Of CBN Interventions and Enthronement of Stable Foreign Exchange Regime

With volatility a major dynamic in economic management, Eromosele Abiodun, James Emejo and Nume Ekeghe examines the various initiatives by the Central Bank of Nigeria (CBN) to ensure foreign exchange stability against the backdrop of a vulnerable mono-economy and dwindling value of the local currency

The value of the Nigerian currency, the naira, has over the years declined on account of the country’s peculiar economic structure and management template, making the exchange rate one of the most watched macroeconomic indices in the country and a recurrent theme in political commentaries.

The naira exchange rate has not only assumed greater prominence in macroeconomic adjustment, it has also become very well-known to stakeholders, including market women and men, who use it as a reference point in the pricing of goods and services.

However, this has not always been the case as the value of the naira was not one for social discuss when the naira was trading at a stronger value than the United States dollar. As at 1985, the average value of the naira to the dollar was 89 kobo to $1. People always refer to the 1970s and 1980s when the naira was “stronger” than the US Dollar, or at least, were at par.

As at last weekend, the naira traded at between N580 and N585 to the dollar, making many who were witnesses to the period of a stronger naira crave for such a time again and question what the country is getting wrong in terms of its exchange rate and the value of the local currency.

The Insatiable Demand for Dollars

But the real question to ask is: what was the demand and supply of US Dollar at that time, and what is it today? In the 1980s and 1990s, the number of Nigerians studying abroad, requiring foreign exchange for school fees and upkeep was negligible.

According to data from the UNESCO’s Institute of Statistics, the number of Nigerian students abroad increased from less than 15,000 in 1998 to over 71,000 in 2015. By 2018, this number had risen to 96,702 students, according to the World Bank. Compared to the 1980s when those studying abroad were mainly for a degree or an advanced degree.

More Nigerians are sending off their children out of the country for primary and secondary education including tertiary education. In light of this, it is no wonder that foreign education has cost the country a whopping sum of $28.65 billion between 2010 and 2020, according to the CBN’s publicly available Balance of Payments Statistics.

Asides foreign education that was being paid off from the country’s reserves, medical tourism has also been calling on the reserves of the country. According to the Nigerian Sovereign Investment Authority (NSIA), Nigerians spend over $1 billion annually on medical treatment abroad.

This fact is corroborated by a review of the Central Bank’s balance of payment data, which indicates that Nigerians have spent $11.01 billion on healthcare related services over the past 10 years. Over the last 10 years, therefore, foreign exchange demand specifically for education and healthcare has cost the country almost $40 billion.

This amount is more than the total current foreign exchange reserves of the country, which stands at $39.32 billion. The foreign exchange demand occasioned by education and health is besides the business and personal travel allowance that also increases the level of demand. Data from the CBN showed that in the nine-month period between January and September 2019, the CBN sold $9.01 billion to Nigerians for personal foreign travels.

These are however not the only demands that occasioned the devaluation of the naira. Whilst it has not always been so, Nigerians have overtime developed a taste for foreign products, thus increasing the import bill of the country.

In 1980, Nigeria’s total imports was $16.65 billion per annum. By 2014, the country’s annual import bill had risen astronomically to $67.05 billion, though it has gradually fallen to $54.71 billion as of last year. Similarly, in 1980, food imports cost us $2.63 billion, as Nigerians were mostly eating what was produced in the country. But as of 2011, food imports had skyrocketed to $18.91 billion, though it has fallen to $14.84 billion as of 2019.

In 1980, over 75 percent of the cars driven in Nigeria were made within the country by either Volkswagen in Lagos, Peugeot in Kaduna, or some other automobile companies. Today, over 99 percent of the cars on Nigerian roads are imported. Also, in 1980, most of the clothes were from Nigerian textile mills in Funtua, Asaba, Kano, Lagos, or other numerous towns and cities. Today, almost all the clothes are from imported fabrics.

A dwindling FX Supply

The challenge of the naira is however not only on the demand side as supply has over the years been monopolistic in nature, a source that has over the years proved to be on the decline, unstable and unreliable in times of crisis.

While the country in times past have relied on both oil and non-oil exports, the focus has in recent times been on oil exports which contributes more than 90 per cent of the country’s foreign currency earnings. In times of global crisis the impact has always been felt on the crisis.

The last six years have witnessed economic turbulence in the country, marked by two rounds of recession, the debilitating economic effects of COVID-19, and the negative effects of downturns in the global oil market.

The governor of the CBN, Godwin Emefiele, last week at a seminar for finance journalists last week had noted that the recent COVID-19 pandemic impacted economies, and disrupted business activities globally.

“Expectedly, Nigeria like most commodity-dependent countries, was not spared the deleterious impact of the pandemic, given our dependence on crude oil export as a major source of revenue and foreign exchange.

“These adverse conditions eventually plunged the economy into a recession for the first time in about a quarter of a century. The media space was suffused with news about the depletion of the country’s foreign reserves and the depreciation of the Naira. That tough period called for bold and innovative decisions to be taken and we did not shy away from doing what we considered to be in the best interest of our beloved country.

“For us, the CBN was to act as a financial catalyst by targeting strategic sectors that could create jobs on a mass scale and reduce the country’s import bills. To solve the immediate and long-term economic challenges of the country, we needed to create an enabling environment with appropriate incentives to empower innovative entrepreneurs to drive growth and development,” Emefiele said.

Fixing the Divide

The Central Bank has implemented various strategies, policies and measures to enhance liquidity in the foreign exchange market and ensure the stability of the exchange rate. It has also implemented various development finance interventions, which have implications for foreign exchange supply and exchange rate stability.

The measures taken are to maintain stability in the foreign exchange market and reduce foreign exchange demand pressure, enhance inflow of foreign exchange and diversification, boost production, non-oil exports, forex supply and economic diversification and provide ancillary measures/interventions in support of foreign exchange management.

Over the last several years, thousands of men have relocated their families abroad but continued to work here in Nigeria. Whilst these men are here earning naira, their major expenses are in dollars for family upkeep, mortgages, car loans, and the likes.

This means that thousands more people are chasing dollars every day, every week, every month. Without going into the reasons for their decisions but imagine that they were reversed and their families were here in Nigeria, the naira would be significantly strengthened.

To boost liquidity and promote inflows to the domestic foreign exchange market, the apex bank, in 2019, licensed additional International Money Transfer Operators (IMTOs). This was to engender healthy competition within the IMTO space, aimed at encouraging Nigerians in diaspora to send remittances home and strengthen the sale of foreign exchange cash to BDCs.

The CBN also amended the procedures for receipt of Diaspora remittances on November 30, 2020. To this end, a directive was issued to all International Money Transfer Operators (IMTOs) to pay the beneficiaries of diaspora remittances in foreign currency (US dollars), through designated banks of their choice. The recipients of remittances were also given the option of receiving funds either in cash or paid to their ordinary domiciliary account.

Naira 4-Dollar scheme was also introduced to encourage Diaspora remittance inflows through the formal channel. The scheme entails giving N5 bonus for every one dollar remitted to serve as an incentive for both senders and recipients of money transfers.

The objective is to enhance the supply of foreign exchange and hence, ease pressure in the foreign exchange market. The scheme, which started on March 5, 2021, with an initial terminal date of May 8, 2021, has been extended indefinitely.

As part of efforts to boost Production, Non-oil exports, Forex Supply and Economic Diversification, the CBN had in line with its developmental mandate, initiated several developmental finance intervention programs targeted at boosting non-oil exports to diversify the economy, increase accretion to external reserves, and create jobs.

It introduced Non-Oil Export Stimulation Facility (NESF) to increase access by export-oriented firms to low-interest financing towards diversifying the revenue base of the economy and expedite the growth and development of the non-oil export sector. The Facility is intended to redress the declining export financing and reposition the sector to increase its contribution to economic development.

It also introduced 100 for 100 Policy on Production and Productivity (100 for 100 PPP) which is to catalyze and transform the productive base of Nigeria’s economy by stimulating credit to sectors with potential for growth and job creation. The core objective of the initiative is to reduce the country’s over dependence on import for food and raw materials. Cumulatively, the initiative has financed 28 projects in agriculture, manufacturing, and healthcare sectors with about N28.02 billion.

More recently it introduced the RT200 FX Programme, which is Race to $200 billion in FX Repatriation. It consists of a set of policies, plans and programs for non-oil exports promotion that will enable the country to attain the lofty goal of $200 billion in foreign exchange repatriation, exclusively from non-oil exports, over the next three to five years. Specifically, it seeks to reduce the exposure of the country to volatile sources of foreign exchange and to earn more stable and sustainable inflows of foreign exchange.

Getting these policies to work whilst reducing the demand for foreign exchange in the country as well as the reliance on oil foreign earnings will further improve the value of the naira.

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