Still on Osinbajo’s call to float the naira

What other options do we have to increase the supply of foreign currency to the Nigerian economy, or do we continue to borrow foreign currency from international lenders to meet the insatiable demand from Nigerians many of whom use the dollar as a store of value?

Nigerians currently have $ 16 billion in their home bank accounts and that does not add the dollar that is held in private fortresses in houses or buried in cemeteries and other strange places, or those held by Nigerians in foreign countries (Pandora Papers).

The main official source of foreign exchange supply in Nigeria remains revenues from crude oil sales, which currently stand at 95%, and with crude oil production falling to 1.4 million barrels per day, from more of two million, which tells you how the forex supply has declined.

Then, if you consider that 450,000 barrels of oil are taken out of that 1.4 million and traded for refined oil, that tells you that 95% of Nigeria’s foreign exchange revenue currently comes from around 950,000 barrels of oil. gross per day.

To make matters worse, the refined oil obtained by trading the 450,000 barrels of crude oil per day is obtained at current international prices but sold in local currency at non-market rates.

This means that from the already depleted revenues from the sale of 950,000 barrels of crude oil per day, the Nigerian National Petroleum Corporation and the federal government must use scarce foreign currency to make up the difference between imported gasoline and the price. to which it is sold locally. .

This leaves the federal government with only one option to maintain the supply of dollars in the local market, the continued borrowing of foreign currency from international lenders at interest to supply the Central Bank of Nigeria, which in its turn. turn, uses this to meet the almost insatiable supply for the forex.

The main unofficial source of foreign exchange in Nigeria remains remittances from Nigerians in the diaspora, and although this ranges from $ 16 billion to $ 23 billion per year, the bulk of this does not go through official channels.

Only those with no options will receive currency inflows today and trade them at the official CBN rate of N 420 instead of the parallel market rate of N 570 to the dollar, and that is why we have over $ 16 billion frozen in residential accounts in Nigerian banks.

Just imagine that the federal government recently borrowed 4 billion euros at an interest rate of 6 or 7%, and which will be used to finance the official Forex market and yet you have over $ 16 billion in bank accounts. homes of Nigerians collecting dust and cobwebs.

Now why isn’t the solution for the federal government to forcibly acquire the $ 16 billion in home bank accounts as some have suggested and the CBN rightly rejected it despite the temptations? , something needs to be done to increase the dollar supply.

When you add currencies stored in Nigerian private homes and other unusual places across the country, and then the extra billions of dollars stashed in offshore locations, the responsibility of any sane government is to come up with measures or policies to increase. the supply of dollars.

We can cry as much as we want over the diversification of the Nigerian economy and for having other sources of dollar currency supply, but this requires long term planning and putting in place the right policies with the will. to make and implement tough decisions.

So, for an import dependent economy where even gasoline which is imported at exorbitant cost and subsidized for sale locally is easily smuggled and sold across the border at considerable profit in neighboring countries, you cannot do a lot.

Only middlemen and those who engage in arbitrage currently benefit from the status quo, even going so far as to buy the forex that Nigeria borrows from international lenders at official interest rates and then sell it to those who have it. need at parallel market rate.

Like the fuel subsidy enjoyed by those who get subsidized gasoline imported at the local market rate only to sell it in neighboring countries at the international market rate, the federal government has a long history of subsidizing the wrong people. ie profiteers and this is what happens with the forex grant.

The same goes for the 13% bypass of crude oil, the intervention of NDDC, the Niger Delta Ministry of Affairs and even the upcoming implementation of the 3% allocation to host communities in under the Petroleum Industry Act of 2021 which was intended for oil-producing communities but which have all been or will soon be hijacked.

So what measures can the federal government take in the short term to dramatically increase the supply of dollars and possibly increase the value of the naira against other foreign currencies? The most obvious is to allow the naira to find its real value against these foreign currencies and in this I agree with Vice President Yemi Osinbajo.

This will have the immediate effect of drastically dropping the value of the naira with an impact on the prices of all imported items and negatively affecting those on fixed income, but to let the current situation continue is to end up in the situations. Zimbabwe and Lebanon. .

On the other hand, the floating exchange rate will allow the forex to be sourced from other sources such as those who hold dollars in home bank accounts and safes hidden in private fortresses and forex holdings in offshore sites, aka the Pandora Papers.

In addition, currency inflows from diasporic sources will also become not only official, but also exchanged through official channels, thus ensuring that there is a unified exchange rate and that all transactions incur official fees and taxes.

It will also downplay the arbitrage market, currently the scourge of the growing gap between official and parallel rates that creates overnight millionaires and billionaires who, due to their illegal income, end up failing. pay no tax.

The pressure of being the sole or main currency provider currently supported by the CBN with all its implications and the interference of government officials and the influence exerted by the CBN and bank officials over the allocation of foreign currency will be reduced. considerably.

Relieved of the burden of being the main provider of foreign exchange in the official market, the CBN can then begin to build up its foreign exchange reserves and be able to intervene on the supply side when the opportunity demands to strengthen or weaken the value of the naira.

But floating the naira and leaving it to market demand and supply will require the federal government to do more to increase its foreign exchange supply as well, and since the federal government currently derives 95% of its foreign exchange supply from selling crude oil, what can be done to get a forex increase from this source?

The easiest way would be for the federal government to ask the Organization of the Petroleum Exporting Countries to increase its oil production from 1.4 million barrels of crude oil per day to at least a minimum of, say, 1.9 billion. , a step he recently took. but was rejected by OPEC for the simple fact that Nigeria is not even able to meet its production quota of 1.4 million barrels per day.

Why is this so? What problems are responsible for it? How can these problems be treated? Considering these issues is talk for another day, but suffice it to say that these issues can be identified and addressed to ensure that daily oil production meets but exceeds Nigeria’s OPEC quota.

Taking it a step further, Nigeria will have to ask itself why it remains a member of OPEC and is tied to a daily production quota for a product that the whole world agrees will not be an energy source in 30 years. at age 50 due to climatic conditions. impact of fossil fuels.

Major consumers of fossil fuels are committed to zero carbon emissions and are committed to embracing renewable energy sources. So it makes no sense to have 40 years of oil reserves when in 20 to 30 years these reserves will have little or no value?

Ultimately, the world is in the throes of an energy crisis right now and now is not the time to limit oil production but to increase it and the OPEC philosophy as long as it goes against it. it is not in the interest of Nigeria and its current resort to borrowing from abroad to increase the supply of foreign exchange.

The other problem is that some of the Nigerian joint venture partners have put their oil lands up for sale, especially in coastal and shallow waters, and the key here is Shell Petroleum Development Company which is asking $ 2 billion for its oil assets. seeking to focus solely on its deep water oil production.

To ensure that it can increase its oil production and profit from rising oil prices, the federal government should negotiate directly with Shell and purchase its onshore and shallow water oil areas for an upfront payment of $ 1 billion. dollars per day, the balance being spread over time.

Rather than handing over these oil acreage from Shell to the newly incorporated giant called NNPC Limited, these oil acreage should be turned over to NPDC which should be removed from NNPC Ltd and listed directly on the Nigerian Stock Exchange.

NNPC Ltd is a monster with too many dead assets (refineries and pipelines) and liabilities (pensions and debts), and thus freeing NPDC to focus solely on producing oil and gas for a world that is in the throes of a energy crisis for the foreseeable future will enable the company to operate according to best market practices and enable Nigeria to position a corporate asset for the expected vacuum that will occur as international oil companies shift to sources of energy. alternative energy.

The increase in oil production resulting from the pumping of 3 million barrels of oil per day well in excess of the OPEC quota will allow Nigeria to increase its supply of foreign exchange, increase the value of its local currency and to use the income to propel its young population into the digital technology space.

  • Omose is a lawyer based in Lagos

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