What other options do we have to increase the supply side of forex to the Nigerian economy, or do we continue with the borrowing of forex from international lenders to feed the insatiable demand of Nigerians many of whom are using the dollar as a store of value?
Nigerians currently have $16bn in their domiciliary bank accounts and that is not adding the dollar that is being held in private fortresses at homes or buried in cemeteries and other strange places, or the ones being held by Nigerians in foreign countries (Pandora Papers).
The main source of official supply of foreign exchange to Nigeria remains earnings from crude oil sales which currently stands at 95%, and with crude oil production falling to 1.4m barrels per day from a high of over two million that tells you how the supply of forex has dwindled.
Then when you consider that 450,000 barrels of oil are taken out of this 1.4 million and swapped for refined petroleum that tells you that 95% of Nigeria’s forex earnings is currently coming from about 950,000 barrels of crude oil per day.
To further worsen matters, the refined petroleum that is obtained from swapping the 450,000 barrels of crude oil per day is being obtained at current international prices but sold in local currency at non-market rates.
This means that from the already depleted earnings from the sale of 950,000 barrels of crude oil a day, Nigerian National Petroleum Corporation and the Federal Government have to take scarce foreign exchange to make up the difference between the imported petrol and the rate it is sold locally.
This leaves the Federal Government with only one option to keep up the dollar supply to the local market, the continued borrowing of forex from international lenders at interest for supply to the Central Bank of Nigeria, which, in turn, uses this to meet the almost insatiable supply for forex.
The main unofficial source of forex in Nigeria remains remittances from Nigerians in the diaspora and while this has ranged from $16bn to $23bn yearly, the bulk of these do not go through official channels.
Only those with no options will get forex inflows today and exchange it at the official CBN rate of N420 rather than the parallel market rate of N570 to one dollar, and that is why we have over $16bn locked away in domiciliary accounts in Nigerian banks.
Just imagine that the Federal Government recently borrowed €4bn at a 6 or 7% interest rate, and which will go to fund the official Forex market and yet you have over $16bn sitting in the domiciliary bank accounts of Nigerians gathering dust and cobwebs.
Now why the solution is not for the Federal Government to forcefully acquire the $16bn sitting in domiciliary bank accounts as some have suggested and the CBN has rightly rejected this despite the temptations, something needs to be done to increase dollar supply.
When you add forex stored in private Nigerian homes and other unusual locations across the country, and then the additional billions of dollars hidden in offshore locations, the responsibility of any sane government is to come up with measures or policies for increased dollar supply.
We can cry all we like about diversification of the Nigerian economy and for having other sources of dollar forex supply but these take long term planning and having the right policies in place with the will to take and implement hard decisions.
So for an import-dependent economy where even the petrol that is imported at exorbitant cost and subsidised for sale locally is easily smuggled and sold across the border at a considerable profit in neighbouring countries, there is only so much you can do.
Only middlemen and those engaged in arbitrage are currently profiting from the status quo, even getting to buy the forex that Nigeria is borrowing from international lenders at official interest rates and then getting to sell it to those who need it at the parallel market rate.
Like the fuel subsidy which is being enjoyed by those who get the imported subsidised petrol at the local market rate only to sell in neighbouring countries at next to international market rate, Federal Government has a long history of subsidising the wrong people, that is the profiteers and that is what is happening with the forex subsidy.
The same applies to the 13% Crude Oil Derivation, NDDC intervention, Ministry of Niger Delta Affairs and even the soon to be implemented 3% Host Communities allocation under the Petroleum Industry Act, 2021 which were meant for oil-producing communities but which have all been or will soon be hijacked.
So what steps can the Federal Government take in the short term to significantly boost dollar supply and eventually drive up 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 impact of causing the value of the naira to drop significantly with attendant impact on the prices of all imported items and negatively affecting those on fixed incomes, but to let the current situation continue is to end up in Zimbabwe and Lebanon situations.
Floating the foreign exchange rate on the other hand will allow the supply of the forex from other sources such as those holding on to dollars in domiciliary bank accounts and hidden vaults in private fortresses and forex holdings in offshore locations aka the Pandora Papers.
Also, forex inflows from diaspora sources will also become not just official but also exchanged through official channels thus ensuring that there is one unified exchange rate and that all transactions attract the official charges and taxes.
It will also minimise the arbitrage market, currently the bane of the widening gap between the official and parallel rates that creates overnight millionaires and billionaires who because of the illegality of their income end up paying no taxes.
The pressure of being the sole or main supplier of forex currently borne by the CBN with all its attendant implications and interference by government officials and leverage milked by CBN and bank officials over forex allocation will drastically reduce.
Stripped of the burden of being the main forex supplier to the official market, the CBN can then begin to build up its foreign reserve holdings and be able to intervene on the supply side as the occasion 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 also do more to increase its forex supply, and since the Federal Government currently gets 95% of its forex supply from the sale of crude oil, what can be done to get increased forex from this source?
The easiest would be for the Federal Government to apply to the Organisation of the Petroleum Exporting Countries to increase its oil production from the current 1.4m barrels of crude oil a day to at least a minimum of say 1.9bn, a step which it recently took but was rejected by OPEC for the simple fact that Nigeria is not even able to meet its 1.4m barrels a day production quota.
Why is this so? What are the issues responsible for this? How can these issues be addressed? Examining these issues is a discourse 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.
Stretching this a little further, Nigeria will have to question why it remains a member of OPEC and is bound to a daily production quota for a commodity that the whole world agrees will not be an energy source in another 30 to 50 years due to the climatic impact of fossil fuels.
The main consumers of fossil fuels are committing to zero carbon emissions and are resolved to embrace renewable energy sources. So it does not make any sense to have 40 years of oil reserves when in 20 to 30 years time those reserves will hold little or no value?
Bottom line, the world is currently in the grips of an energy crisis and this is not the time to be limiting oil production but to be increasing it and OPEC philosophy as long as it runs contrary to that is not in the interest of Nigeria and its current resort to taking foreign loans to increase forex supply.
The other issue is that some of Nigeria’s joint venture partners have put their oil acreages, especially in onshore and shallow waters, up for sale and key here is Shell Petroleum Development Company which is asking for $2bn for its oil assets seeking to focus only on its deep waters oil production.
To ensure it can increase its oil production and take advantage of rising oil prices the Federal Government should negotiate directly with Shell and buy its onshore and shallow waters oil acreages for day $1bn upfront payment with the balance spread over time.
Rather than give such Shell oil acreages to the recently incorporated behemoth called NNPC Limited, those oil acreages should be handed over to NPDC which should be removed from NNPC Ltd and quoted directly on the Nigerian Stock Exchange.
NNPC Ltd is a behemoth with too many dead assets (refineries and pipelines) and liabilities (pensions and debts), and so freeing NPDC to focus only on oil and gas production for a world that is gripped by an energy crisis for the foreseeable future will allow the company to operate according to best market practices and allow Nigeria to position a corporate asset for the expected vacuum that will occur as the international oil companies transition to alternative energy sources.
The increased oil production from pumping 3 million barrels of oil a day way beyond the OPEC quota will allow Nigeria to increase its forex supply, boost the value of its local currency and use the earnings to power its young population into the digital technology space.