02/07/2022
*What does a N614 exchange rate mean to you?*
_Warning: TL;DR_
Trust me, the issue with the Nigerian exchange rate is more than what the prices of imported items would be. It is even much more serious than that.
Let me show you a chain, some might have seen the chain before:
(1) Low household income --> (2) low consumption --> (3) low saving --> (4) low supply of capital --> (5) low investments --> (6) low job creation opportunities --> we are back to (1).
That is the chain in Nigeria, and it keeps going on. When income is low, there is not so much you can effectively demand. Hence, your consumption is low. Because of your high marginal propensity to consume, you cannot even save (na person wey belleful dey save).
If you do not save, how do banks get deposits? How do pension funds grow? How do mutual funds grow? When you save, you effectively supply capital. You are on one side of the financial market. The people on the other side are companies, startup founders, entrepreneurs etc. They need the capital to fund either their fresh ideas, consolidate on existing ideas, or to expand their capacity.
These corporates and entrepreneurs require capital to fund their business solutions such that jobs are created. For context, if a Chicken Republic decides to expand to another location, that means more job opportunities for people. They would need a store manager, an accountant, an inventory manager, a branch officer, food attendants etc.
These employed people too would effectively demand now that they can earn. For instance, a shop attendant can now afford to buy a phone, can now afford to buy new dresses etc. For the seller of phones and dresses, it is a demand increase for them which should be met with a corresponding increase in supply (which means they too would expand, employ more people and it goes on like that). This is what economists call 'multiplier effect'. This is the entire concept of growth and economic prosperity - when people have jobs and can effectively demand, and when those demands are met by supply.
But without the available capital, it becomes difficult to achieve growth. Or if the available capital is short of minimum, then it becomes costly to source capital. Finance people will tell you that the economy is short of liquidity.
The bottomline is that there will be no jobs because people are not investing because capital is not available because households are not saving enough because households are not earning enough because households do not have jobs.
Do you see a problem? Like we are in a cycle rotating to the same problem. Who will solve this conundrum? This is where foreign investors come into your economy. Why would a foreign investor come to your economy?
1. They have excess capital, they are ridiculously rich, their economy is solid. The risks are so low (inflation is low, hence, interest rates/investment returns are also relatively low). Therefore, they want to allocate capital to regions where they can earn significantly higher returns.
2. They would like to take advantage of the low-cost labour and high revenue growth in emerging markets. The demography favours emerging markets.
However, before these lads come, certain factors need to be in place. Some of them include:
1. Clear and consistent foreign exchange policy: the biggest risk they face is FX risk. Currency devaluation only makes sense for a foreign investor before he enters your economy. The moment he enters, a currency devaluation does not work well for him. Nobody wants to enter with $1,000 @ 360 (N360k) and exit N360k @ N400 ($900).
2. Steadily growing economy.
3. Strong institutions, legal system, and security.
Usually, the combination of these conditions is desirable to attract capital. When foreign investors come into the economy, they will fix the problem with availability of capital. Think about how our startups rely on global VC firms for capital. Think about Nestle, Cadbury, MTNN etc. (all foreign investors). The foreign investors will come here, invest in businesses or enterprises, employ people (train them and equip them such that in the long run, the expertise, technical know-how and experience becomes localised. Think about an individual that was recruited as a graduate trainee in Shell or Procter & Gamble. If this individual performs well, he/she stands a chance of learning and going all the way to the top. At the managerial level, you gather more exposure, knowledge, and expertise. You will make money too. At some point, you resign to start your own business, using the expertise, experience, and knowledge you gained over the years. That is how these things become localised gradually).
But one thing is clear, the first no-no for the foreign investors is if your exchange rate policies are not clear. We have travelled far; you can go back to the N614 conversation. The problem right now is that the official exchange rate is N420 while it is N620 at the parallel market. The premium is too wide. When a foreign investor comes to Nigeria, the CBN expects him to supply at N420 but when he wants to go out, the CBN can not supply to him at that same rate. In fact, the CBN is unable to supply at any rate. This is a big problem.
When you have a very wide disparity between the official rate and the parallel market rates, you are basically telling foreign investors that you are not ready for prosperity. They will not come. There are other issues o, like insecurity and all. But at least open the doors for me first. Even we Nigerians will not supply the dollars we get from our relatives overseas (called diaspora remittances) at 420. If we, the locals, would not even do that, what more for a foreign investor?
We are so always obsessed with ‘low price’, ‘low price’. Meanwhile, what matters is the availability of a product. We obsess over ‘low fuel price’ even when there is no supply. The substance is in the price at which the sellers and buyers agree to transact. Papai (a senior colleague of mine) told me that he bought pounds at N570+ from the CBN when the parallel market rate was N770. In Papai’s words ‘why on earth would anyone give me free money?’. Papai, a wealthy man by all standards, was subsidised by many poor people. Yes, that is what those kinds of policies mean. It is the same with fuel subsidy.
The solutions to Nigeria problems are many and you won’t solve all of them overnight. There are short-term/immediate solutions, medium term, and long-term solutions. In the immediate term, to put us back on track, we need to tweak our FX policy. The premium between the official rate and parallel market rate must narrow to at least 10%. That is for a start. Subsequently, other policies need to be implemented to support the short-term policy. Investors will not come to Nigeria and that chain will not break unless something is done to the FX policy. Previously, we often relied on crude oil prices to save our asses (the only reason why I am happy with our current state is that we can now see that our problems are policy induced. All the stupid and lame excuses about oil price have been thrashed). Now that crude oil proceeds are not enough anymore (no thanks to another stupid policy), we have reached the wall and I really do not see any concrete way out unless we do the needful with the exchange rate policy. Now, more than ever, we need to attract those capital inflows. The funny thing is that if you can rejig your FX policy, you won’t have to worry about interest rates at all.
In summary a N614 exchange rate is very dangerous for you from the context of how the wide premium relative to official exchange rate is a further dissuasion for foreign investors to bring their capital. The refusal of foreign investors to bring in those inflows means that we are gonna suffer a lot in this economy. It is more serious than you imagine.
*_Abdulrauf Aremu Bello_*
