Columnists
Naira and the exchange rates
In exchange rate, when Nigeria sells oil, she is paid in dollars, but when Nigeria imports, she spends those dollars also.
So, picture an account, call it Current Account, and one side of the Current Account label “Debit”, on the other side of the scale, label “Credit.”
Debits are Imports and payments made with foreign currency, Credits are Exports and Payments received in foreign currency. When Nigeria sells crude oil, it’s an export, and a $ payment is received. When Nigeria imports cars, $ payments are made. Get the picture?
Here is the relationship, when you import or make a foreign currency payment like Joint Venture cash calls, you debit your Current account, however when you export or earn/receive foreign payments like Petroleum taxes, you credit your Current account.
Let’s assume Nigeria has a net credit or current account surplus. That Current Account surplus flows into Nigeria’s foreign reserves at the CBN. Remember, we sell oil in US Dollars and pay for car imports also in US dollars, thus what hits the reserves are dollars.
Now, the Central Bank of Nigeria (CBN), as the Federation’s bankers, manages the foreign reserves account. The Federation i.e. the Federal, State and Local Governments retain a sharing formula for the US Dollar in the foreign reserves, i.e., the net of exports and imports.
When Nigeria makes export earnings in USD, the CBN exchanges the US Dollars for Naira and retains the US Dollars. Thus, the dollars are owned by the CBN, the Federal and States Naira allocation and is shared via the Consolidated Revenue Fund (colloquially referred to as FAAC).
So, as you can deduce, if exports or forex taxes go up, foreign reserves go up, if imports or forex payments go up, foreign reserves go down (I am being simplistic).
Now to exchange rate, when Nigeria sells oil, she is paid in dollars, but when Nigeria imports, she spends those dollars also. If Nigeria exports more, and earns more US Dollars, there is less pressure on the CBN to supply USD to the market, but if Nigeria imports more, she needs more US Dollars, which puts pressure on the dollars reserves.
Imports mean more US Dollars is needed to fund payments for import. To make Naira rise in value, one way is to reduce imports (or increase exports), because that means fewer dollar requests, making the Naira stronger. Got it?
- We now see a relationship developing…
- More exports mean US Dollar reserves rise, the US Dollar falls, and Naira rises.
- More imports mean US Dollar reserves fall, the US Dollar rises, and Naira falls.
- So, does Nigeria export more than she imports?
[READ MORE: Ghana’s Cedi becomes investors’ delight ahead Nigeria’s Naira)
The answer is Nigeria has net export position, according to the National Bureau of Statistics, as at Q3 2019, Nigeria’s Export-Import figures in N’billion is N5,2885 to N3,8991. However, Nigeria has had a positive current account for years because of overreliance on one main export commodity, crude oil. Yes, non-oil exports are rising but crude oil has guaranteed a positive balance of trade.
So, remember our relationship, “More (oil) exports means US Dollar reserves rise, the US Dollar falls, and Naira rises.”
What happens if oil prices fall or imports rise? Then Nigeria’s revenues from crude oil will shrink. With less US Dollars in the Foreign Reserves, the US Dollar demand rises and Naira will weaken….which is exactly what has been happening recently.
Latest: his is why the CBN is seeking to curb a fall in the foreign reserves and subsequently, a fall in Naira by banning many items from the CBN funded US Dollar market.
What should Nigeria do?
- Speed up reducing petrol imports by local refining PMS and saving forex used in imports of PMS. The available data from the Bureau of Statistics indicates that fuel accounts for over 40% of Nigeria’s total foreign exchange expenditure on imports annually. One commodity, 40%! We have not added rice yet.
- Pass the PIB so that more investors can enter the downstream sectors, build small modular refineries to refine petrol locally. The problem with the petrol subsidy is that petrol is imported, not the subsidy itself. If Nigeria stops importing PMS or scraps PMS subsidy, the value of her currency will rise in relation to the US dollar.
- Don’t just ban imports, go to the local manufactures of soaps, food, textiles, etc. and introduce incentives to drop their costs of production to enable them to compete with foreign imports. E.g., pay them 100% rebate for their cost of diesel, offer them Export Expansion Grants. The goal is to make a locally made bar of soap, for instance, half the price of an imported one.
- Push non-oil exports aggressively, especially agriculture proceeds. It’s not easy but it’s necessary.
- Expand the tax base, diversify government revenues away from sharing oil income.
- Make it far easier for Nigerians to receive remittances from abroad. This will reduce pressure on CBN funds. Remittances to Nigeria from abroad in 2019 was about $25b, far more than FDI and what the Federation shares from oil sales.
- Attract more Foreign Direct Investment and Foreign Portfolio Investment. We have the market, we speak English, we are nearer to Europe and America than Asia. We need to be aggressive and offer incentives to companies to come to Nigeria and invest. One way is to progressively work to improve our score on the “Doing Business in Nigeria” index and eliminating multiple taxation. A company like MTN pays “levies” to Local, state government and Federal governments plus two competing regulators just to set up a telecom mast. Don’t ignore devaluation as a strategy
In Summary, Nigeria is simply paying the price for over-dependence on one main forex generating export. The policy of “get oil, sell oil, and share oil” must stop.
Nigeria should replace it with “get oil, sell oil, pay 10% of gross sales to Sovereign Wealth Fund, then share oil money.” Any future drop in oil prices will create a large deficit because Nigeria has no other savings or forex generator.
It’s our problem, we can fix it.
Columnists
Emerging concerns on crude oil price dents economic recovery
The economy continues to face severe dollar shortages due to lower oil receipts which continues to pressure the nation’s FX reserves.
Yesterday, Brent crude oil price settled at US$41.44/bbl, down 10.7% from 6-month high of US$45.86/bbl. We note rising emerging concerns on the outlook for oil price in the global market. Cases of coronavirus are now rising faster in many European countries that had earlier taken gradual steps to open up their economies. For example, in the United Kingdom, Prime minister Boris Johnson stated the possibility of another lockdown to curtail the recent resurgence in new cases of infections. Furthermore, Libya (who has not been producing crude) announced the lifting of the force majeure on some oilfields & ports where fighters no longer have their presence. This implies Libya would resume production soon which may lead to a glut in the crude oil market particularly as the country is exempted from all OPEC cuts. The fear of increased supply comes amidst fragile demand for jet fuel.
The renewed concerns around crude prices is an unwelcome development for Nigeria considering the fact that hope of an economic rebound is largely hinged on sustained rebound in crude prices. Last week, the Minister of Finance highlighted that the country has suffered a 65% slump in revenue largely due to weak oil revenue. Furthermore, the
economy continues to face severe dollar shortages due to lower oil receipts which continues to pressure the nation’s FX reserves. In addition, external trade condition continues to worsen with a trade deficit of N2.2tn in H1 2020. With oil prices still down by c.30% from 2019 levels amidst the nation’s pledge to OPEC cuts, we do not expect any significant improvement in external conditions. However, we believe news of a decline in crude prices may provide succour for the Nigerian consumer given that lower crude price is expected to translate into lower petrol prices following the deregulation of the downstream sector.
That said, we reiterate our position that the diversification of the economy from oil remains the key strategy in reducing the vulnerability of the Nigerian economy to volatilities in oil market. The non-oil economy (which accounts for c.90% f GDP) remains crucial and its potentials can be best exploited by the private sector.
CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.
Columnists
Are we heading towards a food crisis?
The government may need to review the protectionist measures in place in order to avert a food crisis.
Based on the selected food price watch data for August 2020 released by the National Bureau of Statistics (NBS), major consumer staples showed substantial increases between August 2019 (when the land border closure took effect) and August 2020. The steep price increases across the food items is consistent with the increase in food inflation from 13.17% in August 2019 to 16.0% in August 2020. Of more concern is the fact that rice, the most
widely consumed food staple among consumers showed substantial increase in the two variants; local sold loose (up 37.5% y/y) and imported high quality sold loose (up 40.7% y/y).
Explore the Nairametrics Research Website for Economic and Financial Data
READ: Nigeria among countries to be worst hit by food crisis globally
In our view, the predominant factor behind the surge in the prices of major food items is the closure of the land borders, which has been exacerbated by administrative controls employed by the monetary and fiscal authorities in rationing foreign exchange. We recall that in July, the CBN included Maize on the list of items ineligible for FX from official sources. Recently, President Muhammadu Buhari ordered the Central Bank of Nigeria (CBN) not to allocate foreign exchange to importers of food and fertilizer. We also understand that heavy rainfalls in the northwestern part of the country have also affected farmlands, as the head of Kebbi state branch of the Rice Farmers Association of Nigeria revealed that about 90% of the 2 million tons of rice to be harvested were destroyed.
READ: Has the President erred in stopping CBN from funding food imports?
The persistent increase in the prices of food items despite the protectionist measures implemented by the government suggests that local production still lags consumption significantly. Considering the weak harvest season due to the impact of the global pandemic amidst higher distribution costs linked to higher PMS prices following the deregulation of the downstream sector, we believe price of food items will continue to trend upwards.
Additionally, we expect the pass-through impact of the devaluation in the local currency to put further pressure on imported food inflation. Overall, we think the government needs to review the protectionist measures in place in order to avert a food crisis.
CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.
Columnists
Has the President erred in stopping CBN from funding food imports?
What implication does the President’s directive to the CBN hold for the economy?
The President of Nigeria, President Muhammadu Buhari, last week said, “I am restating it that nobody importing food or fertilizer should be given foreign exchange from the Central Bank. We will not pay a kobo of our foreign reserves to import food or fertilizer. We will instead empower local farmers and producers.”
Why is the president stopping the CBN from funding food imports? The answer is simple. The CBN Exchange rates are cheaper than autonomous sources. The CBN lists the exchange rate for the Dollar at $1 to N379, however the Naira is being sold on the parallel market at N440. Hence, importers prefer to access CBN funds to import, because it reduces the cost of those imports. In effect, at N379, the CBN is subsidizing those imports via a ‘strong Naira’
The President’s directive is thus in line with his new overall push to eliminate all subsidies especially subsidies funded by the scare US dollar. In this aspect, the President is simply seeking to protect the foreign reserves which are paying for other imports. So, he is right.
READ: CBN to set up $39.4 billion infrastructure development company with AFC, NSIA
Is this a wise strategy?
Nairametrics earlier reported on the NBS recently released report on Nigeria’s total spending, which indicated that about N22.7 trillion was spent on food in 2019. This is 56.7% of the total spending (N40.2 trillion) for that period.
Where does the food Nigerians eat come from? Clearly Nigeria has a large agricultural base, but a significant proportion of Nigeria’s food is imported, and the cost of those imports have risen, as the value of the Naira has depreciated in relation to the US dollar.
(READ MORE: Agrorite leading the fight against food insecurity using Agtech)
According to data from the NBS, Nigeria’s spending on food and drink importation increased from $2.9bn in 2015 to $4.1bn in 2017, but dipped in 2018.
Have these imports plus local production met local demand on a consistent basis? The answer is no. Take rice for instance, the BBC reports that, “Between 2015, when the foreign exchange restrictions for rice came into effect, and early 2017, the price of a 50kg bag of rice went from $24 to $82 and fell in mid-2017 to $34, but in June 2019, the price stood at $49.”
The law of supply in economics, states that when the price of a commodity increases, its supply also increases. Hence, there is a direct relationship between price and supply of a commodity. In other words, if the price of rice goes up, more suppliers will enter the market to supply rice.
READ: Naira devaluation would affect our profit margins – Flour Mills
However, In Nigeria, as the price of food is rising, the NBS in the latest Inflation report, says the composite food index rose by 15.48% in July 2020 compared to 15.18% in June 2020. This rise in the food index was caused by increases in prices of Bread and cereals, Potatoes, Yam and other tubers, Meat, Fruits, Oils and fats, and Fish. (essentially everything). The NBS says, the average price of 1kg of rice (imported high quality sold loose) increased year-on-year by 37.72%.
So why has the supply of rice not risen to correspond with rise in prices? Well, because the supply of rice and other foodstuff have indeed risen, but the problem remains logistics processing & storage.
In Nigeria, you only eat corn during corn season, same with mangoes, and tomatoes. Prices fall during harvest, then rise after harvest. The problem is not just with the harvest, but getting that harvest to market, storing the excess, and processing its supplies all year round. Therefore, imports are needed to plug supply holes.
READ: CBN removes “third parties” from buying forex routed through Form M
Nigerians in 2019 alone spent N1.9trillion or 4.7% of their budget on rice alone. When the President banned food importers from getting the CBN dollar at N379; he simply pushed them to import rice at N440; a N61 difference that will be added to the cost of imports, and will fuel imported inflation.
Where the president got it wrong is trying to fix a local logistics problem with a foreign exchange fix.
READ: Official: Nigeria spends N1.2 billion only on imports of Arms and Ammunition
The solution is to go back to the various food supply value chains, de-risk and de-cost them. If food is cheap and plentiful, there will be no need for imports and inflation will fall.
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Oreoluwa
February 25, 2020 at 8:29 am
I like the way you explained it all. All the foreign reserve thingy used to sound foreign to me. Now I understand better.
Gbemz
February 25, 2020 at 11:24 am
You really simplified the explanation. Kudos
Peter Iteka
February 25, 2020 at 12:12 pm
This is easy to understand.. Thank you for breaking it down. This over reliance on Oil is very irritating. Makes us look lazy in our thinking for other source of income.
Ajibola Joel victor
February 25, 2020 at 1:24 pm
What a good expkanation
Rilwan
February 25, 2020 at 1:48 pm
Very elaborate and detailed piece. Well done.
Rilwan
February 25, 2020 at 1:49 pm
Very detailed explanation. Well done and thank you.
Idowu
February 25, 2020 at 6:58 pm
If truly Nigerian government is serious about exporting, it shouldn’t narrow everything on crude oil. Where I work is a private organization that’s into processing of Shea nuts to Shea butter in very large quantity. The company has made over 1000 tonnes of Shea butter and unable to export it due to seaport congestion and this has really affected the company in many ways. If exporting is the major thing that makes our currency to have value, the federal government should encourage the private sectors that’s into production of different things
Michael
February 26, 2020 at 8:52 am
What a good article. I learnt a lot.
Thank you.
Diversification in economy is the way out. Once this happen, our currency will be more valuable.
Evangelist Adepoju Zacheaus
February 26, 2020 at 9:33 am
Please don’t save any 10% or more of Oil money in SWF because history has proofed AREWA Nigerians will wake up one day and waste it on one civil unrest or religious chaos!
Let every state share use it either to develop their state or squander it on pilgrimage!
I. S.
July 10, 2020 at 8:53 am
As a foreigner with many years of doing business in Nigeria, I find the Nigerian people are charmingand resourceful. Work ethic could be better, but that requires a fair sharing of profits with them as better pay and training, and fewer fat cats forming a nexus that supports each other but ignores the people actually producing value.
This last is where corruption and nepotism play a huge part in damaging the economy. This is for the government to control, without killing capitalism at the same time. Not easy, but that is the leadership which is needed.