The Central Bank of Nigeria (CBN) on Tuesday announced plans for a flexible exchange rate regime aimed at increasing foreign currency accessibility. This move had been expected and predicted by many economists for weeks. Even the Vice President Yemi Osinbajo has hinted at a rate of N285 per $1 as a guideline for oil marketers setting fuel pump prices at N145 per liter.
Addressing reporters at the end of the meeting of the Monetary Policy Committee (MPC), the CBN Governor, Mr. Godwin Emefiele said,
“In a period of stagflation, the policy options are very limited. To avoid complicating the conditions, the committee decided on the least risky option to hold. With the foreign exchange market framework now ready, the MPC voted unanimously to adopt greater flexibility in the exchange rate policy to restore the automatic adjustment properties of the exchange rate. Consequently, all nine members voted to hold and introduce greater flexibility in managing the foreign exchange rate. The bank would however retain a small window for funding critical transactions. Details of operation of the market would be released by the bank at an appropriate time.”
Lack of Details
Perhaps just as important as what was said by the Governor, was what wasn’t said. And that is any substantial details, only speculation. The governor mentioned that details would be released at an appropriate time.
While this move was expected, the lack of details wasn’t expected and as a result, the parallel market rates remain unchanged. In fact, as of the close of the trading day, the Naira fell slightly from where it opened yesterday.
Details needed include, the interbank rate, regulation of the parallel market, plans to support new forex prices, implementation of two separate rates and most importantly what constitutes “critical transactions” and qualifies for a subsidized rate by CBN.
Therein lies the problem.
Avenues for Corruption
Financial Analysts have piled on that phrase “critical transaction” and warned that it could lead to abuse in the system. Mr. Emefiele tried to shed a little more light on this. He said,
“There are people who would want to import plant and equipment to produce goods where raw materials are almost 100 per cent available locally. We would support such attempts by people to set up factories, foreign direct investment coming in, or even local direct investment coming in, if they want to import plant and equipment and their raw materials are almost entirely available locally. We will look for an opportunity to provide the incentives that they need to import the equipment so we can produce locally and stimulate growth.”
In my opinion, this is misguided. Using a two tiered foreign exchange regime that rewards one particular group of investors at the expense of others in a country where corruption isn’t controlled is basically asking the fox to guard the hen house.
During the height of the fuel subsidy regime, there were allegations of oil marketers without depots or tank farms going through the trouble of bringing in vessels laden with fuel products and going through all the due diligence using forgery, bribery and false documents to file subsidy claims. Only to then send the cargo to neighboring countries and selling the product to the open market.
In this forex subsidy regime, what stops similar subsidy thieves from forging documents or even the prices of machinery (an example used by the governor) to obtain several millions of dollars only to sell the excess in the parallel market and make a fortune?
For example, $1m obtained at N200 per dollar would today yield a profit of N120m sold at a wholesale price of N320. This can be accomplished in minutes and requires less gravitas than bringing in cargos of fuel to docks only to then send it to Ghana.
Freeing the dollar from its N197 peg is a welcome move. Freeing the dollar completely and without prejudice is the only way to operate a free market economy that is just and fair for all while limiting avenues for government officials and their friends to line their pockets even further. In other words, we need to stop giving government officials opportunities to be ‘fantastically corrupt’.
Venezuela is on the brink to total collapse. Venezuela as of now is a failed state. And that’s just the beginning because unfortunately, things are actually going from bad to worse. Venezuela’s GDP is expected to plunge by and additional 8 percent this year, and inflation is set to rise even more by 720 percent according to projections.
The Washington Post writes,
“According to the International Monetary Fund’s latest projections, it has the world’s worst economic growth, worst inflation and ninth-worst unemployment rate right now. It also has the second-worst murder rate, and an infant mortality rate that’s gotten 100 times worse itself the past four years. And in case all that wasn’t bad enough, its currency, going by black market rates, has lost 99 percent of its value since the start of 2012. It’s what you call a complete social and economic collapse.”
Earlier this week, President Nicolas Maduro declared a state of emergency to combat the economic war he blames on “foreign powers and right-wing forces” in Venezuela.
Currently, there is a recall effort on the way to oust President Maduro and that effort is gaining steam. 70% of Venezuelans want him out.
Food shortages are prevalent leading to long queues that start at dawn and looting has become rampant. In Venezuela’s hospitals children are dying for lack of medicine.
So how did the country with the world’s largest oil reserves get to this point? What can other oil producing nations especially Nigeria learn from it?
All this began with socialist policies of the past President Hugo Chavez who came into power in a socialist revolution that was very popular. Chavez imposed heavy taxes on business and redistributed the wealth to reduce poverty, a move welcomed by the people. Several businesses were nationalized and price controls drove many others out of business.
Here are some quick hits
Venezuela depends on its vast oil reserves so much so that it counts for 96% of her exports and 50% of the government’s budget
According to Transparency International, it is the 9th most corrupt country in the world and several politicians are and having accused of enriching themselves with sovereign funds
Venezuela has the second highest murder rate in the world at 90 per 100,000 people
Venezuela’s budget was pegged at $40 to the barrel for oil. The excesses rather than being saved over the years was blown due to corruption and high subsidies on nearly everything from groceries, to fuel (lowest fuel prices in the world) and power.
So does any of this sound familiar? Currency controls, crime, subsidy, dependency on imports, dependency on oil prices for a budget…stop me when you’ve heard enough.
It is easy to say that several of these don’t apply to Nigeria. But as the labor unions continue to protest the removal of subsidy from fuel, it is important to note that petroleum was easily the largest single item in the budget for Nigeria until this year.
Our population is 180 million and projected to reach 400 million by 2050. Opponents of subsidy removal have also championed subsidies in other avenues such as food, transportation, power e.t.c. But even if we only subsidized fuel consumption, that level of population growth would put significant strain on the coffers of the country.
But the solution to moving Nigeria forward long term has to be private industry. We can’t continue to subsidize consumption in whatever form it exists.
Instead, Government should subsidize production. I am not advocating that the federal government give actual cash to business owners. I do advocate lower business taxes, public private partnerships, stronger intellectual property protections and incentives to aid companies who choose to start manufacturing companies and create jobs.
We should seek a reduction of our dependency on oil exports. Venezuela as I mentioned earlier depends on its vast oil reserves so much so that it counts for 96% of her exports and 50% of the government’s budget. It stands at 80% and 40% respectively for the Nigerian government.
We should also at all cost look to ways to shrink the size of our government. Say what you want about dictatorships, at least there was only one mouth to feed. Today, we have umpteenth amounts of senators, representatives, state governors, state senators, state representative and numerous duplicated ministerial feeds with each individual with endless amounts of commissioners and assistants.
We should also pass laws to curb the way the government spends not just how much. If we make civil service an actual service and reduce the glam and corruption in politics, it will reduce the attractiveness to higher office to people who want to actually serve.
One can at least make the argument that Venezuela reduced poverty of her citizens when things were good. All we did was line the pockets of the elites.
Now is the time to make the tough choices and avoid a similar fate to Venezuela. It has started with the removal of fuel subsidy. That should only be the beginning.
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The Nigerian National Petroleum Corporation (NNPC) has put the national daily consumption of petrol at 40 million liters per day. The ‘barrel of crude’ equivalent is 478,068. That is to say that 478,068 barrels of crude should be able to supply the demand of petrol every day in Nigeria. Nigeria’s peak production and the 2016 budget is based on 2.2m barrels of crude daily. Basically 22% of Nigeria’s peak capacity can take care of the Nation’s demand.
Even with the diminished supply due to militant pipeline attacks, Nigeria’s capacity is 1.6m and demand is 30% of that locally.
Currently, according to NNPC, Nigeria’s refineries have the capacity to take care of only 17% of the total demand. There are discussions to increase the capacity of Nigeria’s refineries through public means (NNPC) and through private investments most notably that of Nigeria’s wealthiest individual, Aliko Dangote. Dangote’s refinery is projected to refine 650,000 barrels per day and is currently scheduled to come online in 2018.
In simple terms, the current problem is that, the lack of FOREX has caused NNPC to lift the cap on fuel prices from N86 to N145. Many have called this subsidy removal but that is simply not the case. What has happened is that since the Central Bank is (at least they claim to be) unable to supply the requisite dollars to pay suppliers at N200 per $1, they are leaving it to marketers to buy at the parallel market. NNPC estimates that marketers would be able to source US Dollars at N290 per $1 and by adjusting the cap, they can sell and make a profit.
The issue with that is twofold; a drastic increase in pump prices which among many effects will boost inflation and hurt the pocket books of the average Nigerian. You could make the argument that due to fuel scarcity, market forces have already caused pump prices to go up.
The second problem is that the pressure on forex rates will increase because now that markets will be sourcing for dollars through the parallel market, it would increase demand and force prices up. By my calculation, it will cost roughly $6b annually if all of Nigeria’s fuel supply were to be sourced externally.
Nigeria has a long term solution in the works. If NNPC can boost capacity to 25% from 17% of demand and Dangote’s refinery comes online as scheduled with the ability to supply 130% of demand; and even with accounting for population growth, you can see that we could be heading towards a market driven solution in the long run.
However, we need a short term solution. Here’s my solution –
Crude Swaps for 100% of demand made entirely by NNPC. Stay with me. Crude swaps would eliminate the need for FOREX to source products. NNPC can then sell products for a minimal profit to marketers and allow markets to set their own prices. When those marketers compete with each other, it will regulate prices without subsidy and minimal price gouging.
What of the loss of revenue the FGN will sustain? Simple, with a foreign reserve of $26b, we would be budgeting $12b over a two year period. Moreover, the FG wouldn’t actually be losing money, they would just be converting USD to petroleum and then to Naira because they would be selling the petroleum swapped at a profit.
What of corruption such as that sustained in such deals during the past regimes? According to Nigeria Extractive Industries Transparency Initiative, Nigeria lost $966 million to crude oil swap deal between 2009 and 2012. So that’s a real concern and a real threat to this plan. However, this is a new regime which has promised to tackle corruption. Also, the loses aside, this actually worked quite well in the past. But back then, no one was paying attention to back room deals. We are not so oblivious now.
Such a move will leave the $20b estimated that Nigerians from the Diaspora to serve other forex demands. Others will come from Foreign Direct investments and whatever sources they currently come from since the FG has limited its supply.
I am sure much smarter people can offer even better solutions and some might even disagree.
What we can all agree to is that we need both short and long term solutions. What we can agree to is that we need to be having these sorts of discussions to come up with those solutions. What we also need is the political will to do something to ease the pressure on Nigeria citizens at the pump and in their pockets.
It appears that other long term plans may be in place to help Nigerians economically in the long run such as the Naira/Yuan swap agreement. But we have to provide short term solutions to allow Nigerians survive to the point they can also benefit from these long term plans.
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