What do we have today? So where is the growth?

Oh, they say the stock market is gaining momentum and already showing signs of recovery since the announcement last week. I ask, how many Nigerians are in the stock market and who are those buying? probably the 0.1% of Nigerians who control 90% of all deposits in the banks. Who in my village in Akwa Ibom or others in Sokoto, Borno, Benue, Enugu or any village or town in Nigeria outside Lagos and perhaps, Ogun, now what is the stock market and what may be happening there.

This is about 99% of Nigerians. In the first place, except some foreign owned companies, the ownerships of the stocks revolve around the owners and founders of the companies in the main, so much so that no matter what huge profits are declared yearly, the stock prices remain at 50 Kobo year in year out. The ones that can make impact for people to buy the shares with confidence are not listed.‎You see, we are not a developed economy but we are acting blindly as one and since this practice has not changed our economic landscape and development since independence, something somewhere is wrong.

Oh, the new Forex regime will bring more Foreign Direct Investment (FDI), Portfolio Investors into the country, they say. I say, how much of this FDI and Portfolio Investors are directly attached to long term economic and business developments in the country. It is only sector, upgrades at some old manufacturers of beverages and toiletries, telecommunications sector and investors like the GE and the Chinese that I can see FDIs working.

Why have the numerous intended Foreign Direct Investors and Portfolio Investors coming not channel their investments to the dormant textile industries that used to employ millions in the sixties and seventies from Lagos to Kaduna and Kano? Or, are we referring to the Hedge Fund FDIs for the lucrative Nigerian stock market, LC financing or the one-year Nigerian Bond buyers at 15 percent, having borrowed the money from their banks at near zero percent.

These are the investors who are eager to see a robust free exchange market so as to be able to send their capital, plus interest out when there are matured. In this category, we can remember what happened when the country started to feel the strain
of dwindling FX reserves and they rushed to sell their shares at any price thereby crashing the stock market not long ago. It happened before and it will happen again. The system should be able to manage these investments meaningfully to the country’s long-term economic objectives for sustained growth and for the appreciation of the Naira towards its original value so that a house of N500m in Ikoyi will be worth at least $100m and not $1.5m equivalent.

Moreover, some commentators have said that the new regime will increase the number of bank loan defaults and bad debts. This is very important area for CBN to look at with its MPC members, because how do they expect customers who borrowed to open LCs at N150/$ two years ago and had since sold the goods be expected to fund those LCs now at the impending market rate of N250 to N350/$, without fault of their own and survive to keep their employees without sending them to the unemployment market and may even become bankrupt? And not to talk of the effect of the copious inflation without concomitant increases in wages.‎

On the other hand, there are those with huge Naira deposits who just want to send out their trapped Forex at any rate and the summation of such applications are more than the FX available from CBN, so how will they handle that in this market driven scenario? And worse still, in the implementation of this regime as announced, is the creation of “King Kong Banks”- named Grade A Banks. This is dangerous for the whole banking system in the country. It is surprising to note that while, on the one hand, the CBN is proposing the Forex to float according to open market forces and at the same time, creating ‘King Kong’ Primary Dealers to handle the FOREX dealings.

This will pull all FX customers to these Grade A Banks to the detriment of the ‘monkey’ Grade B banks. That is transferring public monopoly to private monopoly which is dangerous in any economy. Whether one likes it or not, as we are dealing with human beings, in an import oriented economy, in which almost all businesses, old and new require FOREX, there is bound to be some ‘man know man’ dealings naturally. This negates the transparency of the open market and it is a very curious, discriminating and unfair move for the system.

The allure/virtue of the open market forces regime is the freedom of customers to choose their banks but when they are forced to a few Grade A banks, the whole freedom of choice is lost. The mere mention by a Regulator of Grade A and B banks is official segregation and conveys a level of preference on one against the other. Secondly, Government or CBN would be seen as favoring a few banks no matter the assurances of fair play from them. It just doesn’t work naturally and practically.

The fact that CBN, within a weekend of the announcement of the new FOREX regime, has changed its conditions means they were not properly thought through and connotes some outside influences overnight or authoritarian decision by the managers without Stakeholders consultation. Thirdly, the FDI investors would expectedly ask you to bank with the Grade A Banks before they would deal with you.

Fourthly, the arrangement shuts out new entrepreneurs in the banking sector, as no customer would patronize them as they think they cannot get enough FX to service them. So no more business for start-up banks. The emphasis should be on service delivery and probity with controls in place and punishment for defaulters and not on quantitative prowess.

We should remember that even some of these Grade A Banks started small with selling FOREX obtained from CBN at their genetic years. This provision is no good at all because it tends to equate the open market to the Grade A Banks and not to the customers. Any introduction of an intermediary between the CBN and the customers in handling the FOREX makes the process more costly and cumbersome. We have gone through this before and it didn’t work in the interest of the customer and the open market and the banks were accused of hoarding, diversions, round tripping and favoritism‎ which actually depreciated the Naira the more, artificially.

That’s why they changed to a system where the customer submitted it’s bid to its bank and all the banks processed all their customers’ applications and took them to CBN on a weekly basis. The CBN then computed the average rate from all the rates submitted by the customers and that was the open rate for that week.

I know the banks didn’t like that because they didn’t benefit maximally as being the dealers. And the result was consistent appreciation of the Naira and the narrowing of the gap between the official rate and the parallel market rate. In this way the customers (the market) kept quoting what their businesses can afford and the CBN kept intervening openly with amounts known to the public and their allotments.

Now we are going back to the banks buying from CBN and selling to the customers, a very corrupt practice. How does the public know how much FOREX is sold to the Grade A Banks and how they apportioned/allocated them? That’s the openness being killed. I wonder who advised CBN on this arrangement in this freedom of association era? It must be reversed otherwise we are sinking deeper into corruption.

I know some people will start to yap me but I challenge anybody to fault what I have said. I believe our scarce FOREX should have proper and mitigated management with controls in a country where we don’t have enough Forex. Even in the family, when there is not enough food, the children are allowed to eat first. That’s rationing.

So, I think that we should start now to be ourselves and start to show example to lead as the most populous black nation on earth to show that we can. There must be a period of necessity/want in our life to be innovative and creative so that we can be inventive to produce the goods and services that keep life going to a certain extent by ourselves, for example:

After World War II, China willingly or induced because of its communist stance closed their doors to the West and shunned their goods, money and economic ideologies and when they opened the doors thirty years after, the West was depending on China to balance their books and today the West is indebted to China in trillions
of Dollars and scrambling for their market, moving manufacturing facilities there, even Boeing, Airbus and Apple amongst many other multi-billion dollar companies. By so doing the Chinese working in those plants are imbibing the technologies and the art of producing such products which leads to setting up their own indigenous production facilities. This is what we should adapt in the management of our FOREX.

Secondly, because of Apartheid and imposed UN sanctions South Africa was left to fend for itself to survive for a long time and so they became innovative and creative, developing technologies and capabilities ingeniously and indigenously to survive. When the Apartheid ended South Africa became the economic giant of Africa. Forget about the rebasing of the Nigerian economy and being the greatest in Africa when oil was selling at over $120 per barrel and we were basking in high international ratings.

With this, the Portfolio investors and the Foreign Credit and Debit Cards payment procedures flowed in and flourished as they praised our economy as growing at appreciably and amiably 8% per year better than South Africa. Nigerians plunged in, acquiring millions of Cards individually and abused the system. What do the Rating agencies say today? With the crash in oil price we all crashed, the Portfolio investors hurriedly sold out and we find ourselves where we are today and we seem not to learn any lesson as we set out to repeat the scenario again.

To me there is nothing to compare our economy with that of South Africa. For one, out of the 50 Top African Companies in Africa, ranked by market capitalization in US$, there are only 3 Nigerian companies and our almighty Dangote Group in the 10th position while South African companies occupy the first 9 positions and are a whole 35 out of the 50 with Nigeria 3 out of the 50. Of the next 50 Companies, South Africa has 25 while Nigeria has 5 making South Africa occupy 60 positions out of 100 while Nigeria occupy a paltry 8 out of 100, (African Business, No.430, May, 2016). However, I have told my friend, Alhaji Aliko Dangote that when he finishes with his 600,000BPD Refinery he will be the richest man in the World and Nigeria will be proud of it, and may even be selling Forex to Nigeria.

I believe, we should use the available FOREX to clear the backlog of matured payments to this Monday, the 20th of June 2016. Thereafter to use it on life saving projects and to revamp our comatose/dormant industries like in the textile, steel, locally assembled vehicles with milestones for import substitution parts, equipment for local manufacturing or assembly, solid minerals prospecting, mining and processing, all kinds of

food processing, agriculture enhancement techniques, all small industries processing, health services equipment, transportation, training and scholarships for the bright ones to study and do research abroad to solve unemployment, develop local technology and expertise and be productive. I thank the CBN for still retaining the 41 items out of the Forex market.

Lastly, I wonder why they did not call the IMF into mobilize loans to finance the capital budgets’ deficits at even lower interest rates and longer repayment periods than selling one year old Bonds, now that we have met all their austerity measures with the removal of the petrol subsidy and the floating of the Naira rate according to market forces which they have immensely applauded.

Even, we can use this scarce FOREX to solve some very potential political problems like the proposed Grazing Bill arising from the continuous clashes between the Cattle Rustlers and the communities on their path. The Bill seeks to establish Grassing Grounds for cattle herded from the North to the South to feed before they arrive in good health for slaughter to produce good meat in the South.

Why have to walk down the cattle 1000 kilometres in today’s world of modern transportation systems? This can be been done conveniently by setting up numerous abattoirs in the North, slaughter the cattle there, process them and ship them by Trucks and Trains or even Cargo Planes to the South? This multi-billion Naira business is capable of offering thousands of jobs from even the cattle rustlers to Ph.Ds. I guess the only impediment to such a venture is lack of capital, FOREX and know-how in the art of meat processing. In this way, there will be no life cattle to walk down from North to South and if the Southerners want life cows for their celebrations they can buy them from depots of cows brought in by Trucks and Trains. A huge business potential, which the CBN can intervene with FOREX for would-be investors to help stop all these skirmishes and killings along the routes.

Finally, I get very disturbed when I hear CBN always referring to our Foreign Reserves as what is available to support a certain number of months of imports. That’s defining the FX Reserves in terms of imports sustainability. That is, the CBN Governor goes to bed scratching his head thinking about imports sustainability that produces jobs abroad not the terrible unemployment situation at home and how to use that reserve to produce more jobs, raise the per capita income and improve the producibilities of Nigerian industries to curtail imports. I’m not against imports with the slightest imagination because no country can be an island to itself in today’s world of global trade and diplomacy but a country’s ability to survive at times of any catastrophe is in self-esteem and deterrent to ridicule.

If we can’t change our attitude and management style learning from experience around the world then we must be ready to be consigned to servitude no matter how much money we have in our pockets. We must produce to be developed, Period. Now that Aso Rock cannot be corrupted we should try to be ingenious, innovative, and creative and inventive to build a virile Nigeria.