Although the Central Bank paints that picture, the burden of “boosting supply into the economy” is not only for them to bear. It is a combination of monetary and government policies. The aspect of monetary policy is in their jurisdiction as the Apex bank coordinates central bank activities that are directed toward influencing the quantity of money and credit in an economy.
But government policy refers to the government’s decisions that affect the economy. The Central Bank is not responsible for policies that would attract investment into the country, ease of doing business, diversification of revenue, the infrastructural provision that would help local production and curb excess importation, and the incessant importation of petroleum products into the country.
The dependence on oil revenue has continued to prove its unreliability. As much as two-thirds of Nigeria’s crude for October exports have yet to find buyers. India and Europe are not buying as before. The Indian Oil Corporation, our largest Asian buyer is purchasing little drops of our oil.
Contextually, they are currently purchasing 1-2 million barrels per week, which is relatively lower than the 20 million barrels per month they bought before the pandemic. Additionally, Nigeria’s crude oil production plunged to a record low of 1.24 million barrels per day last month as a result of lingering disruptions at the key Forcados export terminal. Nigeria’s supply forecast looks to stay below OPEC’s quota as operational setbacks continue. So the country currently has a demand and supply problem.
Another enemy of the naira is importation. The largest oil producer in Africa in the 2nd Quarter of 2021 imported lubricating oil, gas oil, and petrol at 68 billion, 152 billion, 782 billion naira respectively. Money paid for these products are sourced in dollars and the inadequacy of our refineries means we need to import more.
The Central Bank has also told manufacturers to source raw materials locally and has issued the same advice to traders that local production is the way to go. The Central Bank’s overarching embrace of the Federal Government’s duties will only continue.
One key factor in the death of the naira is the dearth of significant players in the foreign exchange space. There is the belief that the CBN should re-introduce the Bureau De Change operators. A foreign exchange market with regulated and informed BDC operators will kill speculative activity at the parallel market.
To corroborate this stance, we will examine Milton’s Friedman paper “The Case for Flexible Exchange Rate.”
Milton Friedman presents a more positive view of speculators and argues that speculative noise traders will be brushed aside by informed speculators. Friedman argues that “speculation will only be destabilizing if speculators are uninformed, trading on noise with a tendency to buy when prices are high and sell when prices are low.” For Friedman, informed speculators can help to stabilize markets.
Intuitively what this suggests is the market needs informed speculators. In Nigeria’s case, the Bureau De Change operators can play this role and their re-introduction would boost market sentiment signifying “supply” and not “tightening” which the country is currently experiencing.
In the meantime, Nigeria’s Finance Minister Zainab Ahmed told reporters that Nigeria will raise about $3 billion selling Eurobonds in the second week of October.
The government has approved to raise $6.1 billion from overseas, “so we are looking at doing half of that in the Eurobond market and the other half from bilateral and multilateral sources,” the minister stated.
This coincides with the report that the CBN is planning to boost dollar liquidity in the short term. The SDRs of $3.35 billion received from the International Monetary Fund have helped shore up the reserves and will help stabilize the currency along with this Eurobond sale. Till then, we hope the naira appreciates and eventually converges with the CBN rate.