Everywhere I went last week, talk was all about how the naira was making a remarkable recovery. How doomsday prophets have been shamed. And, how, finally, the central bank appears to have rediscovered its mojo. The mood was always infectious, no doubt. But it was hard, looking at all the happy faces and in the face of so much praise and worship of a munificent God (for making it easy to meet “our dollar payment obligations”), to rain on those parades.
Still, I could not but be baffled by it all.
Basically, what is happening is that the Central Bank of Nigeria (CBN), having coming into a new hoard of dollars, is spending much of it at the retail end of the local foreign exchange market. This new supply of dollars means that more Nigerians who require it are getting some for all or most of their needs; and this is supporting the naira’s new exchange rate.
How did the CBN come into its new hoard of very expensive money? Because structural reforms have made the economy more productive, and new export streams have come on that the CBN is parlaying into the economy’s earnings? Because a resurgent real sector, newly freed from the bureaucracy and red tape, which held it back previously is now producing enough locally to free up supplies of dollars that would have gone before to importing necessities? No! Instead, the nation’s gross external reserves are up because oil prices are up, and probably because domestic production and export are also up.
In essence, nothing has changed. Managers of our economy have not learnt any lessons from the straitened circumstances we found ourselves in after the bottom fell out of the global oil market in 2014. Consequently, if today, oil prices were to head back into the US$100/barrel territory, the monetary authorities will deploy the new wealth in driving up the price of the naira — which is how we have lived since the 1970s, and why, each time oil prices plumb new depths, our economy suffers.
The “Dutch Disease” was supposed to be an affliction. Something that happened to those who are not aware of it. Today, though, we all know the pathology of this ailment. Following the discovery of some new source of export earnings — usually a primary resource, an economy invests in extracting and exporting this good, earning on the back of these activities sizeable amounts of foreign currencies. The foreign currency inflow subsequently pushes up the price of the domestic currency — and of all domestic activity denominated in that currency. These relatively higher prices mean that the output from domestic economic activity are no longer affordable. Or put differently, the processes by which they are produced are no longer competitive.
On the other hand, imports become cheaper. So as domestic resource conversion processes atrophy, nationals of such economies appear to develop a bulimia for the consumption of goods and services from other economies. This happened to most resource-dependent economies in the 1970s.
Norway’s response to the threat from the “Dutch Disease” was to build up a huge sovereign wealth fund. By investing in assets in other economies, it ensured that the sudden wealth from its new oil earnings did not distort the allocative efficiency of the local economy, while building up a huge nest egg in foreign investment. One could argue that emerging market and developing economies like ours are not permitted this luxury. Shortages of schools, bridges, hospitals, roads, court houses, police stations, etc. make it difficult to take money from such economies and invest in assets in economies where this infrastructure are available.
We ought, then, in the light of new dollar export earnings to be looking for ways to spend such money in boosting the domestic economy’s productivity in a way that does not fuel inflationary pressures, or otherwise distort relative prices within the economy. Instead, we appear to favour inflicting both the malaise and the symptoms of the “Dutch Disease” on ourselves, in the quest to bequeath a “strong currency” on the economy.
There is a not too small matter of equity involved here, too. The reserves with which the central bank is propping up the naira’s value are a national heirloom. In other words, they belong to every Nigerian. Yet, only a very small number of our nationals have need for personal travel allowances, and business travel allowances. Or for that matter shop on Amazon. Why should domestic policy concentrate on providing subsidies for the consumption of this small number at the expense of the needs of a much larger, and invariably poorer (not to mention, vulnerable segment) of the populace? Simple, the answer to this question, is. Because this segment writes and reads newspapers, listens to and is noisy on television and radio programmes, and are denizens of the local social media space. Elite-capture of regulatory institutions? I think so.
To extend this argument, it’s important to note that the retail segment of the foreign exchange market accounts for anything between 10% – 16% of total domestic foreign exchange demand. Given that a larger portion of the local demand for foreign exchange is settled outside this market, the central bank’s response to the urban petty-bourgeoisie’s existential challenge does not qualify as a structural one. Not surprisingly, despite the successes recorded by the central bank in pushing the exchange rate of the dollar down on the Marina market for foreign exchange, domestic prices have yet to trend down. I hear that prices on the “transfer market”, where the bulk of domestic dollar demand is processed haven’t been as “blessed”.
Even if one were to concede, for the sake of argument, that a strong currency betokens national economic virility, how do we handle the transgenerational argument around our extractive resources? Put simply, we are invited in this latter discourse to remember that the oil resources that we are currently exploiting are not renewable. Accordingly, they belong to all generations of Nigerians — technically, at least. So, two generations, from now, when the oil would have run out, how would we explain the uses to which we put a resource so scarce?
It clearly wouldn’t be proper to say we used it all to pay PTA and BTA!