By Charles Abuede
Data from the Central Bank of Nigeria (CBN) show that despite hitting a high figure of approximately $45.17 billion as at June 2019, Nigeria’s external reserve has been on a downward spiral since then, losing well over $11 billion in ten months.
Recent statistics from the apex bank revealed that external reserves have fallen below the threshold as required by the Central Bank of Nigeria (CBN) Act of 2007. In summary, the Act says that the CBN must at all times, maintain a reserve level that should be able to fund or sustain two (2) years’ worth of imports.
Nevertheless, the current happenings that have seen a wobbly crude oil market, ground-zero foreign direct investment (FDI) and perhaps, low foreign exchange inflows as a result of Nigeria’s needle-eye exports, coupled with the negative market reactions to the rate of liquidity and significantly, a little or no shift in the naira-dollar rates, which make the dollar expensive as prices go up directly or indirectly, point to the need to maintain appropriate FX buffers.
In light of the foregoing, urgent and strategic steps must be taken to douse this growing concern. However, with an FX backlog estimated at over $5 billion, the apex bank could be looking to incentivize FPIs with higher yields to curtail the steady decline in FX reserves. Meanwhile, the central bank’s data show that Nigeria’s gross official reserves declined by $220 million in August to $35.66 billion. Now, the federal government is in talks with the World Bank and African Development Bank (AfDB) over loans for Covid-19 and budget deficit financing where disbursements would flow directly into reserves and compensate for exits by foreign portfolio investors.
But despite all these, the federal government and the 36 states including the FCT still share from the FAAC monthly disbursement Instead of seeking for ways or policies to help increase or deepen FX inflows and in the end retain them in the economy. To the current crux, what measures or approaches can the monetary authority, as well as the fiscal authority, apply to remedy the reserves depletion contingency?
According to economic and investment analysts who shared their positions on the issue with Business A.M, Nigeria should drive the gospel economic diversification of its non-oil sector as a way to earn foreign exchange to maintain reserve liquidity.
Dubem Enaruna, an economics lecturer at the Nigerian Maritime University said the country can embark on the expansion of her export base while driving the vehicle of her non-oil sectors such as tourism and hospitality amongst others.
“First, in order to remedy this falling state of the reserves, Nigeria should vigorously embark on what most economists would recommend -expansion of both its economic base, export capability, and by implication, export earnings. But the question however is how?
“Nigeria is a country blessed with both natural and human resources; however, there is a small number of industries that manufacture or produce for export and for those that do, have to cope with very stringent conditions. This in itself already has a deleterious effect on export capabilities. Thus, the government must, as a matter of necessity create and continue to maintain an enabling environment for such industries especially in the areas of favourable tax rates and holidays, lower interest rates to enable these businesses to thrive. This will also appeal to potential entrants to the “export scene”,” Enaruna told Business A.M.
The need to reawaken the sleeping non-oil sectors to attract FX to boost reserves
Secondly, the economist continued, “Nigeria should look within and exploit its rich culture so as to boost the tourism sector. According to the World Economic Forum (WEF), sub-Saharan Africa’s travel and tourism sector are very small. In 2018, African countries were reported to have brought in approximately $42.1 billion through the travel and tourism sector, this figure is just 1.6% of the world or global total. This is another area Nigeria should exploit in order to attract foreign earnings, however, in order to do so, some prerequisites such as ICT readiness, security and tourist service infrastructure, to name a few, must be highly prioritized.”
Uche Uwaleke, a capital market professor at the Nasarawa State University and a fellow of the Institute of Chartered Accountants of Nigeria (ICAN), told Business A.M. that, “The other source is Foreign Investments which have been negatively impacted by COVID’19. But the government and the CBN can do something to moderate the demand for forex to ensure that only critical imports are allocated forex.
“It is against this backdrop that I support the recent directive by the President to the CBN to the effect that forex should not be made available to importers of food and other items that can be produced in Nigeria. I equally support the forex restriction measures taken by the CBN in respect of rice, maize, and some other items. The idea is to encourage local production, conserve forex, and create job opportunities and reduce the high unemployment rate in Nigeria.
“I consider external reserves management as having two sides namely the supply and demand sides. As you know, the forex supply chiefly comes from crude oil sales due to the fact that the country’s export base is not diversified. Unfortunately, there is nothing the monetary authority can do about this as the price and quantity of crude oil are beyond the control of the CBN,” Uwaleke explained.
Yet, it is no secret that Nigeria’s export base is quite narrow, this is because there are potential exporters that do not even know how to go about it, and some of those that have an idea often bump into red tapes which discourage them. There should be a thorough export drive and sensitization, business stakeholders should be properly educated on the basics of exportation, in other words, the basics of exportation should as much as possible, be made common knowledge to all business stakeholders in Nigeria.
Garba Kurfi, managing director and CEO of APT Securities and Limited, in his views asserted thus: “With the bumper harvest that is expected, more commodities need to be exported and earn FX. Also, we have minerals across the country as there is a need to pay attention to that sector so as to diversify the economy. The FGN and State sharing revenue has little to do with the devaluation of naira since they share naira but it only posts problems if money shared among them is converted into US Dollar and taken outside the country. This act will heat the economy and increase the devaluation of the naira.
“However, the falling price of crude oil and reduced quantity allow exporting to affect the inflow of FX into the country coupled with the reduction in the flow of FX by Diaspora people give a tight inflow of FX which forces CBN to pay less in the intervening at the Import and Export (I&E) window. Today, there are billions of naira waiting to be exchanged to flow out of the country; that discourages FDI, especially those that play in money market and capital market because they are short term players,” Kurfi said.
How can the fiscal and monetary authorities remedy the situation through international partnerships and transitioned determined exchange rate?
Uwaleke further asserts that the government can remedy the situation through the creation of an enabling environment for foreign investors by continuously improving the ease of doing business, providing enabling infrastructure especially power, roads and IT infrastructure in conjunction with the private sector and more importantly, tackling the rising insecurity challenge in the country. These and more, the capital market professor said, can help Nigeria attract more inflows of the FPIs and FDIs as well as maintaining the international liquidity balance through reserves appreciation.
In a similar vein, the APT Securities chief executive who holds a similar view with Uwaleke also posits that the crash of T-Bills rates has reduced the products that trade-in FMDQ market but that, long term investors are not much affected. He, therefore, calls for investment partnerships which will see international corporations partner with local firms to drive investment that will see the repatriation of foreign exchange earnings into the local buffers.
Kurfi drew attention to the recently signed agreement by BUA to build a refinery with a French company, same with Samsung Company which is building a factory in Lagos among others. “However, with the current devaluation of the naira, I expect more FDI inflow for more refineries and electricity generation companies because of the deregulation of the sectors,” he stressed.
Meanwhile, several analysts have opined that understanding what drives Nigeria’s external reserve position is key to resolving the issues around the recent decline in the reserve. Nigeria’s susceptibility to crude oil receipts has largely contributed to external reserve mirroring oil price movements. This is further compounded by an inefficient exchange rate determination mechanism that has dampened export growth and weakened foreign investment flows. Thus, we must delineate the remedial measure for falling external reserves into short and long term measures.
Fundamentally, for the short term measure, the CBN must begin the transition to a market determined foreign exchange rate that would revive the already weakened FDI and FPI inflow and eventually stimulate economic growth. For the long term, government must radically drive the gospel of economic diversification through prioritization of the non-oil sector.
