Exchange rate and devaluation

Henry Boyo

Industry, commerce, as well as employment opportunities, unexpectedly, flourished for the greater part of Gen. Sani Abacha’s four-year reign, despite Nigeria’s pariah status and the stupendous treasury rape by the dictator. The question, therefore, is how Abacha’s economic team sustained the erstwhile elusive enabling environment, despite the dysfunctional economy that they inherited. Fortunately, Chief Anthony Ani, an insider in that team, answered this question, in his keynote address, at ICAN’s induction ceremony on May 11, 2016.

A summary by this columnist and excerpts from the former finance minister’s 19-page presentation follow hereafter. Please read on:

“We are an import dependent nation, therefore the naira price of dollars, required to pay for imports, will inevitably significantly impact multiple sectors of our economy. Furthermore, despite the collapse of naira rate from $2=N1 to N199=$ since 1985, the IMF, several international banks and experts and the United States of America and have goaded Nigeria to further devalue our currency. Recently, even the immediate past President of ICAN also echoed the call for naira devaluation. Conversely, I hold the view that our naira is even undervalued and President Muhammadu Buhari should therefore resist the pressure to devalue, as there is nothing to gain, because devaluation will further worsen our economic situation, especially when crude oil remains our primary export commodity.

 “Invariably, exchange rate is a key policy variable, because a viable, stable and realistic exchange rate serves as a catalyst for critical adjustments and judicious application of resources. Furthermore, exchange rate stability, attracts capital inflows, and directs other foreign exchange transactions from the parallel market  and therefore augurs well for domestic price stability and international trade”.

The naira was effectively devalued when “Nigeria adopted the IMF’s Structural Adjustment Programme in 1986, with the introduction of the Second-Tier Foreign Exchange Market. Since then, we tried all sorts of auctions – Dutch, English, American etc – of our meagre foreign exchange, but the banks, and their operators made bonanza profits from the market until things came to a head by November, 1994. The banks were selling dollars bought at N22 SFEM price to end users, and manufacturers at N128=$1. Meanwhile, Inflation was galloping at 88 per cent and lending rate was oppressive at over 30 per cent. There was serious price instability and salaries and wages were not aligned to inflation or the parallel market exchange rate. There was national discontent and the security of the nation was threatened.”

Consequently, in November 1994, the acting Finance Minister (Chief Anthony Ani), CBN Governor (Paul Ogwuma) and the Chairman of National Economic Intelligence Committee, the late Prof Sam Aluko, were ordered to find a solution by the National Security Council. “We, therefore, looked at the macro-economic variables and found that there was over-liquidity of the naira in the money market, as a result of excess profits of banks from forex arbitrage.”

“We decided to eliminate this liquidity and reduce instability and inflation. We also resolved to crash the parallel market by all means, but this was problematic, because, with barely $1bn reserves and less than two weeks imports cover, we did not have the capacity to do so, especially when overseas exporters also demanded upfront payments”.

“Ultimately, we (Ani/Ogwuma/Aluko) agreed that for the parallel market to crash, the CBN must fund the needs of the real sector, while banks sourced their own forex to fund other sectors. We also shut all other forex windows and reluctantly concluded that, an exchange rate of N80-82=$1 would be sustainable, but production and productivity must however remain our abiding watch words.”

Indeed, as soon as our recommendations were effected, the parallel market crashed from N128 to $82/$1. Furthermore, we discovered that proceeds from non-oil exports and remittances from Nigerians in the Diaspora were surprisingly nil. On enquiry, we gathered that Asian businessmen, who controlled Nigeria’s non-oil exports, persistently, falsely condemned whole shipments to be substandard and ultimately declared valueless, whereas these exporters actually sold and retained the proceeds abroad.”

“Similarly, the meters at flow stations of our oil terminals malfunctioned and remained idle for years, with the result that crude oil were shipped, for which no payments were made. Consequently, we introduced pre-shipment inspection to further seal these loopholes and open up significant capital inflows. We were equally determined to reduce our heavy dependence on food and petroleum imports, particularly.”

Furthermore, with the removal of the existing tax on overseas remittances and the introduction of other supportive laws such as the Nigerian Investment Promotion Act 1995, which guaranteed long term investments in Nigeria, foreign inflows increased, and external reserves rose to $7bn by 1997, to make the exchange rate more stable and the Naira virtually convertible. The Foreign Exchange (Miscellaneous Provisions Act 1995) also targeted foreign investors and an estimated $400bn stashed away by Nigerians with the re-introduction of domiciliary accounts.

“An important development was that the CBN now made a profit of N58 per dollar, on forex sales to the real sector; consequently the CBN was awash with naira which we applied to balance our budgets and also build infrastructure such as the Gwarimpa Housing Estate, the biggest housing estate in Africa, whereas before the introduction of AFEM, these huge profits were selfishly cornered by banks and bankers.”

Nevertheless, with substantial CBN profit from dollar sales, we did not need to borrow externally or internally between 1995-8!

“In February 1995, I proposed payment of $7bn as full debt settlement, spread over five years with nil interest, and our Paris Club creditors were very excited with this proposal. However, in 1996, during the process of analysis and verification of the entire Paris Club debt, we discovered 18 ‘failed projects’ valued at $1bn, which were never executed, even though the funds had been drawn down. The Government insisted that rather than pay, we should go to court. Subsequently, however, the IMF wrote to the Paris Club creditors not to deal with Ani or his agents. Sadly, we ended up paying $12bn rather than $7bn during the debt cancellation exercise, even when our creditors had earlier accepted 70-80 per cent discount on our debts”.

“The whole Paris Club thing was a debt trap to enforce a Structural Adjustment Programme and they used Nigerian economists, trained in North American universities for this enforcement. The debt cancellation exercise of 2003 destroyed our exchange rate mechanism, as the CBN abdicated its responsibilities as the central player in the forex market, while Bureaux de Change operators were inexplicably also licensed and funded by the CBN.”

Eventually, there were 3,000 BDCs owned by bankers, legislators, politicians, all funded with $60,000 weekly. Regrettably, with this development, few families or clans took control of the forex market and made a kill with super profits and the rest is history. Ultimately, the naira also became gradually compulsively OVER-DEVALUED. Today, the same banks, with robust support from the IMF and other financial experts are again suggesting that the naira should further be devalued, despite the absence of any positive impact from earlier serial devaluations.

Profits made by banks in respect of forex transactions remain humongous and Nigeria is the only country which frivolously re-exports its remittances, with liberal limits of over $150,000, at a time, on forex denominated personal debit cards, in a country where N18,000 ($80) is still the minimum wage! It is inexplicable that, although the naira is not convertible, remittances which are meant to stabilise our exchange rate is now re-exported with the CBN’s facilitation. This is the cause of the scarcity of dollars in the market and is also the cause of the worsening depreciation of the naira in the parallel market. Naira must not be devalued and I submit that President Buhari is right in resisting devaluation.”