Nigeria and the Dollar Economy -By Femi Onakanren

The expression, when it rains, it pours seems especially designed for Nigeria sometimes.

Within the last couple of years, the nation has lurched from one existential crisis to another. Practically all the sectors have been hit in one way or another.

The country had an on-again, off-again relationship with recession. Inflation went rogue despite (some will argue, as a result of) several economic interventions and policies to stem the tide. States were practically bankrupt and unable to meet obligations. The single largest contributor to revenue took a big hit as the victim of the ego of true super powers.

Then came the Covid-19 pandemic. All these while insecurity and insurgency at different levels and regions had seized the stage and grabbed our collective consciousness.

But our rather reckless politicians were more obsessed with power mongering that they only saw opportunities to build even more divisive narratives and exploit our long held reservoir of bias and bigotry. Food prices were playing a less celebratory version of the popular Dorime song and lamentations echoed in redemption songs.

Surviving 24 hours is truly a miracle here.

The latest matter which is of grave national concern and leading public discourse is the spiraling death trap of the foreign exchange rates.

Nigerians have always had a interesting relationship with the FX rate; it is often used as a point of national pride/achievement or reference of better times.

It is so endemic that even the ugwu seller on the street corner side is quick to point to the FX rate as a defence of rising food prices, justifiably or otherwise. Unbeknownst to us, we had dollarized our economy.

The current state of the exchange rates mortal decline has revisited the tombs of this familiar ghost along with the eerie dread of imminent doom.

Every conversation is interspersed with, _”do you know how much the Naira is to the Dollar?”_, it is ridiculous.

Aside from the obvious psychological insecurity of a third world economy, the average Nigerian’s obsession with the foreign exchange rate is befuddling and mind boggling.

For context, how does one judge the strength of a currency, especially with respect to other sovereign notes of value exchange? The simple answer is, the currency’s purchasing power.

This simple view can easily explain the alarm and dread Nigerians have towards rising exchange rates. However, this only tells part of the story and as such would present a misleading narrative that could serve as the self fulfilling prophecy of doom.

The real value of a currency is a result of the productive output of the sovereign economy backing it and/or the depth of its reserves both long term and short term. Thus, the actual figures may not be truly representative of the state of the economy. Countries have been known to deliberately devalue their currencies in a bid to gain/seize competitive pricing advantage on the global stage.

Nigeria is obviously a different animal. Despite the huge natural and human resources bestowed on the country, we are basically a consumption-driven economy. This means that whatever we mine, farm or discover only has base raw material value. We are severely limited in converting these raw resources into finished goods.

Think of it as a farmer who sells a sack of cassava for N25,000 Naira but who has developed a taste for the fine cuisine and buys a meal of Eba or Amala for N10,000. The difference is that the food vendor (restaurant, hotel, buka etc.) has added extra value to the cassava and can thus charge a premium beyond the raw material.

So, all we are blessed with have only base value. This is where it gets more tricky. As a consumption-driven economy, it would mean that our principal economic activity will be trading.

This is because our inability to provide supporting infrastructure (road, transportation, power etc.) and policies have not encouraged productivity. Also, the long term nature of building transformative businesses informs lower interest in innovation beyond the immediate profit or returns.

So, we cannot properly harness our resources, we are limited in converting them to finished goods and we have acquired a taste for the fine things in life. Quite a grim prospect.

It is also alarming that even the development and exploitation of our natural resources is mediocre at best. The unhealthy focus on crude oil has led the king to dance naked in public.

Mines rich in mineral ores are underdeveloped with loose security and policies allowing a few to enrich themselves at the detriment of the many. Even agricultural produce, which are replenishable and always in demand are given scant attention.

Our people think farming is beneath them _(what? Me? After getting my degrees and all? I reject it in (insert preferred divinity) name)_.

One must also balance this with a recognition and acknowledgement of the reality on ground. First off, farming is a long term venture and living is a now-now mandate. In fairness to the President Muhammadu Buhari administration, a more concerted effort has been given to incentivize participation in agricultural ventures but the challenges are quite debilitating.

Secondly, storage is a serious limiting factor which deeply affects production propensity. Huge losses are often suffered by farmers because of an inability to find proper storage.

Thirdly, transportation is the killer in tracks. Getting the produce from the farms to the markets and ports in a good state is often a bigger challenge than the entire farming experience. When we add policy convolution, security concerns, middleman arbitrage etc., we have quite a potpourri of misery.

Thus, we do not produce enough food/cash crops, are unable to properly store or transport the little produced and often have to dodge arrows and darts from mitigating policies, insecurity etc. along the entire value chain.

International trade is heavily dollar based so if the exchange rates sneeze, the economy catches Covid-19.

Increased consumption, with our growing population, means Increased dollar demands to meet needs. This forces the Naira into irrelevance and a roundabout and unhealthy devaluation ensues. It is an excruciating form of economic sabotage whilst only seeking to survive. The scenario puts the economy’s reserve under increased pressure tweet local demands (a lot of naira chasing few dollars). With dwindling dollar revenues, the noose tightens.

Another interesting twist is that even though we recognize our infrastructure deficits, shoring up and bridging the gap would further increase our exposure to the dollar. We are short on dollarized revenues and would necessarily need to borrow. The funds would be obtained in USD, a more stable currency as part of the risk mitigation framework of the lender.

So, we borrow in USD, spend in USD but earn a little in USD and have a lot of inevitably low value Naira at our disposal. Not a very comforting narrative.

Nigeria’s economy has huge potential and is strategically positioned as a hub of influence in West Africa and Africa at large. With the largest black population in the world (approx. 200m), highest GDP in Africa ($514bn), a top 20 emerging market/economy etc., the country and its currency is a prime target for currency speculation and attacks. This is further exacerbated by the regulator’s irreconcilable policy direction. Issues like multiple FX rates and windows, preferred bidders access, lopsided exclusive list coverage etc. makes it as easy as shooting fish in a barrel.

The opportunity for arbitrage is too compelling not to be taken. It is also particularly damning that even deep economic matters like this have been polarized along ethnic, religious and political divides. Why offer preferential rates and access to pilgrimage seekers, manufacturers (who often already enjoy significant tax breaks and other incentives), government and political cronies etc. Would anyone do back bending work when you can ‘clean out’ from the comfort of your room with just a couple of phone calls?

CBN recently went on the offensive against BDCs (which it licensed) and FX rates publishing online platforms (accused of negative influence and encouraging currency speculation attacks). Whilst the fears espoused are real, the damning indictment is that the stage was set, propped and delivered by the CBN itself. Nature abhors a vacuum and once an opportunity presents itself, it is inevitable it would be taken.

Today, the prospect of a N600 to the dollar reality seems more an inevitability than a doomsday scenario. The question is, how do we get out of this mess?

Many ideas have been mooted but all seem like the proverbial blind men giving descriptions of an elephant from running their hands on it. Like them, many of the solutions see one part but are happily oblivious of the implications, requirements or reality fall-out.

It has often been proposed to float the naira. Let the laws of demand and supply take place. The currency will find its level yen, yen, yen. What this fails to apprehend in its ludicrous naiveté is the crippling, if not fatal, effect on everything else within the period. Inflation will skyrocket, food prices will rise to fuel increased insecurity, public breakdown of law and order is the mostly likely end game scenario. In this conflagration, politicians will still be seeking how to hold on to power(?) and would increasingly drive divisive wedges for their selfish interests. Pockets of warlords will start appearing promising a better life for their ‘people’. For a tethering country, this may be the final push into the abyss.

Others have suggested a redenomination of the currency. Remove the zeros in deft economic surgery and voila, N1 is equal to $1! Sounds marvelous! But it is a death trap. The dollar is not strong because of a placeholder value. The dollar is strong because there are strong socio-economic fundamentals backing it. Fundamentals which are glaringly nonexistent in Nigeria’s case.

The redenomination may massage our egos for a time (short), but it would usher us in the economic nightmares of Zimbabawe and Venezuela. Some posited, but Ghana did it successfully. Yes. In a simplistic review.

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First off, Ghana is a much smaller country with far less economic or sociopolitical issues and innuendos.

Secondly, the redenomination was a temporary salve as the unresolved underlying issues have started to rear their stubborn heads afresh. Without the pace of productivity rapidly rising to justify the placeholder effect of the redenomination drive, the economy risks a crippling collapse at the slightest shock. Imagine translating this nightmare scenario to a country on the scale of Nigeria?

Some have opined that reducing dependence on importation and building local capacity within the economy. Sounds nice but this is a long term play. Short term survival, and if possible, relative prosperity, are more pressing needs.

We lack the requisite infrastructural support to build from and our consumption demand far outstrips whatever we can produce in the short term. Again, another doomsday scenario with galloping inflation. The consumer index will go haywire and we would quickly approach the apocalyptic inevitabilities of the previous solutions raised. The FG tried to incentivize local capacity with several intervention funds and blanket bans on some imports (drains on our FX without the commensurate benefits of import returns due to smuggling and corruption). This worked in part to raise our local capacity from the previous (e.g. rice) but not enough to meet out needs. Hence the current situation with food and commodity prices soaring. Quite the conundrum.

The truth is, there is no easy way around it; there are no silver bullets. The solution is an amalgam of all the highlighted propositions with the devil being an understanding of the required balance for effectiveness. One thing that stands out is that the multiple exchange window has to go post-haste. Every other proposition can be built on this foundation. It is also apparent that we need to massively and aggressively bridge our infrastructure deficit. This has to go beyond political rhetoric and narratives. It has become obvious from the foregoing that improved local productivity is the panacea to most of our ills. Without the availability of the appropriate, basic infrastructure, this would be nothing but a pipe dream. Fiscal responsibility is another important step to take. The vault of subsidies across different sectors (oil and gas, electricity, transportation etc.) are themselves pressuring the naira and driving scarcity of our meagre dollar earnings. We need to look at ourselves and own the truth; we are a nation of huge potential but not a rich nation.

Potential does not equal reality. We have been spending what we do not have and posturing as a wealthy country. We need to jettison such projections and mentality so we can better apply ourselves to the serious matter of nation and economy building.

The matter of increased foreign direct investment (FDI) has been another resounding gripe. As with most things in Nigeria’s policy making sphere, it has become a cliché. However, it is an important dimension for deep consideration in the attempt to shore up the countries productivity and by extension, the value of the Naira.

FDI is a double edged sword that needs to be managed with the foresight, preparedness and ingenuity of a Chess Master. On the one hand the injection of FDI will reduce pressure on the central dollar demand we currently are experiencing which is ramping up the exchange rate and allow for a more tolerable easing towards a unitary exchange system. Poorly managed, it would be a state sanctioned attack on the nation and currency via money laundering, arbitrage institutionalization and parallel market prominence.

The administration of President Obansanjo represented the country’s highest spurt of widely felt economic progression. One of the key projects delivered was the liberalization of the Telecommunications sector. After the bidding process, the second round encouraged more locally driven/led investments. It would appear that the success of this drive stemmed from the underdeveloped nature of the sector at the time. As a new market, the country could grow with the opportunities presented. This same trend was observed in capital injections in e-commerce and Fintech startups. The sectors also blew up and provided many entrepreneurial job opportunities.

What seems to stand out is that the same energies and application could not deliver similar successes in different sectors (power, energy etc.). The common denominator? Those sectors are already established and their poisoned identities fully confirmed. The key players in those industries sabotaged government efforts (internally and externally) and FDI inflow was constrained as RoI became speculative. From the foregoing, FDI should be encouraged and promoted in nascent innovation driven sectors that have not suffered the contagion of the Nigerian socio-economic and socio-political malaise. As these overlooked or undeserved sectors take shape, FDI will have ease of access for introduction and proliferation. We would also be building local capacity and by extension, increasing base productivity. Agricultural initiatives support is another sector that could be harnessed to drive FDI growth due to our high disdain for the farming profession.

FDI moves to where opportunities arise. We need to identify, create and encourage the environment for such opportunities. The traditional set up are mostly compromised and deeply mired in the diabolical economic sabotage game. New frontier sectors, their identification, support and encouragement will greatly ease the current pressure as well as solve ongoing bothersome perennial issues like unemployment, market penetration, revenue diversification etc.

Finally, the question of national identity again rears its head on this, as with all other matters of national discourse. Whilst our dependence on the dollar seems an unfortunate consequence of years of mismanagement, Stockholm Syndrome seems to have taken a hold of our reasoning and we measure ourselves inordinately against the performance of the naira against the dollar.

Many are saving funds in USD whilst lamenting the exchange rate. I know it is about survival and safeguarding ones earnings for the rainy days but how does that play out when the supposed survivalist action is self sabotaging? If the scarce resource required for increased real trade and productivity for economic progression is heavily pressured with demand only to be reserved for idle value breeding by betting against the Naira, then we are the most foolish of people. We would have sacrificed short term gratification for long term misery.

We have become such intense victims of neo colonialism that the proverbial usage of the left hand to point to one’s ancestral home couldn’t be more apt. We see good in other people’s lands and curiously, are glad to abide by their laws but once we are on our own shores, all reason, courtesy and decency are thrown to the winds. The resounding mantra these days is to ‘jakpa’ (emigration). The sad amusement is that emigration is a well worn tune that has regaled many generations of Nigerians. We sang it in the 80s 90s so it’s rebound remixes aren’t novel to the discerning. Sadly, the reasons haven’t changed.

Emigration in and of itself is not wrong but when it becomes a life goal, one is definitely scratching the bottom of the barrel. However much as we are infatuated with the dollar, it will never be our currency. ‘Escaping’ from Nigeria is not the road to personal or collective salvation. If one reviews the percentage success rate of emigrants (legally), it is rather low. Kicking the can forward for immediate comfort and gratification is foolhardy. The children one is seeking comfort for abroad will only be grafted into the rat race of the new system whilst those they are better than will continue to enjoy the opportunities Nigeria presents.. History, if we bother to review, has taught us this.

Without adjusting our socio-economic outlook, expectations and appetites ad well as rigorously applying ourselves to increasing local productivity, per excellence, across board, all the lamentations from different quarters are just exercises in futility. It must be clearly stated that the attempted dollarizarion of the Nigeria economy will not transform the country into the United States of America. That is a pipe dream.

If we continue to attempt to force the indirect dollarization of our economy, we will only dive deeper into the depths of poverty, hardships and regression. These will stimulate insecurity, chaos and eventual loss of governance controls and structures; ultimately, we would cease to exist as a nation. There are no scenarios in which continuance with the current structure across board provides an advantage; we will win nothing.

This is the sad truth and our inevitable reality if we collectively fail to make the right adjustments in governance, policy and sociopolitical identities and values.

Femi Onakanren writes from Lagos.