Follow Us on Google
A trade deficit in simple terms means the country is importing more of what it needs- this generally results in loss of jobs and decline in economic growth. According to a report from the Bureau of Statistics on foreign trade, 2021 first quarter report, Nigeria spends an average of $10 billion and estimated N508 billion of imports to meet its food and agricultural production shortfalls of mostly wheat, rice, poultry, fish and consumer-oriented food services. The country’s food insecurity is even made worse by rapid population growth.
Nigeria boasts of the largest youth population in Africa, most of whom are unskilled and unemployed but can be gainfully employed in agriculture and food-oriented services hence the wisdom in CBN Anchor Borrowers Fund.
The CBN’s financing of the Anchor Borrowers Fund had so far granted loans to about 4.8 million small holder farmers for food production. With the initiative, the country now produces over 7.5 metric tons of rice annually. This is a giant leap from four metric tons in 2015. Success they say begets success. CBN is determined to replicate the same feat achieved in rice production in wheat production. With the symbolic exhibition of rice pyramids in Abuja and a follow up in Kaduna, CBN has demonstrated the capacity that it could reverse Nigeria’s trade deficit and reduce pressure on the Naira by eliminating major food imports.
If the Anchor Borrowers Fund is sustained, rigorously monitored and even expanded, Nigeria will be on its way to self-sufficiency in food production. We must applaud the Governor of Central Bank and his team for their efforts, despite our conflicts of interest and convoluted politics, for doing all they can to reverse Nigeria’s trade deficit and reduce pressure on the Naira through direct intervention in Agriculture despite demands for deeper reforms from the International Monetary Fund, World Bank and some political elements speaking the voice of these multilateral institutions.
The multilateral institutions argue that a free-floating Naira would help the economy withstand future shocks. But Nigerian authorities fear inflation stemming from a sharp devaluation could throw more people into poverty. Already the inflation rates are high and people are finding it extremely difficult to survive. The cost of food products despite the high yield being recorded remain unaffordable to the common man hence the Central Bank must be careful in accepting unsolicited monetary policy advice from IMF and multilateral institutions.
Thankfully, the Central Bank Governor, Godwin Emefiele had consistently rebuffed the IMF pressure insisting that the apex bank will continue to manage the Naira as against unregulated flexible float of the Naira. A strong Naira is our pride hence the CBN must jealously guard its independence as monetary policy regulator without the over bearing and misguided influence of compromised and conflicted politicians. What is happening to the Naira, and why is the Naira pressured? Here are some key facts about Naira and recent monetary policies:
The COVID-19 pandemic and oil price crash hammered Africa’s largest economy. 90% of our foreign exchange earnings come from oil and gas exports. COVID pushed the country into its second recession in four years. It narrowly exited the recession in the fourth quarter, but the sharp drop in oil revenues led to a balance of payments deficit of $14 billion last year and has depleted its foreign reserves.
Insecurity in the North and other parts of Nigeria affected food production which added additional pressure on the Naira as the country scrambled to meet with the shortfall amidst rapid population growth. The value of imported agricultural products went up by 140.47%.It spiked by 18.37 % compared to the last quarter of 2020 . While Nigeria spent more importing agricultural products from outside the country valued at N630.2 billion, it only managed to export a meagre N12.2 billion in agricultural products. Of the agricultural import value, Nigeria spent N258 billion on wheat importation in the first three months of 2021 representing 3.8% of the total import share for the period – a trend CBN is determined to reverse as part of the measures to reduce not just Nigeria’s trade deficit but also reduce pressure on the Naira. The government of President Muhammadu Buhari, who took office in 2015, has kept the currency artificially high as a matter of national pride and in other to stem inflation.
During the last oil price crash, in 2016, the Nigerian Central Bank created a system of multiple exchange rates in order to avoid a large official devaluation. These included a market-determined rate for investors and exporters called the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX).
Faced with a N5.6 trillion-naira ($15 billion) budget deficit this year, the government is seeking a $1.5 billion loan from the World Bank. But in return, the World Bank wants Nigeria to do more to bring the official exchange rate at par with the dollar and other rates, including NAFEX, into line.
Left with little choice, Nigeria’s Central Bank devalued the naira’s official rate twice last year and has weakened the exchange rate for retail users. It also banned issuing the dollar to Bureau de Change outlets while relying on the banks. But how far the banks have done in meeting up with public demand remains to be seen as black markets continue to thrive.
The CBN nevertheless has continued to gradually adjust the currency since the devaluations, limiting dollar access for unnecessary imports and implementing restrictive forex policies to support the Naira. After oil prices crashed in 2014-16, Nigeria raised interest rates to attract investors. But when crude prices plunged last year and foreign money fled, the Central Bank reduced yields on treasury bills in order to boost naira liquidity. But with the Russia / Ukraine war and the world energy crisis, the cost of crude has again risen beyond what it ever was some 12 years ago. How will the rise in oil price impact on the Naira. How can Nigeria benefit from the sanctions on Russia’s oil and gas by the US and European allies? It has been alleged by some quarters that over 80 per cent of Nigeria’s crude oil production are stolen and that the NNPC cannot account for over 100 million barrels of oil. It has also been speculated that NNPC has not been consistent and transparent with remitting her earnings into the federation account as required by law. How do we make NNPC accountable since oil and gas revenue accounts for over 80 per cent of our dollar liquidity?
Scholars like Patrick Curran, senior economist at emerging markets consultancy Tellimer, said that essentially CBN refusal to allow further devaluation of the Naira guarantees a loss on investment when the currency is forced to adjust, unless returns exceed the overvaluation. I don’t align with these arguments especially when we have not put our population into productive use
Nigeria’s debt is among Africa’s lowest-yielding, which the government is counting on as it seeks to cover this year’s large financing needs via cheap local borrowing. We do not need to live on rental economy when we can plug the financial leakages and push back on corruption which has become endemic. Besides the significant oil price rebound following the Russian war has the potential of meeting our offshore debt obligations and will further improve our dollar reserves.
To continue to shore up the Naira, the Central Bank had offered cheap credit to try to boost manufacturing and agriculture in order to cut imports. The investment in agriculture is paying off, though more needs to be done to make cost of food more affordable to the people. The CBN financed Anchor Borrowers fund remains a commendable effort that can be replicated in other sectors. The CBN has also eased rules on diaspora remittances to increase dollar liquidity, after the naira fell sharply on the black market.
With dogged determination and consistency in the monetary policy the CBN may eventually accomplish the stated goal of low and stable inflation, decrease of FX shortages, parallel market depreciation and reduced pressure on the Naira.
