The World Bank may not be right, but something has to change


Beyond oil revenue and own-source foreign exchange inflows, over the past 18 months Nigeria has benefited from an increase of more than $7 billion in external reserves from non-current sources, including debt issuance. Eurobonds and International Monetary Fund (IMF) Special Drawing Rights, but the external reserve has been steadily declining, a trend that shows we haven’t been saving for rainy days.

So far in the year, the external reserve has plunged 4.5% or $1.83 billion and we are unlikely to maintain the current level of $38.69 billion throughout the year. year, because if we can’t save when there was an avalanche of autonomous influxes, how can we save ourselves now that things are getting a little tighter. Of course, unless we want to be reckless and inflate the debt service burden, which is already choking, Eurobond issuance is probably out of the equation for the rest of the year, given of the current cycle of interest rates in the international debt capital market.

There are no drawing rights or bilateral loans from the World Bank or the IMF this time around because I don’t think we’re ready for punitive loans with all kinds of conditions from these Breton Woods institution. Incidentally, the clouds are now heavy, with fears that interest rate hikes in the US and other developed markets could trigger further foreign exchange pressures for frontier and emerging market currencies, like naira. If you will allow me to say, all other things being equal, the higher the interest rate in the United States, the stronger the US dollar will be against most currencies in the world, especially those in highly dependent countries imports like Nigeria.

The World Bank recently said there was a backlog of $1.7 billion in demand for foreign currency by foreigners seeking to repatriate their funds from Nigeria. Again, the International Air Transport Association (IATA) recently alleged that $450 million belonging to foreign airlines was stuck in Nigeria, a development that has prompted a number of airlines to review their booking approach. , some requiring payment in foreign currencies. Even for those who accept Naira, you can be sure they have factored the cost of delayed access to foreign currency into their pricing – it’s all about the time value of money.

Interestingly, when we look at external reserves, we only pay attention to the gross position, which can sometimes be misleading because it does not take into account the excess of obligations such as futures and swaps coming to maturities (particularly with Nigerian banks), which amount to billions of dollars. So the question is whether the CBN was to meet all foreign currency obligations as they come due and provide foreign currency to meet all actual demands as technically we don’t now what the reserve position would have been exterior.

There is no doubt that one of the main reasons why the naira is so volatile and continues to depreciate is the way it is managed. The price of an asset in the financial markets, especially the forex market, is based on expectations and it is a market where perceptions quickly become reality. How can the naira be stable and why won’t there be panic buying and speculative attacks on the naira when there is news everywhere that airlines cannot access to foreign currencies to repatriate the proceeds of their sales? To the best of my knowledge, despite the decline, Nigeria’s current external reserves of $38.6 billion are one of the highest in Africa, especially considering that it can afford more than seven months of our imports.

However, how can we believe that we have a sufficient external reserve and that we are struggling to finance real demands such as the request made to airlines to repatriate their revenues? Many banks simply cannot talk, they are in arrears with unfunded personal travel allowances, tuition fees and medical expenses, which the CBN has duly approved but has yet to reimburse the banks. This is why the banks are diplomatically moderating their appetite to process these retail foreign currency demands and of course the ripple effect is what we see in the parallel market where genuine foreign currency users have to find their funds as alternatives. It is sad that we continue to delay providing foreign currency to genuine users until it creates a false impression of capital controls or sends a negative signal about the CBN’s willingness and ability to support the local currency.

This recurring situation perhaps justifies the concerns of market participants and the general public about the CBN’s ability to meet the demand for foreign currency. If the demand is real and we still have to provide foreign currency to airlines and other users, such as foreign investors looking to repatriate their capital and/or come back, why do we have to wait for everyone to panic and things jump out at us before doing what is necessary?

By the way, I’m not sure Nigeria can afford a fully liberalized exchange rate market, and very few countries, if any, operate a theoretical fully liberal exchange rate market. However, our current approach to managing foreign exchange must change and we must, of course, liberalize the market better, because the current system not only creates rent-seeking opportunities, but also tends to waste very scarce resources. . Do we need to defend the Naira, the answer is YES, given the country’s vulnerability to foreign currency volatility, despite the current opaque approach. It also unfortunately favors consumption to the detriment of support for production. This is perhaps wasteful and prioritizes the luxuries of the wealthy over the average poor Nigerian women and men, who bear the real cost of Naira volatility.

The CBN may not be adopting the recommendations of the IMF or the World Bank on the floating of the naira, but there is some merit in the arguments and it calls for a complete overhaul of the current CBN exchange rate regime. A good exchange rate policy is a big step towards controlling inflation, especially the imported component of the persistent rise in consumer goods prices. The Asian Tigers don’t float their currencies, and we don’t have to naively adopt their measures. On the contrary, we can learn from both East and West by developing a local policy that suits our particularity.

It’s not that easy, but it’s not rocket science either. Ultimately, we cannot and should not continue with this current exchange rate regime if we are serious about supporting the naira and driving the economy forward. Too much depends on the stability of the country’s exchange rate, including foreign direct investment as well as the ability to convert local savings into job-creating investment opportunities in the real sector.

Surely, if we are to create sustainable jobs, we must solve this exchange rate puzzle in a way that can be managed sustainably. The longer the reform is delayed, the worse the situation becomes. You don’t help a cow by cutting her throat with a razor!


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