Godwin Emefiele, the governor designate of the CBN who formally takes office on 01 June, reportedly told the Senate at his confirmation hearing in March that devaluation is “not an option” and would be “devastating”.
We do not know the full context of his remarks, and cannot be sure if he was being asked about a possible adjustment of the mid-point for the naira within the corridor or about a more radical move. However, we can say that he shares the party line of policymakers on the appropriate exchange-rate regime. The CBN is mandated to achieve and maintain price and exchange-rate stability. It regularly says that the largest single input into inflation is the exchange rate.
To flesh out the argument for the status quo, Nigeria has a voracious appetite for imported goods and services. There are some benefits for the few from a strong currency. The cost of luxury goods is contained. Most of us are familiar with the imports of luxury vehicles and premium brands of cognac. A similar case can be made for the purchase of fx to pay for school fees in the UK and elsewhere.
However, a casual look at the data from the National Bureau of Statistics (NBS) for merchandise trade in 2013 tells the fuller story. The largest categories of imports (cif) per the UN’s standard international trade classification (SITC) were commodities (34.3% of the total), machinery and transport equipment (22.6%), and manufactures (10.2%). We assume that commodities include premium motor spirit (petrol) and other refined fuel products.
The need for machinery and manufactures can be explained in the context of Nigeria’s dilapidated infrastructure and limited productive base. The profile of imports in 2013 therefore points to policy failings but does not indicate that the wealthy minority is the main beneficiary of the exchange-rate regime.
Those failings are being addressed, most notably through policies of backward integration. The FGN’s economic policies are based upon import substitution so that the productive sectors of the economy can meet consumption demand as far as possible. Rice is the most cited example yet we should also mention sugar, fish products, oil palm, vegetables and inputs such as fertilizer. According to the same series from the NBS, 9.6% of merchandise imports in 2013 (N680bn) consisted of food and live animals. There are some obvious savings.
Another failing would be addressed by the deregulation of the petrol price. We are cautiously optimistic that the new administration after the elections in February will take the plunge, offer some one-off sweeteners to the population (without adding to recurrent expenditure), sit out the inevitable protests and reap the benefits. Our argument rests upon the very strong case for deregulation as well as numerous greenfield projects for new refining capacity. We doubt that the promoters of these projects would proceed if the subsidies were still in place. A different NBS data series for 2013 shows imports of petrol and other refined fuels at N1.1trn.
The exchange-rate preferences of the CBN/MPC are well known. The question then becomes whether they can deliver. It is being increasingly asked as we approach the election. Soaring fx demand in February and March, which the CBN attributed in part to large dividend remittances, fuelled fears that the monetary authorities could not deliver and would be forced, as a minimum, to adjust the mid-point in the corridor. Although the pressures have eased for now, choppy conditions in the market are likely to return.
This is evident from a look at fx flows. We have already commented on the hearty import demand but analysis must also include the leakages in oil production. The latter are running at 300,000 b/d or, if the data in the CBN’s monthly report for February (2014) is consistent with its series through to December, as much as 500,000 b/d. The report indicated a monthly average of 1.86 mbpd, compared with the assumption of 2.39 mbpd in the 2014 budget. As we cannot explain the timing of the acceleration in leakages, so we cannot say when they will be stemmed. This is a variable beyond forecasting.
In our view therefore the fx market will remain choppy. The benefits of import substitution are necessarily gradual while the inflows are uncertain due to the oil production losses. If we took a long term view, we might anticipate the recovery of the losses and a pick-up in output towards a new high of 3.0 mbpd on the strength of a healthier investment climate in the industry. At this point, however, we are looking no further than the aftermath of the election.
On balance we feel that the CBN will be able to muddle through. In a repeat of the market tensions of February and March, it may well have to adjust the mid-point to, say, N160 per US dollar. We do not expect any further depreciation unless the production losses continue to mount and/or there is a steep fall in the international price of high quality crudes.
We hesitate to give a timing for such an adjustment. One theory was that the change would come after the end of the CBN governorship of Lamido Sanusi. This has clearly been overtaken by events and has been replaced by another view that the change will follow the election. If it comes, it will be a modest adjustment under pressures in the market. We do not see a change in official thinking, which Mr Emefiele shares with the overwhelming majority of policymakers.
