Mr. President, Make Us A Market

Feyi Fawehinmi

Mr. President, during your media chat yesterday, you said you need to be convinced on devaluation.
I don't think I can convince you on that as there simply is no good way to convince someone to devalue something.

But I want to try to convince you of something else — pricing and markets.

You are correct in that Nigeria finds itself in a terrible situation with the collapse in oil prices.

Oil is the major source of foreign exchange in the Nigerian economy so a drastic reduction like has happened with oil falling from $110/barrel to less than $40/barrel will test anyone.

To make matters worse, Nigeria walked into the oil price collapse practically naked with no reserves to cushion the bad times.

Scarcity
The reality is what it is and crying everyday will not produce dollars. When something is desirable but limited in quantity, it is scarce.

These 2 conditions have to hold for there to be scarcity.

The air we breathe is desirable but thankfully it is not limited so it is not scarce.

Dollars are desirable but very limited especially right now, they are therefore scarce.

The challenge now is what to do when faced with such scarcity.

From your comments and the policies you support, it is clear you believe that the best way to deal with this situation is by placing restrictions on who can access dollars for things you think we can produce locally.
That’s all fine.

But there is a better way to achieve the same thing you want to achieve that will give you less stress and allow you to focus on other things instead of chasing after people who are determined to run rings around you.

2 Prices Instead of 1
The origin of the challenges being faced in Nigeria with regards to forex is that we always have 2 different prices.

There is always an official rate and a black market rate. The official rate is always cheaper and the harder it is to get dollars at that official rate, the wider the gap between the 2 rates become.

Now, I am sure you know fully well that the wider the gap between the 2 rates is, the greater the opportunity for very easy profits if you can simply get it at the official rate and sell at black market rate.

If there were enough dollars to meet all the demand at the official rate, there will be no gap between the 2 rates. But this is clearly not the case especially right now.


Mr. President, if you go to any developed economy, you will never find this business of 2 different prices.

The most you will get is tiny differences where the only way you can profit from different rates is by moving billions of dollars which is hardly worth it and very risky.

Exchange rates are not things that governments in such countries spend their night and day worrying about like we do in Nigeria.

So how are these countries able to maintain relative stability in their currencies without anyone actively trying to control it or setting what forex can be used for?

Enter One Way, Exit Another Way
Mr. President, today the official CBN rate is roughly N200 to $1. At the black market, the rate is around N270 to $1.

Now Mr. President, imagine you have a friend outside Nigeria who has $10,000 and wants to bring it into the country.

Which rate will he go for? Of course he will go for the N270 rate which will give you more naira for your dollar.

But what if you have naira and you need to buy $10,000 to make some purchases abroad. Which rate will you go for? Again, its simple — you will go for the N200 rate which will cost you less naira to purchase.

In any normal market, you and your friend will simply exchange your naira for dollars. But because of these 2 prices, we have an abnormal market where it does not make sense for incoming money to simply be matched with outgoing money.

During the media chat, you spoke about how the TSA system makes things simple and clear without the need for multiple accounts.

You mentioned that NNPC used to have 45 accounts but now they have only 1.

This means that everything coming out and going in is in one place and will be easy to monitor and detect any fraud or malpractice. It makes the life of auditors much easier and the government is able to get all revenues.
Your TSA example is similar to what is going on here with forex.

Instead of having a single market with one price, we now have multiple markets that do not match with each other as they normally should.

This is creating all sorts of problems in the economy. The worst of these problems is that people are now using their energies and brain power to find ways to buy money from one market and sell it in another market.

This is why people are running to Dubai with hundreds of debit cards. The potential profits are enough to pay for their ticket and hotel while out there and still make it worth their time.

What The CBN Data Says
Mr. President, the example I used above of you and your friend is not just a hypothetical one. It is actually happening.

And I can show you with figures published by the Central Bank of Nigeria.

On the CBN website, we can find statistics of dollars going in and out of the economy and where they are coming from. I did not publish these figures, the CBN did.

Let us use the Cash flow figures for July to October 2015 as shown below

Total Cash Inflow through Autonomous Sources and CBN Jul — Oct 2015

I want to draw your attention to line 16which says ‘Total Cash Inflow through Autonomous Sources’.
This represents dollars coming into the economy through people like your friend I used as an example above.
Now compare with line 2 which says ‘Total Cash Inflow through the Central Bank’. You can see that every month, dollars coming into the economy through autonomous sources is higher than what is coming in through the Central Bank and the gap widened in those 4 months.
Now let’s look at the dollars leaving the economy for the same period.
Total Cash Outflows through the Central Bank Jul — Oct
2015
I draw your attention to line 27 which says ‘Total Cash Outflows through the Central Bank’. The average for the period is $3bn/month but reducing monthly.

These are the people trying to buy dollars at the official rate which is far more attractive than the autonomous or black market rate.

Total Cash Outflows through Autonomous Sources Jul — Oct 2015 This time look at line 52 which says ‘Total Cash Outflows through Autonomous Sources’.

The numbers have dramatically collapsed to less than $300m per month.


People are happy to come in through autonmous sources where they get more naira for their dollars. But when they want to go out, they prefer to go through CBN which gives them more dollars for their naira. The 2 prices being operated have created 2 different markets that cannot be matched. You cannot blame people for behaving this way. It is perfectly rational.

In any normal market, you will go out the same way you came in. There should only be one market.
In the UK, you cannot buy dollars online and then sell it on the ‘black market’. You will lose money as there really is just one market with only very tiny differences in prices.

From the above tables, we see a situation where CBN is carrying the burden of supplying everybody even though it does not collect the money coming in from autonomous sources.

Using October 2015 as an example — $2.8bn came in through the CBN while another $4.2bn came in through autonomous sources. In the same October, $2.3bn went out through the CBN which is almost the same amount as came in. Infact, when you look at September numbers, you see that more money went out through CBN than the money that came in.

This is where the ‘pressure’ on the naira is coming from.

Yet, we can clearly see that there is money available from other sources but it cannot be matched with outgoing in a way that will relieve pressure on the CBN due to the problem of having 2 different prices.


Make A Market
It is true that Nigeria needs to earn foreign exchange in other ways apart from oil.

But building an export economy is not going to happen overnight. For now, the challenge is how to survive without damaging the economy with all these policies about restrictions.

There is clearly forex coming into the economy from other sources like people in the diaspora. The challenge is how to create a single market where all the money going out can be matched with the money coming in.
This will give everyone less of a headache and energy can be spent worrying about other issues like Boko Haram and infrastructure.

When you have a single market, if the naira depreciates, it will simply be because there is not enough dollars coming in and everyone will adjust.

For your government, the response to such a scenario will be to find ways to attract more dollars into the economy i.e policies that attract investments.

If the naira appreciates, then you know that there are more dollars coming in than going out and you really don’t need to worry yourself about that.

But there is no way to get to this market system without giving up control. The naira has to be set free to float and exchange for whatever price the market thinks it should exchange for.

Such a system will also give investors confidence because they know that they come in and go out without anyone telling them they cant have access to their money.


It also means that we cannot judge what people decide to use their money for. If people want to buy dollars to go and party in Dubai, so be it.


Ultimately, you will have to encourage an economy where reward is directly linked to effort. Someone who makes millions simply by stealing or roundtripping is more likely to burn that money importing champagne — easy come, easy go.

That is the problem that needs to be fixed and not the symptom that manifests itself with ‘irresponsible demand’ for forex.


You want Nigeria to live within its means?

You dont want scarce dollars to be spent on importing things you think can be produced?

That’s all fine. But the best way to achieve these things is not by trying to second guess human behaviour. It is by allowing markets to do their work.

Floating the naira will mean that the naira’s value could drop sharply. But ultimately it will settle at the price that clears the money coming in with the money going out and there will be stability.

And the exchange rate of the naira to the dollar will be a mirror to the country to tell everyone whether or not the Nigeria is earning enough dollars to pay for what it needs. Just like in any other normal country.
Update — 7th January 2016

I saw an interesting story in the papers a couple of days ago that illustrated the problem of forex mismatch and warped incentives in Nigeria as a result.

The Cement Producers Association of Nigeria gave an interview to The Nation newspapers complaining about the current forex policies. But what they are complaining about is quite revealing:

Cement Producers Association of Nigeria (CPAN) has urged the Central Bank of Nigeria (CBN) to reconsider its foreign exchange (forex) policy that compels exporters to sell their forex earnings at the CBN’s official exchange rate of N197 to the dollar instead of allowing them to sell at the open market.
They are clearly exporting some of their output and get paid in US dollars. But the CBN compels exporters to sell their dollars to it and collect naira.

That is, they get their dollars exchanged to naira at the official rate. This means they are losing about N70 on every dollar at current black market rates.

But the question to ask is this — how is the CBN able to compel them to do this?

And the answer to that is simple — they obviously import some of their inputs and therefore, buy the dollars for those imports at official rates. The price of being able to do this is that you must then repatriate your export proceeds to the CBN when you get it.

When they are going out, they are happy to go at official rate. But when they are coming in, they want to enter through the black market.

It would be funny if it wasn't so serious.

P.S Feel free to go through the CBN figures yourself and let me know if you feel I’ve read anything wrong.
From the homepage go to Statistics > Statistics Database > Data Browser > Select A Sector > External Sector Statistics > Other External Sector Statistics > Select Frequency (Monthly)


Tick the first sub category ‘Cash Flow (US$ Million)’. Select the start and end year and the months you want to view and generate data.