Nigeria’s Perennial Dollar Shortage By Samson G. Simon, Ph.D

Foreign exchange in the context of global trade and finance is a very significant resource to a non-convertible currency country that is struggling to earn it through the export of goods and services and capital inflows. It needs to be efficiently managed to meet the country’s developmental needs, for that is the reason governments take a keen interest in foreign exchange reserves and the exchange rate.

The CBN’s Investors and Exporters (I &E) foreign exchange market is the official exchange rate where foreign exchange is traded based on prevailing market conditions. The CBN intervenes with supply to ensure the stability of the exchange rate. The market is currently functioning under the difficult challenge of limited forex supply.

What is more, Dr. Muda Yusuf’s Centre for the Promotion of Private Enterprise (CPPE) said these shortages will continue unabated. Even though, it is primarily the case of demand outstripping supply in the forex market; the problem has multiple dimensions amongst which are:

 i. Sharp currency depreciation.

ii. Volatility of the exchange rate.

iii. Monetary and foreign exchange policy rigidities.

iv. Limited export earnings and capital inflows

v. Weak accretion to foreign exchange reserves

• weak production base and undiversified economic base in terms of production and exports.
• low productivity of the economy.
• Insecurity

Furthermore, the exchange rate is not stable in the current situation of high crude oil prices. This is because the country’s oil production is limited and much lower than the OPEC’s relatively low quota of 1.72 mbpd because of scandalous crude oil theft and secondly, heavy importation of refined petroleum products costa an arm and a leg. Crude oil production reduced from 2.07 mbpd in first quarter, 2020 to an average of 1.31 mbpd in 2021 due mostly to oil theft and difficulties in some oil terminals. The other factor that has limited the impact of high oil prices on government revenue and foreign exchange reserves is the continued heavy importation and subsidizing of refined petroleum products to meet domestic consumption needs such that the net accretion to foreign exchange reserves is marginal if any. Despite the CBN’s efforts, parallel market rate (N600/$), which continues to trade at a premium, will likely disincentivise exporters from selling FX proceeds at the I&E window. Hence, the underlying issues of non-supply of FX to certain classes of demand (which has been the primary driver of parallel market pressures) may still need addressing.

Professor Mike Obadan has these solutions:

People have been clamoring for the Central Bank of Nigeria (CBN) to liberalize the foreign exchange by allowing only market forces to fully determine the exchange rate.  Some even go further in suggesting foreign exchange market should operate like a commodity market where every operator buys and sells currencies at market price. However, do all these proposals address the fundamental problems of the foreign exchange market? Moreover, in reality the solution is not that simple. Considering the effects of exchange rate fluctuations on trade and domestic inflation, governments seek to intervene in the forex market in the hope of moving the exchange rate in the appropriate direction. For no where in the world is absolute floating of currency allowed.

For a liberalized forex market will have macroeconomic implications on economic stability, inflation, real sectors and growth, and social welfare. Forex would further be curtailed while the cost of forex and production may be prohibitive, thus eroding competitiveness. Already, the inflation is high at present. A strictly market-determined exchange rate will further escalate inflation through the pass-through effect of imported goods prices to domestic prices. Exchange rate depreciation is transmitted directly to the consumer price index through an increase in the prices of final goods and services that are imported from foreign countries and indirectly through an increase in net exports of goods and aggregate demand. The negative impact of high inflation on welfare is obvious: reduced purchasing power, increased poverty.

The best way out is by boosting the productivity and earning capacity of the economy. Increase foreign exchange reserves and hence strengthen and stabilise the naira exchange rate. Address issues relating to low productivity and limited diversification of the economy in terms of exports, high import-dependent production structure, high propensity to import and excessive demand for imported goods and services, and the comatose capital goods industry.

In the meantime, however, the authorities will do well in boosting oil exports and taking advantage of the current regime of high crude oil prices in the global oil market. Turning the tide on crude oil theft which has prevented the country from meeting even the OPEC-approved production quota, and compelling the NNPC to make remittances from direct oil export sales into the Federation Account and external reserves account. For the oil sector contributes over 90 percent of the nation’s foreign exchange earnings and external reserves accretion.

Nigeria needs  to diversify its export earnings from a strong reliance on hydrocarbon-related inflows into things like long-term concessionary funding for exporters of semi-finished or finished non-oil products aimed at expanding production capacity; provide concessionary funding for the export of local commodities for which Nigeria enjoys comparative advantages; scheme guarantees naira rebates for non-oil exporters who provide verifiable evidence of export repatriation and sales to the I&E window; decongesting ports and improving access to export facilities. Structural issues outside the scope of the CBN have definitely contributed to the impasse. For example, insecurity has hampered the agricultural sector.