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Naira-for-crude Deal: An Ingenious Option To Uphold

Nigerian policymakers sometimes assume that those who will implement and benefit from the policy understand the intended purpose. It is not always the case, and there is a need to explain or provide more details about the expected impact and implications of new policies. It is obvious that the members of the immediate past management of the Nigerian National Petroleum Company Limited did not understand the rationale and benefits of the naira-for-crude policy when it was introduced unless they were just out to frustrate Dangote refinery as a competitor and, invariably, the government. It is always necessary to explain vividly and seek the cooperation of those who will implement policies in the context of what is referred to as moral suasion. If the NNPCL’s erstwhile managers understood the policy and loved the country, they would do all that was necessary to make sure there was an improvement in the output of crude oil to prevent private oil refineries from importing crude oil. They can then reach an agreement that a proportion of the exported refined fuel and other by-products of the crude oil will be paid back in foreign currency and into Nigeria’s foreign accounts. It is like the export tax being paid into our reserves. The government’s decision to uphold the policy with no intention to repeal it in the immediate future is very desirable and commendable. Using foreign currencies to pay for local purchases is injurious to the value of the domestic currency and the economy. Such payments weaken the value of the domestic currency, as customers have to use the domestic currency to buy foreign currency or currencies, thereby putting undue pressure on the local currency. A weakened domestic currency, and in this case, the naira, has negative and grave implications for several activities in the economy. It affects domestic prices by causing inflation and rising cost of living; it prevents domestic investments and inflow of foreign investments; it has implications for the competitiveness of export goods in the international markets; and it prevents domestic currency from acting fully and beneficially as a medium of exchange in the economy. Let us look at these. Devaluation weakens a country’s currency in value against other countries’ currencies. The Nigerian currency is currently assumed, within the context of a flexible exchange rate regime, to be floating against foreign currencies. So, it can appreciate or depreciate depending on global market forces. That is, it can move up strongly or down against the foreign currencies, respectively. However, the government or the central bank can devalue the currency officially if it feels that it is overvalued or for whatever other economic and non-economic reason. When a currency continues to appreciate and gets over and above an assumed world average, the country will lose importers of its products to other countries producing the same goods and services with a lower currency value. Of course, such global actions will make the currency depreciate as the country begins to buy more from and sell fewer goods and services to the rest of the world. Eventually, the value returns to what we term an equilibrium price. If, on the other hand, the currency depreciates below the equilibrium level, the country’s goods and services become cheaper and attract importers from other countries. The resulting flow of funds into the country makes the local currency appreciate until it reaches that equilibrium point. The same trend in demand for goods and services and fund inflows occurs when a central bank deliberately devalues the domestic currency. The fact is that a country devaluing its currency must have goods and services to trade internationally; otherwise, it is a wasted exercise. That is why Nigeria has never achieved positive results with its devaluation. We do not have many market-commanding non-oil exports, and the price/quantity of crude oil, which is our major and dominant export, is determined in the international markets. We do not have control over either the price or the quantity of crude oil for export. The price is determined by the market and the latter by the Organisaiton of Petroleum Exporting Countries. But the objective of our devaluation is different, and it is erroneous to say that it failed. Devaluation of the naira by the CBN has always been done to get more of the domestic currency for crude oil payments in dollars. That is, the dollar revenue is monetised in naira. The monetisation results in more money for sharing after devaluation and creates a money illusion for various governments that would have a share in the revenue. That is what this government did after it was inaugurated. The naira was officially devalued massively after the subsidy on imported fuel was removed. The combination of the two policies made funds available for spending (and stealing?) to the tiers of government but also made domestic prices rise rapidly. If the money had been used to fund and expand production, the resulting inflation would have been moderate and employment generated, but it was used for the consumption of goods and services that were in short supply, thereby causing inflation and inflation, and part of it was converted to foreign currencies for illegal capital outflows to accounts of politicians abroad, extending the weakening of the naira against foreign currencies. Unfortunately, industrial production in Nigeria is import-dependent, just as the consumption of petrol and petroleum products is a major import item. The continuous demand for forex to meet these production and consumption obligations further weakened the naira. The inability to meet the obligations fully depressed the industrial sector and made the importation of finished products inevitable. Such imports (raw materials and finished goods) with a devalued naira are bound to be expensive, with a resultant rising cost of living or deteriorating standard of living. The depressed industrial sector will, in the first instance, cause the rate of unemployment to rise, and these unemployed youths serve as foot soldiers in public demonstrations. Foreign investors are always concerned about the labour market and the cost of labour, the population and national income, and the exchange rate. The first two have to do with production, the next two are related to the consumption of products, while the last is concerned with the repatriation of profits. We have an active labour market with less disruption for production despite recent workers’ strikes. The population is huge, though with low income. Nonetheless, the population size and income provide sufficient markets for the sales of goods and services for any foreign investor. That is why the President’s efforts at mobilising foreign investments yielded partial success in terms of promises. The Minister for Trade and Investment recently informed the nation about the billions of dollars in investment promises. The weak currency is a major deterrent to actualising the promises. If businesses make huge profits in naira, they have to exchange the funds for one of the key currencies, which, given the current exchange rate, will amount to a fraction of the original naira amount. The naira-for-crude deal is one major and affordable way of reducing pressure on the value of the naira in the production equation. Meeting up, domestically, with the required supply of crude for local refineries and thus cancelling importation of crude oil is the second major step towards strengthening the naira value or appreciation of the naira against foreign currencies. We can then expect potential foreign investors to fulfil their promises. The execution of the naira-for-crude policy also has positive effects on domestic prices in terms of eliminating some importation costs like shipping, insurance and tariffs. This brings down the costs of production and subsequently the sales prices of petrol and petroleum products. We are already noticing the change in pump prices of petrol, which hopefully will bring down domestic prices, especially in the areas of transportation. If the country can remove the use of foreign currency in the oil sector production processes, a huge relief from pressure from the forex market on the naira will be noticed, and naira appreciation could become a reality. In such situations, more forex will be available for the importation of raw materials and spare parts in other production sectors. Foreign investors will be encouraged to move in. The resultant naira appreciation and increase in production will cause a fall in unemployment and inflation, with a rise in real wages. Nigerian exports will become more competitive internationally because the cost of production will have fallen. Hopefully, the policymakers will not introduce new policy shocks as usual.

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