Of course, the issue with crude oil price crash is beyond our control as a nation. Truth is the oil cheese has moved. On the 16th of February 2016, Saudi Arabia said they were willing to consider a freeze in production if Russia would do the same. Between them, they produce over 20million barrels per day. Oil price moved up marginally on that news, but truth is, does that change anything for us as a nation? Not exactly. Remember that the problem in the industry is not just excess production, but reduced demand for crude. The United Sates has become a net exporter of crude; Iran is also threatening to increase its export potential. We, as a nation, suffer from both ends of the crude divide, we do not have buyers, and we do not have refining capacity. In the short term the government has engaged in swaps to meet local demand, but in long run, my tale is that we will need to invest in local refining capabilities and other oil infrastructure. The best time to invest has always been in down market, this time offers that advantage – lowered cost of oil infrastructure because of the lull etc. I already blogged about this in "Who Moved My Crude Oil Cheese".
Policy actions that the Government has taken in the past few months have not worked because of the inability to correctly predict response to the actions. 2015, post- election, the first wave of exchange rate pressure that started during the campaign session was relieved slightly when people who had gained election campaign money, shared in Dollars, tried to offload, but it was short lived. Once the euphoria of the election passed, and the reality of the crude oil income crash came home, the next wave of pressure began. Coupled with the anti- corruption moves and the reduced availability of FX from CBN, exchange rate began to rise. The government moved and issued the first policy, “Stop accepting Dollar cash in banks” the thought was that the move will make the dealers hold their cash and excess cash can then force down price. It did for a few days, until the market deciphered the move. They envisaged that there was no way government could keep the cash out of the banking space for too long, and concluded that the policy would not last. So they played the waiting game and of course the exchange rate rebounded and started the rise. Fast forward 2 month, the policy was reversed. The market won their bet and the exchange rate skyrocketed. Then the CBN while not meeting the demand of legitimate importers equally banned sales to Bureau De Change, the market tried to hold on within the scarcity and the rise continued. This point ties to the third cause – The activities of speculators.
As at 2016 February, the currency has crashed by almost 100% in the black market, and to all intent and purpose, the crash has been based on speculation and the speculators have been fed by the scarcity of FX on one end and huge unmet demands at the other, leaving everyone speculating on PRICE. Both corporate and private people speculating that the dollar will get to N400/USD and as such everyone holding on to their cash until then so they can make huge profits on their Dollar. However the pent up demand for legitimate due LCs, foreign loan repayments and other invisible transactions – school fees, medical bills and all that would have normally been provided by the government have not been assuaged. Banks have huge volumes of legitimate requests that they can't seem to meet and this has forced everyone, both the corporates and the individuals into the already excessive pressured parallel market or whatever market they can find, even across the border market. So the FX market is experiencing pressure both on the demand side and on the supply side and both pressures are impacting Price! Nigerians are beginning to renege on their obligations with their international counterparties, FX loans not settled, LCs, not paid on, schools fees not settled just to mention a few, and the effect is failed credit rating and increased credibility issues with regards to Nigeria and Nigerian businesses, further increasing the pressure on government.
In normal economics, “Price” balances demand pull or supply push. High demand creates high price if supply is steady, and low demand creates lower price if supply is steady. Supply may now move up or down to counter-balance price and achieve a desired price, but in this case it is different. Concurrently Demand is increasing while Supply is reducing; making it difficult for Price to find its equilibrium, even the speculators hanging in between do not have the supply intervention to cash-in on the price, hence the free fall. The only way to curb the free fall is to introduce an external influence - an intervention on supply side to close the bottom of the supply bottle and curtail the supply fall. The other undesired advantage is that the intervention could also take advantage of the price to profit and this will in this case be termed devaluation.
So my take is this, government is the only body with the ability and the will to find Dollars to intervene in the market without excessively taking the undesired advantage of Price or even forfeiting the price advantage all together. Government already has the estimate of all our non – oil import and a fair estimate of our invisibles within the banking system that is not fulfilled, so Government can source some financing that would cover our imports and invisibles for two quarters from our International parties, mostly bilateral – US or China etc. The sourced fund will be used to settle all the obligations currently unsettled in the Banking system, and then to provide funds to settle imports over two quarters. The mere announcement of this funding will reduce the psychological pressure the market is going through and begin our long journey towards recovery. My take is that it is during this intervention that the government may take advantage of the current exchange rate to effect some devaluation so as to get in more Naira for the FX used for the intervention. This is the only point where devaluation can make any sort of sense. Devaluing outside of this premise is of no value to the country, period.
Secondly the government would have to further reduce the list of items valid for FX, so as to protect the country from frivolous FX demands while reinstating the 2002-2004 regulations on Domiciliary account deposit and export proceeds. We had these restrictions between 2002 and 2004 in this country and it provided sufficient controls for our foreign exchange, interestingly, the price of crude today was the price as at 2003.
Thirdly, it is hopeful that Buhari’s government can achieve this because of their strong anti-corruption stance. Corruption would have been a bane to this intervention, but in the atmosphere of no –corruption, reducing the pent up demand within the banking industry will have strong impact, apart from the fact that it will reduce speculating pressure on the exchange rate, it will go a long way to stimulate the economy and while increasing income obtainable form import duties and all.
I hereby submit my opinion.