Nigeria’s Foreign Exchange Problem: Our Economic Problem

It is not unfounded to boldly say that the bulk of Nigeria’s current economic challenges is crude oil driven. Before now, the major impact was initially external through the fall in crude oil prices. That we can hardly influence. The latest impact is through decline in crude oil output due to increasing pipeline vandalism in the Niger Delta. This part is internal and within our control.

How are these factors combining to affect us?
Ceteris paribus, these two forces are the primary source of the nation’s economic challenges primarily through its impact on FOREX generation/policy, which has seen declining foreign investment, slowed growth of 2.79% in 2015, negative growth (-0.36%) Quarter 1 of 2016, inflation at an all time high of 13.72% (highest level since August 2010) and unemployment climbing in the last 5 quarters (Q1 2015 to Q1 2016).

(On the side note, the fight against corruption has also reduced the amount of free/corrupt money floating in the system.)

The internal crisis will lead to probable spillage, cut in production of crude oil, decrease in export of crude oil, fall in oil export earnings, cut in employment at least within the oil industry, cut in revenue to finance federal and state governments’ budgets, unpaid salaries and incomplete projects, decrease consumer demand, increase in deficit financing, rising debt stock and so on. That should see GDP for the Oil industry continue to slide if nothing is done to contain it.

On the external side, crude oil exports unfortunately accounts for an average 80% of Nigeria’s visible exports earnings. If you add export of natural gas to it, together they accounted for 92.6% and 92% of our foreign exchange earnings from visible exports in 2014 and 2015 respectively.

So a slide in the crude oil price has significantly impacted the value of the nation’s crude oil exports. Unfortunately, earnings from gas export and non-oil exports also took a hit in 2015. Thus, while the nation earned $82.5bn from visible exports in 2014, the earning slipped in 2015 to $46.4bn (declining 44%). In fact, Visible (or merchandise) trade balance entered a negative in 2015 for the first time since 1998 as visible imports exceeded visible Exports by ($6.4bn).

These factors may have occasioned the FOREX policy to restrict access to foreign exchange and import curbs to tilt funds more to the importation of inputs and away from the importation of items that are produced locally. In fact, figures in for January and February 2016 put the nations visible export earnings at $6.4bn while imports were higher at $6.99bn which may result in a negative trade balance in Q1 of 2016.

Where FOREX comes from?
Just to point out, we can identify 3 major sources of foreign exchange to the Nigerian economy, these include, Export earnings (Visible and Invisible), Unilateral transfers (e.g. remittances from siblings abroad) and foreign investments (portfolio and direct investment) and loans
As pointed out earlier, Visible export earnings declined 44% in 2015. Net current transfers (net remittances/unilateral transfers) has been above the $20bn in the last couple of years but declined 8% to $20.17bn in 2015 from $21.918bn in 2014.

After JP Morgan delisted Nigeria from its bond index in September last year, it just seemed investors that were hitherto monitoring our bonds closed shop as investment in the Quarter 1 of 2016 was a mere $1.5m from as high as $705m in Quarter 1 2015. Portfolio investment in the equity segment also took significant hit as inflow in Quarter 1 of 2016 was $201m from $1.1bn and $792m in Q1 and Q4 in 2015 respectively. Foreign Direct Investment has been pretty low with $174m coming to the country in Q1 of 2016 as against $394m same period last year. $241m was borrowed in Q1 of 2016 as against $416m same period last year. In summary, while we imported $710m of capital (foreign investment, credit and loans) in Q1 of 2016, the nation imported $2.67bn dollars of capital in Q1 of 2015. (See NBS capital importation report for Q1)

What we can basically see from the details above is that the nation’s foreign exchange income or dollars (if you prefer) has been significantly declined. The dollar scarcity is real and our current foreign exchange policy doesn’t seem to be coping well. The parallel market valuation of the Naira is 70% lower at about N340 to $1. In fact, it may appear that the CBN may actually be granting subsidy to firms that source the dollar at N197 from them. Because as it seem, market prices seem to reflect imported (exchange rate) inflation which is closer to the parallel market rate than the CBN rate.

Except a miracle happens and we fine crude oil prices rising and oil output increases in the Niger Delta region improves significantly, Nigerians should just prepare for some tough time. In fact, the tough time is already at hand, with deteriorating growth and rising unemployment.

Tough Choices
The outcome of CBN Monetary Policy Committee meeting this week will seek to influence areas of foreign exchange policy, inflation, rising unemployment and economic growth. Great creativity has to come into play.

Policies to increase foreign exchange access that will cater for importation of necessary manufacturing inputs as well as stimulate economic growth are imminent. However, 2 evils may have to be considered; increasing interest rate to curb inflation and attract foreign funds (which may negatively impact the local economy in the short term) or devalue the nation’s currency and ease FOREX access to reduce the pressure on dollar demand and make more Naira available upon conversion of export proceeds to run the local economy.

Consumer demand is squeezed with rising prices (inflation) eating into their constrained budget thanks to the increase in food prices and PMS prices. Unemployment figures from NBS shows that more Nigerians are thrown into the labour market, either from having lost a job or having graduated from higher institutions (or finished NYSC where necessary). State governments are finding it difficult to pay salaries as crude oil earnings which contribute significantly to budgets of Nigeria’s federal and state governments fall short.

A grave task lay in the hands of our leaders.

Written by Emmanuel Imaguezegie

Dear God,
You Took away my favorite Singer (Lucky Dube)
Also took away my favorite Rapper (2pac)
You took away my favorite Actor (Bruce Lee)
Took away My favorite Comedian (Dede One Day)
God, Am writing this to let you know that President Buhari is my Favorite President
Hope To Hear From You Soon

Following...

Hmmm... Some other countries are already deep in the mess.
See Venezuela:
https://www.nairaland.com/3124689/sugar-scarce-venezuela-coca-cola-stop

CBN finally decides... Allows exchange rate to float more freely
http://dailypost.ng/2016/05/24/cbn-finally-adopts-flexible-exchange-rate-policy/

Emmyvans:
CBN finally decides... Allows exchange rate to float more freely
http://dailypost.ng/2016/05/24/cbn-finally-adopts-flexible-exchange-rate-policy/

I have no idea what they're up to with this.

989900B:


I have no idea what they're up to with this.

Market forces may be allowed to determine the value of the Dollar against the Naira.
That should see the official exchange rate plummeting from N197/$1 to between N260-N280/$1
Hope they also make FOREX easily accessible this time

Crude oil output for quarter 2 was forecasted at 1.6m barrels per day during the period.
With the rate at which oil installations are being attacked and output shut in by oil firms.
Q2 crude oil output forecast may drop to an average 1.4m barrel per day.

Nigeria is sure doing a good job propping up oil price on the international market.
With more forex shortage imminent, the value of the naira may slide further leading to rising import inflation. If foreign investment (or dollarsof some sort) does not close up balance of payment challenges

Finally, the CBN takes a decision on forex, provides a more floating exchange rate guideline and the market economy seems pretty excited as access to the green back is sure to improve and a level playing created for all businesses. Trust more dollars will come out from their hide-out even as foreign investors are lured back into the country...

Step in the right direction I'd say, though with a risk of further inflation but only a short time