Opinion

What CBN can do to make Nigeria benefit from rising oil prices

T he ongoing war between Russia and Ukraine which has stretched into 80 days has reportedly affected the global economy with sharp increase in commodity and energy prices.

The world, including Nigeria, has witnessed rapid spikes in costs of commodities like rice, wheat and fertilizers. Despite being one of the world’s largest energy producer and exporter, Nigeria, according to forecasts, may not benefit from the current increase in prices of gas and crude oil.

Nigeria’s case is further compounded by its baskets of problems – insecurity, oil thieves, depreciated naira, depreciated foreign reserves, high debt service ratio, plummeting oil production, payment of trillions in petroleum subsidies, unemployment, desertification, shrinking Lake Chad, fake news, frequent collapse of the national grid, infrastructural collapse, incessant strikes by ASUU, labour and so many other disturbing issues. General insecurity has already crippled food production in parts of Nigeria. In the year ending 2020, only about 25% of the nation’s arable land was cultivated.

 

The country risks food shortage and possible food riots amidst rising inflation which now peaks at record 16%. Nigeria remains one of the largest importers of food products which are partly the reason we have trade deficits. According to a report from the Bureau of Statistics on foreign trade, Nigeria spends an average of $10 billion and estimated N508 billion of its imports to meet its food and agricultural production shortfalls of mostly wheat, rice, poultry, fish and consumer-oriented food services. This complementary import is necessary to feed her exploding population but we need to see how we can engage the population of unemployed youths into useful productivity, hence the wisdom in CBN’s robust intervention in agriculture.

 

There is a need to expand CBN’s intervention in agriculture so as to get more people involved not just in agriculture but in agricultural extension services. To make Nigeria globally competitive in the energy sector, the CBN in 2020 commendably invested $250 billion in the National Gas Master Plan. The aim of the intervention was to develop gas infrastructure for export purposes and to meet local consumption. If Nigeria’s gas infrastructure is fully developed it will create economic growth and jobs.

 

The CBN has continued to cooperate with other partners and multilateral institutions to improve infrastructure financing in several critical sectors in the country under the PPP. Millions of dollars have been mobilized to aid these efforts. For instance, the investment in the West African Gas Pipeline working in synergy with the Nigeria-Morocco Gas Pipeline project will boost gas delivery in West Africa and Europe.

 

It would appear the CBN anticipated the Ukraine situation and the looming energy and food crisis when it commenced her intervention in the energy sector and agriculture by financing the Anchor Borrowers Fund which granted loans to about 4.8 million small holder farmers.

 

With that initiative the country now produces over 7.5 metric tons of rice annually as compared to 4 metric tons in 2015. Success they say begets success and there is need for sustainable intervention and create several more windows of expansion for growth. If the Anchor Borrowers Fund is sustained, rigorously monitored and expanded, Nigeria will be on its way to self-sufficiency in food production.

 

The apex bank must maintain its grip on the naira despite demands for deeper reforms from the International Monetary Fund, World Bank and some political elements speaking the voice of these multilateral institutions. The multilateral institutions and their apologists argue that a free-floating naira would help the economy withstand future shocks. But the reality is that inflation stemming from a sharp devaluation could throw more people into poverty. Nigeria is grappling with lots of issues revolving around poverty, inflation, insecurity and food crisis. A free fall of the naira will only create more woes hence the Central Bank must be careful in accepting unsolicited advice from the IMF and multilateral institutions. The speculation that the CBN may stop selling FOREX to banks will cause more hardship and should be dispensed with.

We all know why the naira is pressured? Here are some key facts about the naira and why CBN’s intervention remains critical and the CBN being the sole custodian of Nigeria’s FOREX earning from oil and gas is obligated to ensure those who need FX for their transactions get it.

This does not mean we should diminish our focus on export earnings and diaspora FX repatriations. Ninety percent of our FOREX earnings come from oil and gas exports. COVID-19 disruptions pushed the country into its second recession in four years.

It narrowly exited the recession in the fourth quarter, but the sharp drop in oil revenues led to payments deficit of $14 billion in 2021 and has depleted foreign reserves. Insecurity in the North and other parts of Nigeria affected food production which added additional pressure on the naira as the country scrambled to avoid a food crisis amidst rapid population growth.

 

The value of imported agricultural products went up by 140.47%. It spiked by 18.37 % compared to the last quarter of 2020. While Nigeria spent more importing agricultural products from outside the country valued at N630.2 billion, it only managed to export a meagre N12.2 billion in agricultural products.

 

Nigeria spent N258 billion on wheat importation in the first three months of 2021 representing 3.8% of the total imports share for the period. A trend CBN is determined to reverse as part of the measures to reduce not just Nigeria’s trade deficit but also to avert a food crisis while reducing pressure on the naira.

 

During the last oil price crash, in 2016, the Nigerian Central Bank created a system of multiple exchange rates in order to avoid a large official devaluation.

 

These included a marketdetermined rate for investors and exporters called the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX). Faced with a N5.6 trillion ($15 billion) budget deficit this year, the government is seeking a $1.5 billion loan from the World Bank. But in return, the World Bank wants Nigeria to do more to bring the official exchange rate at par with the demand for dollar and other rates, including NAFEX, into line.

 

Left with little choice, the Central Bank again devalued the naira’s official rate twice last year and has weakened the exchange rate for retail users. It also banned the issuing of dollars to Bureau de Change outlets while relying solely on the banks.

 

The CBN nevertheless has continued to gradually adjust the currency since the devaluations, limiting dollar access for unnecessary imports and implementing restrictive forex policies to support the naira. After oil prices crashed in 2014-16, Nigeria raised interest rates to attract investors. But when crude prices plunged last year and foreign money fled, the Central Bank reduced yields on treasury bills in order to boost the naira’s liquidity. But with the Russia/Ukraine war and the world’s energy crisis, the cost of crude has again risen beyond what it ever was some 12 years ago.

 

How can Nigeria benefit from the current rising oil and gas prices especially given the indication that the recent increase in oil does not equate to increased revenue nor does it improve the external reserves of Nigeria economy? Inflation remains a major concern to global policy makers and its ripple effect is being felt in Nigeria. Petroleum scarcity has resurfaced in many gas stations in Abuja. Diesel where it is available remains out of reach.

 

Due to epileptic power supply, scarcity and non-affordability of fuel many businesses are closed. Since oil and gas revenue accounts for over 80% of our dollar liquidity, Nigeria can benefit from the rising oil cost by curbing oil theft and making NNPC, the National Upstream Regulatory Commission and the Midstream and Downstream Regulatory Authority more accountable.

 

The law requiring that all monies collected from oil and gas revenue to be mandatorily paid into the Federation Account should be strictly enforced and adhered to. CBN, why selling FOREX to banks, must ensure strict compliance with its rules and processes. The interwoven convoluted relationship between the regulator and regulated remain a challenge that must be addressed. There is a need to revisit the CBN’s Corporate Governance Code for Banks and Financial Institutions and the Financial Reporting Council of Nigeria Corporate Governance Code.

 

The rule requiring corporations to ‘comply or explain’ is weak and gives room for abuse. The rule should be revised to make compliance more forceful so as to minimize corporate fraud. We do not need to live in a rental economy when we can plug the financial leakages and push back on corruption.

 

Besides, the significant oil price rebound following the Russia/ Ukraine war has the potential of meeting our offshore debt obligations and will further improve our dollar reserves if we manage the situation well. It’s never too late to begin to do the right things if we are determined

 

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