January 25, 2021 / 09:12 AM / By Michael Ogunremi for Utopianomics / Header
Image Credit: Port Calls
The Central Bank of Nigeria (CBN) is embroiled in a complex dilemma of attracting foreign exchange earnings, growing the economy, and achieving price stability. Some of the policies introduced to achieve these objectives are counterproductive to some of the objectives and productive to others. The fact remains that the CBN is doing too much and because they want to achieve a lot, they are forced to introduce some policies that could significantly hinder the economy. An example of such a policy is the recent proposal of the CBN to ban exporters who do not remit their foreign exchange earnings through the official FX market from accessing the banking system for future FX transactions.
This recent move by the CBN speaks to stifling the existing trade process in Nigeria. Let's start from the obvious, exporters often require FX to import some of their primary inputs. As of September 2020, news sources report that the CBN has a backlog of FX demand in the sum of $2 billion. If exporters, who are importers at other times, cannot access FX for their imports, why should they route their FX earnings through official sources? It appears unfair to exporters. If the CBN wants all export earnings to go through official channels, can they guarantee these exporters FX when they need to import? Of course, No!
Every business is out to make profits; when they turn out profits, they can pay their taxes easily to the government and everyone is happy. Should exporters be forced to comply with this proposal from the CBN, they will sell their Dollars for N390 per dollar. Even if the CBN decides to be benevolent, they could only offer N410 at best for the export earnings. Imagine an exporter who earns $10,000 and sells it to the CBN, he will get N3.9 million in exchange. In the parallel market, he could sell at N460/$ at minimum. This means he could have gotten N4.6 million. A loss of N0.7 million will affect their export businesses. This loss could have been used to export more products and earn more revenue. This will also drive taxes to the government.
Again, if the CBN is demanding the hard-earned USD of exporters, the puzzle is that the government is asking for revenues that they did not provide enough infrastructural support for. Quite right, there are CBN policies that are supporting exporters, but the challenges exporters face is also enormous. For instance, an agric exporter has to use traditional farming methods to grow crops; there is no mechanization; there is no security for their lives and their farms up north; the roads leading to the ports where the products will be exported are bad; at the port, there are all forms of red-tape, bureaucracy, and corruption. With all these impediments in place, it appears wrong to demand USD earnings from exporters.
No doubt, the CBN has an overwhelming FX problem. They have explored almost every means to attract FPIs and remittances to support crude oil earnings, but the government boxed itself into this problem. While everyone is recommending diversification as a solution to this FX crisis, it is a long-term solution for Nigeria. What can be done immediately? At the top of my list would be floating the currency. This approach was adopted by Egypt some years ago and today, their currency has gained momentum against the dollar. It will be difficult at first, considering an import-oriented economy like Nigeria, but with committed leadership and institution in place, the result will be improved FPIs to support the reserves and exchange rate.
What the CBN should understand is that they cannot keep adopting the same approach and expect a different result. Even if this policy takes off and exporters comply, without fiscal support like a huge tax cut for exporters, scrapping certain export fees, and improved export infrastructures, there will be an insignificant effect on the economy. Moreover, export is a huge pulley for growth. China came this far because of its production and export. Therefore, a policy that discourages exports will curtail growth and Nigeria needs a whole lot of growth.
It is likely that this policy will fly, and exporters will be coerced to comply, but the CBN and other policymakers should bear in mind that anti-export policies are not palatable for growth.
About the Author
Michael Ogunremi is an economist with PricewaterhouseCoopers Nigeria. He is a specialist in economics, finance and business. He is steadily growing as an economist by working on myriads of economics and sector-specific research projects with skills in econometric modelling and macroeconomics analysis.