TUB-THUMPING CBN FOREX POLICY

The Central Bank of Nigeria (CBN) is an establishment that came into existence through the breath of the law; specifically, the CBN Act of 1958 which clearly spelt out the administrative framework and responsibilities of the CBN, under the statute of the Nigerian government. This Act allowed it began operations in 1959. Essentially, there are three major Acts of the CBN, 1958 CBN Act; 1991 CBN Act; and the 2007 CBN Act. The 1991 Act repealed the 1958 CBN Act and all of its amendments, which sought to guarantee the independence of the CBN, to a large degree.

Aside being the the issuer of legal tender currency (Naira), banker to other banks, responsible for maintaining monetary and financial stability and to maintain external reserve; the CBN's major mandate is to ensure price stability, which the 2007 CBN Act puts in black and white. Within its purview, the CBN is doing everything to achieve that mandate, using the tools at its disposal. Some of which may not appear favourable to many persons, and they have their arguments; and some of which are worthy of heralding. 

I have read commentaries of notable Nigerian Economists and Policy Analysts making backlashing critiques against the foreign exchange policy of the Bank. I am aghast as to why the merits of devaluation are apparently dismissed, and the failure to recognise present realities and domestic conditions that we are today faced with. I guess some explanations are needed, as basic as they may appear. For those who it may interest, a devaluation is a deliberate reduction in a country's currency in relations to another currency. This is associated with countries that practice the fixed or semi-fixed exchange regime, or what could be known domestically, as managed floating exchange rate policy. Know that, the purpose of devaluation is to correct for trade imbalances and also to protect reserve currency of a nation. When a country devalues its currency, it makes the cost of import expensive and the cost of export cheap, thereby helping to strengthen, accelerate and promote activities of domestic businesses by potentially debasing the taste for foreign goods that could be manufactured or already manufactured locally at relatively lower cost; and consequently encouraging exports. 

The problem therefore is not with the CBN policy, rather the problem is inherent in the fiscal arm's failure to develop, promote and execute structural policies that would encourage expansion in industries that could potentially generate export revenue for the nation. The CBN within the ambit of its operations is providing the support it can. One action that is commendable by the governor, Godwin Emefiele, is to have issued a directive to refuse foreign exchange to businesses that intend purchasing foreign goods that have substitutes in Nigeria. We must recognise that the CBN is constrained by the amount it has in its reserve, and if no effort is made towards managing the reserve, as it is done through the wisdom of the present CBN monetary team, we may be heading for specters of jeopardy.  

In May 2014, the value of naira to dollars was around 160 naira to one dollar. But in May 2020, we have seen a dollar exchanged for 390 naira and even over 400 naira at the parallel market, against the official rate which remained pegged at 360 naira to a dollar, compared to the initial rate of 306 naira to one dollar in December 2019. In the same breath, in May 2014, the foreign reserve stood at 36.9 billion, in spite of crude oil price trading at over 100 dollar per barrel (The oil proceeds were majorly spent on importing refined crude oil products and other importing items; and subsidy, further deteriorating the size of the reserve. Unfortunately, this has not completely changed), compared to May 2020, where the reserve presently stands at 33.6 billion, and the price of brent crude trading around $30 margin (No thanks to the COVID-19  pandemic). It is no surprise why we have seen sluggish improvements in our foreign reserve, because of the overbearing reliance on crude oil.  It will therefore amount to foolhardiness not to protect the reserve, and as a result, find the economy in an incurable doldrum or long lasting deleterious consequences, bearing in mind that some of the debts the Nigerian government owes are dominated in foreign currencies, which will be serviced with liquidity in the reserve vault of the CBN. We must achieve a turning point one way or the other, whether at present or in posterity, we must absorb the difficult pains, but it is better now.

The fiscal dimension through the Ministry of Finance; and Ministry of Budget and National Planning must lead reforms that could cause a paradigmatic shifts in policy choices and formulation, to enable it achieve underlying objectives of development and prosperity. The government ought to prioritize policy of economic expediency that transcends beyond the deadlock of ill-spending, misappropriation and misapplication of funds that could be targeted at sectors that have remained untapped, and revitalise industries that could create local employment and provide export earnings beyond sales of crude oil. The insufficient state of subsistence that the oil market provides the nation has to reach a cessation, by moving towards a modern economy, underpinned by structural transformation. 

For the CBN, it is fundamentally taking the hard but justifiable steps in enforcing its mandates. The need for a secular integration between the monetary and fiscal systems is overwhelmingly important to achieve the broad objectives associated with development in a most expedient way possible. The unfettered struggle for a better livelihood for many Nigerians and economic growth continues. 

Author: Adams Alex Osunde 

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