CBN’s new forex regulations

IT is comforting to note that sequel to the new forex regulations rolled out by the Central Bank of Nigeria (CBN) last week, the naira has been regaining its strength against major currencies. The naira, which was trading against the dollar at about N520/$ just a week ago, is now trading at about N440/$, following the pumping of dollars into the forex market. The feat is commendable.

The CBN’s strategy is to target the supply of dollars to those segments of the market that usually resort to black market operators to source forex as a result of exigencies. These include parents who have to pay their children’s school fees and those who have medical bills to settle. It also plans to clear the backlog of demands for forex by retail users. Consequently, in a little over one week, the CBN has released about $800 million into the market. This has eased access to forex from the official windows to these categories of users. They no longer have to patronise the street retailers of forex and that has reduced the pressure on the naira.

There is no doubt that the relative peace in the Niger Delta region, which led to the upping of the country’s daily crude oil production, coupled with the appreciation in the prices of crude oil, resulted in the swelling of the nation’s foreign reserves as well as excess crude accounts from where the dollars which the CBN released to the market were drawn. This means fortune has smiled on Nigeria. This also means that the resurgence of the naira is a consequence of luck. But these pertinent questions need to be asked: For how long can the nation depend on luck? How far can it stretch its luck? For how long will the CBN continue to flood the forex market with dollars?

The plain truth is that this strategy of pumping dollars from the foreign reserves to defend the naira is not sustainable in the long run. If the prices of crude oil should crash or restiveness should revisit the Niger Delta region, the nation would be back to square one. This in essence means that to avoid a reversal of fortune and a return to the era of one dollar going for over N500, the CBN has to think beyond the current strategy and come up with policies that will strengthen the economy as well as the currency. Great nations don’t count on luck; they depend on well thought-out and implementable policies. Nigeria should not depend on luck; the government ought to take charge of the economy by putting in place the  right policies that will shield it from the vagaries of crude oil prices or restiveness in any part of the country.

Those in charge of fiscal and monetary policies should come up with robust policies that will facilitate manufacturing activities within the country. It is quite worrisome that the latest guidelines of the apex bank only address consumption, not production. The CBN specifically makes provision for those who need forex for consumptive activities but ignores the concerns of those who need it for manufacturing. Nigeria needs to walk its talk. If the nation wishes to boost local production, it should enact policies that would make this happen.

Nigeria is import-dependent; that means it needs dollars for importation. So, if there is a slide in supply, there will be crisis.  A way out of this is to encourage local production of many of the items imported. While the nation is on the long walk to becoming a producer of what it needs, the government should formulate policies that would promote import substitution so as to scale down our need for forex. Putting in place policies that would stimulate local production targeted at exportation will also take the burden of flooding the market with forex off the CBN. If there are Nigerian companies that are earning forex locally, the CBN will have less to do with forcing the value of naira up. The naira’s value would respond to the quantum of forex available locally.

So, rather than deploying the bulk of the nation’s burgeoning foreign reserves and excess crude account to defending the naira, the government should deploy the resources to putting in place critical infrastructure that would stimulate and sustain local production. Unless this is done, the current intervention by the CBN will only be a placebo treatment, something to soothe the pain but never sufficient to heal the wound. Nigeria deserves much more than that.