As Osinbajo doubles down on forex reforms
Against the backdrop of the controversies generated from the call for market reflective exchange rate by the Vice President, Yemi Osinbajo, a former executive director, international operations at a first generation bank, has listed structural economic issues as key reason why Naira has been under pressure of devaluation.
Meanwhile, Osinbajo has said he did not call for devaluation of the Naira, contrary to some media reports, explaining that his position was for a foreign exchange management regime that is market determined.
READ ALSO:Devaluation of Naira: ACJHR frowns at Osinbajo’s statement
Osinbajo, through a statement signed by Laolu Akande, Senior Special Assistant to the President on Media,
Office of the Vice President, reinforced his position saying that under the current foreign exchange regime privileged individuals and firms are taking advantage of the wide parallel market premium to rip off the country’s foreign reserves.
The parallel market premium is the gap between the official exchange rate and what obtains in the parallel market. Presently, at N410/$ in the official market as against N570/$ in the parallel market the premium is at N160, yielding a huge profit margin to traders who do round-tripping.
His further clarification was coming as the former bank chief noted that devaluation was the easiest thing for the Central Bank of Nigeria, CBN, to do but that is not what Nigerians need now.
Expressing the view that devaluation is a sentimental policy option he stated: ‘‘The CBN can follow these sentiments and move the Naira to say N550/$1. It is quite easy. But what are it’s macroeconomic consequences? Here are a few: ‘‘Government debt service is already over 70% of revenue. A devaluation will make it to over 100% easily; ‘‘Inflation, though high at 17%, has been trending down in the last five months. A devaluation to N550/$1 will push inflation to over 25%; and Fixed income earners, which includes all government workers, will see their real wages (take home pay minutes inflation) evaporate into thin air.
The same pay they got last month, which they were already struggling to use to make ends meet, will simply buy less than half of what it bought them last month. This could ignite justifiable calls for salary increases and could cause social unrest, in a country where tensions are already high.’’
Listed other downside implication of a devaluation policy, he further stated: ‘‘Loans that were indexed on FX will be immediately repriced (higher interest rates) and terms will be made much tougher. This could lead to widespread defaults, higher NPLs and financial system instability; Imports will become much more expensive, translating into higher production costs. Producers who can will pass the higher costs on to consumers, who will pay more the same goods. Producers who cannot pass on the cost will shut down their operations over time; Nigerians who buy FX from the CBN for school fees, medical bills, BTA, PTA, etc will pay much more in Naira; and since imports value will rise astronomically and exports won’t (our main export is oil which we cannot control its price or quantity), the country’s current account balance will go into deficit and make our balance sheet much worse!’’.
He argued further that aside these arguments, ‘‘it is shortsighted to assume that the rates in the tiny parallel market (only 7% of Nigeria’s FX market), which serves many corrupt and illegal activities should determine the rate of the Naira. How can rates in 7% of the market determine rates in 93% of the market? How can the tail wag the dog?’’
According to him, given all these, it is really difficult to see why the Naira should be devalued at this time.
Making a policy recommendation he stated: ‘‘We should be looking at the more structural reasons for the sustained pressure on the Naira. For example, let us consider the following questions: Why is it that 80% of cargo ships and planes that bring goods to Nigeria (for which we pay dollars) leave our shores empty (implying we do not earn dollars from potential exports of goods they would have carried)?; What has been done about the perennial complaint of many potential exporters about the gridlock of the Ports and the myriad of illegal charges levied by a multiplicity of agencies at the Ports?; Does the Nigeria Custom Service consider itself a trade facilitation agency or a revenue generating one?; If they are a trade facilitation agency, has anyone seen their strategic plans to improve Nigeria’s international trade and ability to earn FX?; What is the Government’s budget and plans for the Nigerian Export-Import (NEXIM) Bank?; A bank that was set up to specifically finance non-oil exports.’’
He raised other related developmental issues government was expected to have engaged its policies.
In the area of education he said, ‘‘Nigerian parents now spend over $10 billion annually to educate their children in all parts of world and at all grades of education from primary, secondary and university levels.
‘‘If we could reverse up to half of this huge annual drain, the Naira will strengthen to under N250/$1. Even middle class families and entry level civil servants no longer believe in the Nigerian educational system or its quality.’’
He queried, ‘‘What is the government (at all levels) doing to change this? Can we begin by requiring that the children of all government officials at all levels (whether elected or appointed) be educated in Nigeria?; What is the government doing to improve our healthcare systems and ensure we reverse the need for Nigerians to seek medical treatment abroad even for routine checks? We can save up to $7 billion annually from this and the Naira could strengthen to less than N150/$1 if we include the reversals/savings from educating our children here.’’
He also picked holes in the government’s agro and manufacturing sector policies and said, ‘‘In the 80s and 90s, the typical basket of food Nigerians ate was almost totally made in Nigeria. Our clothes were made here with cotton from our farmers, textiles from our mills and embroidery from our tailors.
‘‘Our cars used tires made here. The cars themselves were made either in Kaduna (Peugeot) or Lagos (Volkswagen).
‘‘Today, we spend billions of dollars annually importing anything and everything! What is the government’s plan to reverse this trend? Can we begin by requiring that over the next 3-5 years, all government vehicles be made in Nigeria by Innoson Motors or any other car manufacturers? If we can reverse up to 40%, the Naira would strengthen to N70/$1.’’
On other national issues, he said, ‘‘Over the last 3-5 years, more than 5,000 men have relocated their families to Canada or other places for “better” life. And this trend has continued unabated with no end in sight. Whilst these men are here earning Naira, their major expenses are in dollars for family upkeep, mortgages, car loans etc.
‘‘This means we have more than 5,000 new men chasing dollars everyday, every week, every month. Imagine if the country gave them some hope to believe and stay, the Naira would be strengthened to N25/$1.
‘‘From CBN published reports, NNPC used to fund the CBN reserves with over $3 billion per month from sale of crude oil. This contributed immensely to stabilizing the exchange rate. Unfortunately, in the last 7-10 months, the NNPC has not funded the reserves at all, according to the CBN! What is the government doing to reverse this situation and call the NNPC to order/account?’’
In concluding, he stated: ‘‘The country’s problems are significant but fixable. The solutions are staring us in the face. We just have to be honest and work diligently to solve them rather than make cheap political statements aimed at scapegoating.’’
Osinbajo digs in
Meanwhile, a statement from Laolu Akande, Senior Special Assistant to the President on Media, Office of the Vice President, said: ‘‘Our attention has been drawn to statements and reports in the media mis-characterising as a call for devaluation, the view of Vice President Yemi Osinbajo, SAN, that the Naira exchange rate was being kept artificially low.
‘‘Prof. Osinbajo is not calling for the devaluation of the Naira. He has, at all times, argued against a willy-nilly devaluation of the Naira.
‘‘For context, the Vice President’s point was that currently the Naira exchange rate benefits only those who are able to obtain the dollar at N410, some of who simply turn round and sell to the parallel market at N570. It is stopping this huge arbitrage of over N160 per dollar that the Vice President was talking about. Such a massive difference discourages doing proper business, when selling the dollar can bring in about 40% profit!
‘‘This was why the Vice President called for measures that would increase the supply of foreign exchange in the market, rather than simply managing demand, which opens up irresistible opportunities for arbitrage and corruption.
‘‘It is a well-known fact that foreign investors and exporters have been complaining that they could not bring foreign exchange in at N410, and then have to purchase foreign exchange in the parallel market at N570 to meet their various needs on account of unavailability of foreign exchange. Only a more market reflective exchange rate would ameliorate this. With an increase in the supply of dollars, the rates will drop and the value of the Naira will improve.
‘‘The real issue confronting the economy on this matter is how to improve the supply of foreign exchange, but this will not happen if we do not allow mechanisms like the Importers and Exporters window to work. If we allow this market mechanism to work as intended, we will find that the Naira will appreciate against the dollar as we restore confidence in the system.’’
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