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  • #Nollywood Entertainment #Nigeria News: Need for Alternative Sources of Forex Earnings


    analysis

    Nigeria must look for alternative sources of foreign exchange earnings, writes Eromosele Abiodun

    Beginning from Prof Charles Soludo, who started the clarion call to protect the foreign reserves from depletion, subsequent governors of the Central Bank of Nigeria (CBN), have all made it a top priority to protect the reserves.

    However, with the forceful depletion of the Excess Crude Account (ECA) and the subsequent drawdown of the foreign reserves, Nigeria is now facing the reality of a low foreign reserve and strong appetite for importation of every goods and services.

    This is just as global official reserves have increased significantly and quite rapidly in recent years. This phenomenal growth is a reflection of the enormous importance countries attach to holding an adequate level of international reserves.

    To safeguard the value of the domestic currency, foreign reserves are held as formal backing for the domestic currency. This use of reserves was at its height under the gold standard, and survived after the Second World War under the Breton woods system. After the Breton Woods system, the use of foreign exchange reserves to back and provide confidence in domestic currency replaced the gold. Nevertheless, for most developed countries this is not, these days, the prime use of reserves.

    Analysts have also argued that keeping reserves helps in timely meeting of international payment obligations. The need to finance international trade, they stressed, gives rise to demand for liquid reserves that can readily be used to settle trade obligations, for example to pay for imports. While this is typically done through commercial banks, in many developing countries, including Nigeria, the central bank actually provides the foreign exchange through auction sessions at which authorised dealers buy foreign exchange on behalf of importers. In industrialized countries where the manufacturing sector produces for export markets, the transaction need for holding reserves is less important.

    This is not the case in Nigeria. Consequently, the CBN imposed tight controls on the foreign exchange market in February last year to curb speculation on the naira and save the dwindling foreign reserves, which closed 2013 at $43.6 billion, about $500 million below the $44.1 billion recorded on December 28, 2012. The reserves have dropped to $29 billion.

    Need for Caution While there has been pressure especially from foreign investors on the CBN to remove restrictions, some experts have argued that if Nigeria does not apply the brakes as CBN has done through its policy, Nigerians will wake up one day and see that they cannot import the most critical things we need in the country.

    “Even the Media Houses will not be able to import critical components of their Press Machinery, Newsprint and importers of various items now under ban and those being supported will discover there is no money to pay for the imports.

    “Letters of Credit will dry-up very fast because no foreign financial institution will be willing to risk its investable fund in an economy without a buoyant foreign reserve. Foreign currency reserves are vital to a nation’s economic well-being. Without adequate reserves, an economy can grind to a halt. The country may be unable to pay for critical imports like crude oil, or service its external debt,” said Chief Executive of Eczellon Capital Limited, Mr. Diekola Onaolapo




    He stressed that those asking for liberalisation of the CBN’s hold on the forex market are simply asking the Nigeria to grind to a halt after years of forceful depletion of the ECA and foreign reserves.

    “The last episode of currency crisis in Nigeria was managed through the deployment of our huge reserves to prop-up the Naira. That war chest is no longer available and the only available option is to provide a floating flexible managed forex policy, which the CBN has been doing practically well.

    “Nigeria’s inability to turn its potential productive capacity into earning productive capacity has used its precious reserves to support importation of locally available items which in itself is a critical factor in unemployment crisis in the economy.

    “Every time the CBN pays for the importation of a rod of steel, toothpick, egg, pampers, American Juice or Aluminium, employment is being exported to the producing country and unemployment is being imported as a by-product of these locally available imports,” he said.

    Reserves as External Assets The International Monetary Fund (IMF) defines reserve assets as external assets that a country’s monetary authority can use to meet balance of payments financing needs, use to affect currency exchange rates in currency exchange markets, and other related purposes.

    Most nations hold the vast majority of their foreign currency reserves in United States dollars and a much smaller portion in euros. This is because a sizeable war chest of foreign currency reserves is especially handy during a currency crisis, since it can be used to defend against speculative attacks on the national currency.

    For instance, Russia holds substantial foreign currency reserves. In 2014, the United States and the European Union imposed economic sanctions on Russia for its involvement in the Ukraine conflict. Coupled with a 50 per cent plunge in the price of crude oil (Russia’s largest export and a key driver of its economy), these sanctions severely impacted the Russian economy.

    The Ruble slid 40 per cent against the dollar in 2014, but the outcome could have been far worse if Russia had not intervened in foreign exchange markets to prop up the Ruble, expending more than $80 billion of its reserves in doing so. As it is today, Nigeria attempt the Russian $80 billion Forex Intervention?

    Therefore the proponents of anti-CBN policies and the sack Emefiele group are just begging the solution to the currency crisis. If not for the timely introduction of precautionary measures by the CBN, Nigeria would have grinded to a halt without adequate foreign reserve to back our imports and balance of payment positions.

    Nigeria experts believe is in a race to salvage the nation’s economy and the naira. “It is about time that the practitioners in the Entertainment industry begin to take their place in the scheme of things, one cheap source of foreign exchange earnings is from entertainment product/ services export from Nollywood. Entertainment Industry is an under-tapped and underdeveloped foreign reserve generator, which if properly structured can earn the country a minimum of a $1billion dollars averagely per annum,” said financial expert, Eric Idiahi.

    Solid Minerals Potential Experts also believe that solid minerals sector has the potential to generate massive foreign exchange earnings for Nigeria. An official of Solid Mines Limited, a company that plays in the mining sector told THISDAY that Nigeria stands to earn about $50 billion from her abundant solid minerals if the necessary framework is put in place to harness the resources.

    Indeed, the nation has been estimated to possess over 400 solid minerals, 40 of them available in commercial quantities, though only 13 of these are being exploited at present This is believed to have dragged down the sector’s contribution to the national economy to a paltry 0.3 per cent and generating about $1.5 billion into the country’s coffers.

    The official said that the sector could add as much as $50 billion to the nation’s Gross Domestic Product (GDP) by climbing from 0.3 per cent to 10 per cent growth in the next three to five years, if the necessary investment is made.

    Besides, optimal utilisation of the solid minerals could also create over one million direct and indirect jobs within Nigeria and far increase Africa’s inter-trade activity, which currently stands at $110 billion.

    “The under-development of the mineral sector has resulted in Nigeria importing minerals that can be locally produced thus missing out on the opportunity to increase local output, earn foreign exchange and create jobs.

    “This is the crux of the matter, Nigeria imports what it can readily produce locally and the forex policy of the CBN has been designed to encourage local production of these minerals thereby increasing local productive capacity, improve foreign exchange earnings and creating millions of jobs.

    “Over 40 solid minerals have been discovered in commercial quantities in Nigeria. Some of these include: barites, gypsum, limestone, bismuth, marble, feldspar, mica, gold, coal, bitumen, considerate, silver and germ stone, iron ore, lead-zinc, talc, copper, kaolin, among others,” he said.

    Other Forex Generators

    That said, other foreign exchange generators are agricultural sector, IT Exports, Oil and Gas. Refining the petrol that the nation consumes locally will also generate huge foreign exchange for Nigeria. Take for example when the Dangote Refinery will come on-stream, it will generate $6 billion dollars in foreign exchange for the country. If there are 10 of such refineries in Nigeria that will be a total of $60 billion generated by 10 refineries alone.

    Idiahi said:”The message of the CBN governor is very clear, give me more Dangotes then you can enjoy on restricted access to foreign exchange, if one source is generating $60 billion add to our current $28 billion, Nigeria will have in its foreign reserve vault a total of $88 billion.




    “This will achieve two things speculative attack on the naira will subside and naira can maintain an assured stability backed by strong foreign reserve position. The lazy way out of this situation is to submit to devaluation. I want to ask, if the CBN were to devalue the Naira, what will be the exchange rate?”

    According to him, CBN is selling at N197/$1 and it is N280/$1 in the parallel market, if we devalue then it becomes N350 to a dollar and you can determine the attendant implication on all imported goods and services.

    “On BDCs, Nigeria is the only country in the world where the central bank sells FX directly to BDCs. Despite the benevolence of the CBN, greedy BDCs bought at N197 but sold at N270. Hence, the intended “subsidy” was not reaching Nigerians, as in the case with fuel subsidy. This arbitrage opportunity attracted many unscrupulous persons into the BDC business. Before CBN started selling forex to BDCs, there were only 74 in 2005. In the 10 years since CBN started forex sales to BDCs, the number is now 2,800 with 150 applications for licenses every month,” he said.

    At its height, the bank used to allocate $8.6 billion to BDCs per annum. This potential saving is better re-allocated these funds to raw materials, plants, equipment, fuel imports, BTA/PTA, etc.

    According to Idiahi, indeed, why should a business enterprise be established only on the basis that the government must supply its goods or raw materials, especially when the government does not make these products? How can someone open a tomato shop and insist that the government must supply the tomatoes for him/her to sell? Why can’t the trader source the goods?

    The contentious attachment to arbitrage by unregistered BDCs operators and the registered BDCs in collusion with some unscrupulous elements in the organised sector does not create employment rather it creates pressure on the naira and by extension instability in currency valuation.

    As at today, over 90 per cent of dollar inflows into the CBN come from proceeds of crude oil sales with oil prices dropping from $116 per barrel in June 2014 to $27 per barrel in January 2016, representing a decline of over 70 per cent, this evidently shows that resource aggregation is clearly under threat.

    When oil prices were high, the CBN got about $3.2 billion inflow every month. Today, the apex bank receives less than $1 billion monthly. Yet, our import bill, which used to be N148 billion per month in 2005 (last year we had $50/barrel oil), is now about N920 billion.

    “Given this difficult scenario, the CBN had no choice but to prioritize the allocation of foreign exchange to various groups, goods and services. This policy is right and needs to be supported. Everyone must be encouraged to make money not trade money,” Idiahi added.

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