Beyond Exchange Rate Unification: Imperatives For Reviving The Nigerian Economy

By Olorogun Bernard Okumagba

It is indeed fitting and appropriate to applaud the bold step taken by President Bola Ahmed Tinubu (GCFR) on the unification of the Naira exchange rate and removal of subsidy on Premium Motor Spirit (PMS). Timely and appropriate, these policy initiatives will unlock the huge potentials for investment, jobs and capital flows, thereby enhancing investor confidence in our economy.

The extant regime where the Naira had several rates versus the dollar and which promoted unproductive arbitrage, rent seeking and unfair competition significantly hurt the nation’s economy. Also, the previous PMS subsidy regime promoted corruption and had become a massive drain pipe on our country’s finances. Having said that, the challenges of the Nigerian economy go beyond exchange rate unification and fuel subsidy removal. There are fundamental issues that need to be addressed if rapid progress must be made in the new political dispensation. I will however focus on the unification of the Naira exchange rate and the key issues arising from the policy.

Contemporary economics holds that the exchange rate is influenced by six main factors viz: inflation, interest rates, current account deficit, public debt, terms of trade and political stability/economic performance. A cursory glance at how Nigeria ranks on these indicators would reveal that we have been performing below par. Inflation for instance increased from 9% in 2015 to 22% in 2023. Interest rates (MPR) jumped 500 bps from 13% in 2015 to 18% in 2023. As for the Current Account Deficit, the challenge is that it is more structural rather than cyclical. Structural deficits are underpinned by under-investments, relatively low productivity, persistently high relative inflation rates and lower cost competition. And these are all visible indicators evident in the current state of the Nigerian economy. In terms of public debt, Nigeria’s total public debt stock stood at N46.25 trillion (excluding the N22.7 trillion Ways and Means loans from the CBN) as of March 2023. With the floating of the naira and the accompanying depreciation, this figure is expected to balloon further. Ordinarily, there is nothing wrong with borrowing. If a country uses external debt to finance investments that have higher returns than the interest rate on the debt, the country can remain solvent. The question is what have we done with these vast amounts of debt over the years?

Flowing from the above, it can be safely posited that the problem with Nigeria’s exchange rate goes just beyond the multiple rates and pseudo-fixed regime adopted in recent years. There is a fundamental need to address other pressing issues highlighted above. A few suggestions that could assist in resolving these issues are enumerated below:

Taming Inflation, Curbing Food Prices, And Improving Food Security

Food and energy prices have remained at the core of Nigeria’s inflationary pressure over the years and urgent steps need to be taken. To cushion the impact of higher spending on petrol which affects transportation from the farm gate to the markets and raises the costs of food between the farm and the fork, there is need to embark on widescale investments in agricultural production. Production of staple foods need to be boosted by policies that would attract investments into such ventures. For instance, Nigeria is a top three producer of sorghum globally with 6.7 million metric tonnes annually. The USA tops the charts with 11.4 million metric tonnes per annum. Incidentally, sorghum grows naturally in about 21 states countrywide. Nigeria also leads the world in the production of other staples like yam and cassava. The Food and Agricultural Organization (FAO) ranked Nigeria as one of the World’s largest producers of yam with about 60% of the Global production of the product. In terms of cassava, the FAO also posits that Nigeria is the largest producer of cassava in the world, producing one-fifth of the world’s output. Despite this, the country is yet to meet sufficient domestic composite demand for cassava. Focusing on the production of these three staples and their derivatives alone can earn Nigeria huge export revenues, temper food inflation and improve food security. There are many other crops that Nigeria produces very well. In fact, the country ranks 6th globally in terms of countries with the most arable land with over 84 million acres of arable land. The top five countries are United States, India, Russia, China, and Brazil.

Boosting Foreign Exchange (FX) Earnings Via Economic Diversification

The convergence of the rates is only the first step in curing the ills of the FX market. The next step is the most crucial and that is to boost supply into the market. The government should prioritise supply of dollars to support the naira float. In a floating exchange rate regime, there should be sufficient availability of foreign exchange to defend the currency against the actions of speculators. History recounts what happened to Britain on the infamous Black Wednesday when the pound suffered its steepest intraday decline due to speculatory attacks. it is instructive to note that steps must be taken to prevent any speculatory attack on the naira.

To address this problem, there is a stringent need to boost the sources of foreign exchange outside of the current crude oil exports. This is the time to diversify the Nigerian economy away from fossil fuel dependence and invest profitably in non-oil resources. It is estimated that Nigeria is relatively rich and replete with solid minerals in commercial quantities. The administration should now focus on how to profitable exploit the vast amounts of solid minerals available in almost every state of the federation. According to the Nigerian Investment Promotion Commission (NIPC), Nigeria has 45 different solid minerals buried in various locations across the country.

But these minerals are largely untapped. Both local and foreign investors can leverage on this multi-billion-dollar market. But because of the unwavering focus on crude oil in the last 60 years, successive governments have not paid enough attention to the exploitation of these vast reserves of solid minerals estimated to be worth billions of dollars. Most of the mining of these solid minerals including precious ones like gold is done by artisanal miners who are not licensed or regulated and who are being exploited by their foreign patrons operating below the line in key states like Zamfara, Kaduna, Katsina, Kebbi, Kwara, Osun, etc. The data from the NIPC estimates that the country loses about $40billion annually in unexploited gold. Imagine if this was added to our dwindling export revenue from crude oil. It would literally double our export earnings, improve our current account position, ameliorate our debt service/revenue issues, and make available huge sums of cash to be invested in the exploitation of other solid minerals required for industrialisation.

Investing in solid minerals will not only serve as a good source of foreign exchange earnings but could assist in resolving Nigeria’s huge energy poverty. For instance, the key metal components of the lithium battery which is crucial to solar energy adoption are found in commercial quantity in Nigeria. To date, a key discouraging factor for the rapid adoption of solar power systems is the cost of purchasing and replacing batteries which are often sourced cheaply from Asia and have very low quality and longevity. Imagine how quickly solar would become a way of life for Nigerians if the batteries could be manufactured locally and sold at comparatively affordable rates.

Conclusively, whilst applauding the new administration for the bold and rapid steps taken so far to steer the economy in the right direction, it is pertinent to say that the work is just beginning and all stakeholders within the private and public sectors must be ready to support the administration’s effort through effective collaboration, hard work and sacrifice. We must all stand ready to make our dear nation great again to enable it to occupy its justified place amongst its peers in the comity of nations in the coming years.

•Olorogun Bernard Okumagba, FCA, is a former Delta State Commissioner for Finance

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