The famous coach of the Arsenal football club in England once said, that everyone becomes your teacher when things are not going well. That statement is as apt for football as it is for politics and especially national governance. When all is well, we are content to keep our counsel or measure out sparing plaudits. But and if there is delay, faltering or failure, the pens, drums and megaphones are whipped out in a trice. It is the brigade of the pocket economists. Who would be a leader in such times as these. But it is said that uneasy lies the head that wears the crown. Let him/her who feels the need wear it.
Multiple Exchange Rates
The grouse this time is the exchange rate, or should I say, the multiple Naira exchange rates. You see, one has struggled to understand the logic behind having multiple exchange rates. But then again, as a pocket economist, I do not have to! Indeed I have neither a degree nor professional training in economics. Has that restrained me from pontificating? No. I hide behind the coat-tails of HRH Sanusi who has come out to criticise the regime. He goes as far as to describe it as a racket by the rent-seeking elite of Nigeria. This wacky policy is a red cloth to pocket economists and a no-entry sign to foreign investors. If we are hoping to build our economy with input from externally sourced funds, it is important to create an alluring environment.
We all know that Nigeria enjoys annual remittances in excess of $20 billion yearly. A large percentage of which is sent through informal channels. Most of this money goes to subsistence of family members and support for friends. However, a lot more idle funds could be remitted by Nigerians in Diaspora but for three reasons:
- Investment opportunities are not well known
- There is considerable uncertainly and risk involved
- The exchange rate mechanism is unfavourable
The first two are major issues and will take some time to resolve. The third is a policy that can be changed on short notice, but its impact would be great.
Discriminatory Double Doors
Many Diaspora Nigerians could liquidate slow-growing assets worth tens of thousands of USD/Sterling/etc. in a short time. But those investors would be bringing in their Forex at the official exchange rate. As of yesterday afternoon, the official rate traded 306 Naira to the US Dollar. At the same time, the black market traded 408 Naira to the US Dollar. Imagine then that our Diaspora investor remitted $10,000 USD via the official rate. That would have fetched him N3,060,000=, whereas he could have had N4,080,000= on the black market. In real terms, such a person would have lost 33% of the real value of their USD in the Nigerian economy, on entry!
Supposing that the Naira and Dollar remain at the same exchange rate for the next 12 months. Let us also assume that our investor bought into a business that grew by 20% in the same period. At the end of the year to date, his N3.06m would have grown to N3.67m. If at that point he/she decides to repatriate the capital, they would have to buy back the USD from the black market. Of course the N3.67m would only buy $8995= USD. The investor would have failed to make up the initial investment despite a very impressive 20% annual growth. This cannot be a formula for mobilising foreign investors. Most certainly not the Diaspora Nigerian with small holdings. When balanced against the risks and the opportunity cost of relatives/friends not helped, investing in Nigeria is not persuasive.
To Subsidise or Not
We all understand that the government seeks to protect some key industries from the vagaries of exchange rates, and guarantee that they can operate with reduced exposure to rate swings. That is a good thing. This OECD report shows that many countries around the world provide agricultural subsidies to their citizens. It would therefore make sense for the FGN to “subsidise” those sectors officially and let the Naira float. And whereas we have had a bad experience with subsidies for hydrocarbons, we can learn from our mistakes. Rather than distort our economy with confusing and counterproductive exchange rates that are being abused, we should revisit subsidies. Subsidies are localised; they can be tailored to specific needs and with careful administration, abuse can be eliminated.
The word “subsidy” is used here with a twist. It means that any organisation in the named sectors can buy their inputs at the single “floating” exchange rate. Thereafter, the producer can apply for subsidy credits, having provided documentation from non-affiliated third parties that have purchased their outputs. There would also be need for corroboration by bank(s) involved in the transaction(s). The subsidy credit could then be cashed, or applied as a discount on the next purchase of foreign exchange. This approach discourages round-tripping, decreases pressure on foreign exchange, and defers subsidy payment to align with productive output.
Mr Emefelie may be struggling at the helm of the CBN, but surely he is not entirely and solely responsible for this warped policy on exchange rates. It is about time the federal government realises that this thing is doing more harm than good. There has been a net loss of productive output since this policy was hatched. Is it not about time that we admit our error and change course?
But then again; I am just a pocket economist! What would I know?
May God bless Nigeria; amen.
Viva New Nigeria!
Oyewole, Olanrewaju J (Mr.)
London SE18 3PD
+44  793 920 3120
Mr Oyewole is a social and political commentator, blogger. He is a technology consultant with significant experience in the UK security sector. He has participated in key IT initiatives for the UK police and army.