Last week Tuesday, the CBN Governor met with the organised private sector to discuss developments in the foreign exchange market. He gave insights into the continued pressure on the naira blaming it on speculative activities of operators. He urged the Nigerian business community to focus on local production promising that the CBN will assist local producers who manufacture products that are now being imported into the country.
Excerpts
No cause for fear and panic
I would like to say, just to underscore a point, that people are nervous, people are worried, let me assure you and say that there is no need to be nervous, there is no need to panic. No doubt there is a need for concern, and we will certainly find a solution to the current crisis caused by falling oil prices. It is a journey that all of us are already in. I say with commitment, we will pass through it. That is why I am trying to say that there is no need for anybody to be nervous.

Global economic trend
The important thing is that the global economy has shown in some economies, some recovery. The recovery is seen to be weak, particularly in the United States, where we see unemployment dropping to as low as 5.8 per cent. We have seen inflations at some low levels and we have seen the growth in the GDP in the US come up to as high as 3.8 per cent in 2014.
Another macro economic development in the world had to do with falling commodity prices, I mean we are only seeing crude oil prices and I give you an example. The price of gold fell from a peak of about $1,380 per Pound in March 2014 to as low as $1,140 per pound in November 2014.
Similarly, the price of copper fell by nearly 11 per cent in the cause of the year. So what I am saying here is that what is happening in the global economy is not just about the drop in crude oil prices, we have seen drop in prices of all commodities, we have also seen in the world, rising geo-political tension and conflicts, the battle in Ukraine and of course the EU and the US taking on Russia, about the annexation of East Ukraine, and we also had geo-political tensions in the Middle Eastern.

Negative trend in global economies
Well, the negative is that unemployment in some countries is rising particularly in advanced and emerging markets, for instance in Spain the rate of unemployment is about 23.7 per cent, Italy 13.4, Greece 25 per cent, South Africa 25 per cent and in France about 10.4 per cent. These are some of the things that have happened in the world in the course of the year, we saw the tapering in the US, where at a point, the US was injecting about $35 billion into the US economy on a monthly basis and of course, the world is awaiting the effect of that.

What about Nigeria
In Nigeria, what we have seen is that we have some positives; we have seen the robust GDP growth rate of 6.35 per cent which is among the highest in the emerging markets in the world. We have seen inflation stabilising to about 8 per cent as at December 2014 compared to as high as 16 per cent that we saw as far back as two and half to three years ago.
This is a strong positive for Nigeria in the sense that we have tried as much as possible to keep inflation low and it is not only by using monetary policy tools to control inflation, but also by the diversification of the economy particularly in the agricultural sector, helping to keep prices low. In December 2014, some of you who may have monitored commodity prices, I mean staple foods like rice, beans and garri, would have observed that prices remained low, at worst, marginally higher than they were. Given what has happened, one would naturally have expected that prices will go up and people will begin to feel the effect, but I think this did not happen as a result of some of the policies that have been put in place both by the monetary and fiscal authorities as well as the political authority to ensure that the Nigerian economy remains resilient.
Nigeria’s GDP increased by an impressive rate of 6.4 per cent last year and it is pertinent to note that the growth rate have been driven largely by the non-oil sector of the economy. Deficit budget also have decreased and we have considered that positive, deficit budget increasing to N680 billion as at November 2014 from about N4.15trillion in 2013.
So things are not that bad and I think we should be happy about that.
Negative effect on Nigeria
Some of the negatives that we have seen are that as a result of the drop in crude prices, between June 30 and December 31, 2014, price of crude oil had dropped by 50.7 per cent from about $112 per barrel to $55 per barrel in December and right now, we are talking about below $50 per barrel. This decline is about 50 per cent, from December 31 and now. Unfortunately, as a result of the drop in prices resulting in dropping revenues, we have seen the foreign reserves drop by about 12.3 per cent to about $39 billion in July 2014 to $34.26 billion on January 22, 2015.

Impact on Exchange rate
Naira has depreciated by about 8 per cent and 13 per cent at both official and inter-bank markets respectively in 2014 and by 5.6 per cent at the inter-bank market as at January 23, 2015. As a result of the drop in crude prices and the fact that people feel that the reserves are dropping, we have seen the movements into a bearish market in the Nigerian Stock Exchange, to the extent that today, the NSE All-Share Index closed at about 43,657, a decline of about 15. 9 per cent in 2014 and 29, 687 as at January 22, 2015.
The trends in the oil prices has shown that during the year under review, we have seen oil price drop by nearly about 60 per cent from a peak of about $115 per barrel in January 2014, to as low as $50 per barrel in January 2015. Another spill over from the slide we have is that in January 2014, reserves was as high as $42 billion; by April, it has dropped to below $37 billion, and sometime in July, we were able to move it up to about $39billion and between October and now, we have seen the reserves dropping under pressure.
Exchange rate movement
In January 2014, the exchange rate at the official window was about 155, and the inter-bank and the bank 116 in January 2014 and of course, moving up to around October of 2014 when we began to see the reserves drop and the pressure on the exchange rate; that is what we have at this point where the official window is about 168/170 and of course, the interbank at slightly higher than180.
Now what does history teach us? From history, we have the pre-crisis period, crisis period and we have the post-crisis period. In January 2007, both the official and the interbank rate, the BDC during the pre-crisis period, we could see a sort of convergence of the three markets at about 118 and this continued up to 2008 and in October 2008, we saw during the crisis period the Bureau de Change price hitting the roof at almost close to about 190 and the interbank also moved up as we see the official price moving up to about 158, moving down to about 155.
You can see that during the crisis period, you normally find the official market moving too high and there will be divergence between the BDC markets as well as the official and interbank market rate during the crisis period.

Importation of non-essential goods
So the issue therefore is, what is the extreme pressure on the exchange rate in Nigeria? We have seen demand pressure on the currency arising likely from the lopsided dependence on imports. Today in Nigeria, toothpick is being imported, tomato paste, furniture, rice, fish, sugar, petroleum products are being imported into Nigeria.
Perhaps it is important for all of us to know that if we import one set of toothpick, it impacts on the reserves, so why should we be seen to be importing items that we can produce locally? Why should we be importing tooth picks? I will give credit to the cement industry. The lesson in history is that if we are committed to a cause and we stand by that commitment to that cause, there is no how we will not improve our economy. Some years ago, Nigeria was importing cement and of the list of items imported into Nigeria then, cement used to rank one of the highest, up to three years ago we were importing cement into Nigeria, but today we are not only producing cement for our local consumption, we have started to export cement.
Alhaji Dangote is at the forefront of some Nigerians who have said let’s take this up and let’s begin to revive the situation and improve our economy, it is not rocket science to get determined and tell yourself that Nigeria has limestone, if we have limestone what is stopping us from being able to blast our limestone and convert it into cement, use it not only for domestic consumption but also for export?
Need for local production
Why is it that we are unable to do this in Nigeria? Simple wool we import, tomatoes, we import, in fact, we import rice, we import fish, sugar. You can imagine what will happen, how employment will be created, if you take something as simple as fish, what does it take to develop an aqua-culture and in the process of developing the aquaculture industry, you will also be developing the feed mill industry, because you will need the feeds that will feed the fish in the aquaculture business. As you produce the feeds, you will also be growing the maize that you need for that industry, can you imagine the entire value chain; the kind of employment and improvement in GDP that will be created as result of these efforts?
I am saying if we are doing it in cement, why should Nigerians ever think that it is difficult to do it in fish? What does it take to grow rice? I am happy that efforts are being made, I am sure that in the course of time, we are not going to ban importation of rice, we are going to say that we will no longer provide foreign exchange if you want to import rice into this country. Rather than import rice, I will advise you go into the production of rice, if you want to use your dollars that you kept somewhere to import rice no problem, but we will not allocate foreign exchange for you to import rice.
The same way we will graduate into other products. I keep saying that before I was born, we have been importing milk, what does it take to produce milk, are we saying that if it has been done in other countries, it cannot be done in Nigeria? I do not believe so; it only involves commitment; that is what we are saying.
The only thing that can help us to reduce the demand pressure on our domestic currency is that we need to see ourselves producing most things that we are importing, that will help.
Aside from rice, petroleum products are being imported, and a lot of speculative demands going on in the different sectors in this business.
Take a cue from Dangote
Aliko Dangote has invested about $9 billion in the petrochemical business, and he has committed to Nigerians that by the end of 2017, he will begin to produce 500,000 barrels of petroleum products in this country. What that means is that by that commitment, we will stop importing petroleum products in Nigeria come end of 2017.
You do not have to build a $25 billion worth of refinery, you can do a modular refinery and that is why I am saying that if I find somebody who says he wants to invest $9 billion in petrochemical business and I find someone who wants to invest money in the oil and gas business where we are going to be producing polypropylene, not only for domestic consumption but also for exports, if we have people who are saying yes, we can commit some billions of dollars or over $1 billion for the production of rice or we have people who want to commit money into the business of aqua culture, or in sugar, if somebody invests $9 billion and he raises equity, somebody brings his money and says I want to invest $7 billion in fertilizer business and out of that he brings $3.5 billion of his money as equity and he puts it in that business, and he tells foreign banks, give me $1.7 billion loan and he tells local banks give me $1.75 billion as loan and he comes to central bank and say he wants N50billion, we will assist him as the Central Bank of Nigeria in support of his effort in helping the country produce what it would have imported.
What are we saying? Even if we have been accused of being involved in questionable physical activities, what we are saying is that what seed can you sow to help people who are showing commitment to help our economy? What can you do to help and encourage people who are showing commitment to our economy? That is the bottom line today.
CBN will support import substitution investment
Why would CBN or the government help this people, because they are able to reduce the demand pressure on our local currencies. What we find is that if they can do this, we can conserve our external reserve and do something good with it and like I said earlier, when external reserve goes up, there is a direct relationship between external reserve and exchange rate.
We have seen speculating demand, we have seen rent seekers taking advantage and I will warn that those of you who are speculating, will lose your money, and I have told a few people that there is no need to speculate, we have about $34 billion in reserve, don’t forget that I said in 2007, our reserve was less than $10 billion, we survived with that.
I know economic activities have improved but I am saying that $34 billion can support this economy, there is no need for you to panic, if what you need is to import just one microphone, do, there is no need for you to be nervous, there is no need for you to panic, you want one microphone, you import five.
If you are supposed to import one bottle of water, please continue, there is no need for you to think that because of drop in prices, that the exchange rate will go up, you are contributing into putting more pressure on the naira and speculating demand and that will push exchange rate high. If what you say is that you want to continue to do your business, that is importing, do it in an orderly manner, there is no need for you to be nervous, I am appealing to all of us who are speculating with the currency to stop and in the cause of that, you will find out, because I heard a few people saying they are doing forward transaction at 190 and above 190, you will lose money, I assure you, there is no need for you to panic.

Capital flight
As a result of the drop in prices, we have seen increased foreign exchange out-flow, no problem, you brought in your money, what we say is free entry, free exit but do it in an orderly fashion and that is why we introduced some measures because we have seen that people were beginning to behave in an orderly fashion. If your demand is legitimate, we will meet all legitimate demand, we would not be concerned about illegitimate demand, what did we do as a result of what we saw in the market (as a result of the pressures), we had to re-classify some eligible goods and services from their R class window to the interbank window, conduct special intervention budgeting market in order to stabilise the rate. We will do more – prequalification of customers’ applications to forestall portfolios’ demand and there is need for us to also stop that.

Hope for all in 2015
2015 is not bad, it will be good but we need to take certain actions. We believe that in the cause of the year, there will be reversal in the crude oil prices, if that happens, it will help us in this nation. We are determined to ensure our GDP growth rate is protected at about 5.5 per cent, we will try to see what we can do to keep inflation rate within the bound that we have set for ourselves, but what is most important for us here is that we need to begin to diversify our economy. We need to begin to look at the structure of our economy and tell ourselves that as we stopped importation of cement and today we are exporting cement, we can do the same and encourage those who are ready to produce to support the economy and help conserve our reserves and ultimately keep our exchange rate strong. Inflation is expected to be under control in 2015. The CBN as the monetary authority stands to support the economy, defend the reserves and the country’s exchange.