Mike Obadan, professor of Economics and Statistics of the University of Benin is a member of the Monetary Policy Committee and board member of the Central Bank of Nigeria. He disclosed to BAMIDELE FAMOOFO in this interview on the sidelines of the 32nd seminar for Finance Correspondents and Business Editors organized by the Central Bank in Akure, Ondo State, that the way out of Nigeria’s seemingly endless battle with dwindling foreign exchange and the current energy crisis is for government to wield its political will to drive local refining of oil through the modular refineries. Excerpts:
How best could the government have reduced the negative impact of the rising global oil prices on Nigerians?
It is for the government to maintain the same level of expenditure it was running before prices began to go up. That way we will not know that anything is happening or that there is any change in the price of oil commodities. Incidentally, that was the same thing that happened in 2007 and 2008 when there was a global financial crisis which started in the US and it resulted in lower demand for oil and prices of crude oil fell. The Central Bank took from the Excess Crude Account and maintained expenditure and we as Nigerians did not feel the impact of high petroleum prices. But after that crisis, in 2009, prices kept rising until 2014 when crude oil price rose to $147 per barrel around July or August. Thereafter, prices started going down. Invariably, production is the thing, if we are able to use oil earnings in the period of boom to diversify the productive base of the economy and create a good and enabling environment for manufacturers, definitely all will be well. Like we said ours is a high cost economy up till today. It makes exporting of oil goods to be difficult compared with low cost exporters of the same product from other countries.
I guess export earnings are low due to production challenges in the country?
I cannot agree with you more because that is the situation that we have in Nigeria now. If productivity was high and we are able to produce semi-manufactured goods which have value and they are exported abroad, invariably we will be able to earn foreign exchange to be able to build strong external reserves and this will make us own a strong currency.
What do you say about the call for naira to be devalued as some believe it is too strong?
When I said depreciation can help exports, it is not for a country like Nigeria at the moment. But for strong economies, industrial- based economies like the United States, China, Japan, Germany and the United Kingdom; they can devalue their currency to make their export cheaper abroad for them to sell more goods. But in our own case as it were we cannot devalue to say we are promoting export.
That is not the reason to allow depreciation here because we don’t have the goods to be exported for money. Incidentally, currency depreciation does not affect the price of crude oil which accounts for over 95 percent of our exports. So, the point is that whatever changes we make to the exchange rate by way of depreciation does not earn us any value. But unfortunately, this is a bitter truth, that because of the oil that the country has, the orientation of the fiscal policy has changed as the fiscal authorities expect the exchange rate to depreciate in order to balance the budget. That is not the purpose for using the exchange rate as an instrument. The exchange rate is essentially a policy instrument to manage the external sector which affects the import and export of goods and services across countries, foreign exchange earnings and external reserves. You see because Nigeria has been selling crude oil exports and then when the dollars come, monetization is done, the government is happier at a higher rate of exchange. But that does not help the stability of the macro economy. If we have a diversified economy that oil now plays a very insignificant role, definitely the exchange rate will perform its expected role in macroeconomic management. So, the issue of balancing does not apply now. At the moment the exchange rate is treated not as a means to balance trade but to earn more cash when the naira depreciates against the dollar.
What about using moral suasion to stabilize the crazy exchange rate we have at the moment?
Well, I think for whatever it is worth, it can be used. But my source of worry is that it is not even being used at all. Take the issue of inflation, there is so much arbitrariness in the pricing of goods and services now. Economic agents jack up prices to whatever levels they want especially for goods that are inelastic in demand, (goods which we must buy); i.e. medicine, food (even if you reduce the quantity). What they now do is to use all kinds of excuses, the latest being the price of diesel. They also talk about the price of naira against the dollar. Even when you want to buy tomatoes in the market they will still tell you that. So, moral suasions can help in such a situation. And, again, there are some towns or cities where some unions control the price of commodities once they get them from the farmers. They constitute themselves into oligopolies or monopolists to control prices. I believe the government must stop them. Let the people know that the government is concerned about their welfare. It should appeal to them or even warn these people causing instability in prices. I think this is where moral suasions can help because the economic agents need to be told that the government is aware of the activities and that it is concerned and they could do something drastic if they continue along the line. Moral suasion is not a major approach but it can be complimentary to all other strategies.
“My take is for the government to call all the investors and enter into agreement with them to assure them that they will get crude oil and that oil will be deregulated. I can assure you that if we have many refineries prices of petroleum products will come down. There is no reason why it should not come down. I believe that is the option for now”
Can local refineries help in this situation?
Yes, it is desirable to have local refineries because of their positive impact on the economy. They can contribute to government taxation, reduce demand on foreign exchange and if we have large oil we can export for foreign exchange. At the moment this government has strived to encourage local refineries through the modular refinery option and it has given about 75 licenses to investors to set up modular refineries. A good number of them have commenced construction while a few have completed works at the refineries. I understand one or two are actually producing diesel in the Eastern part of the country. I know a few others that are also ready for production and I think that is where the problem lies. There is one in Edo State who is my friend. He told me that since the middle of last year, he has completed the first phase of a modular refinery that can produce 5,000 barrels of oil per day. He has a plan for 30,000 barrels per day but the problem he has is inability to access crude oil. He’s trapped. I think this is because of the hurdles from the NNPC. This is a bit tragic because if the government is encouraging investment in modular refinery and lower level officials who are implementing the policy become the problem. Despite the fact that he has met with top level officials at the NNPC, he’s yet to begin production. I think what is required is the will from the government to make it work. If the directive comes from the top, vested interests will take the back seat and the modular refineries will work. So, I think that is the way to increase domestic refining of oil now. To get the modular refineries working is the way out of this energy mess in the country. If I were a decision maker at that level of government, all I needed to do is to invite the investors and find out what is happening from time to time and find a solution to the problem. But when the will is not there the problem will continue. It is the same problem which made investors who got 18 licenses under the Olusegun Obasanjo regime not to attempt to establish. What they wanted was assurance from the government that NNPC would supply crude to them for refining.
They wanted to be sure because they knew that the tendency for the NNPC over the years was to export crude oil for forex while local refineries were starving. Secondly, they wanted assurance that the sector would be deregulated when they started producing refined oil. My take is for the government to call all the investors and enter into agreement with them to assure them that they will get crude oil and that oil will be deregulated. I can assure you that if we have many refineries prices of petroleum products will come down. There is no reason why it should not come down. I believe that is the option for now.
Can the naira ever become convertible?
The naira cannot be convertible because of the current state of the Nigerian economy. One of the factors for convertibility is the state of economic performance. I mean how well or robust the economy is doing. An economy that is struggling on all fronts cannot have its currency convertible. It means a situation whereby someone can easily use the naira to make transactions in another country. In other words, there is free exchange of naira for other currencies for the purpose of international trade and transactions. It means there are no restrictions on the use of the naira. It means it can be bought by a Ghanaian or Sierra Leone person and be used for transactions in their economy. For that to happen the country must have very strong stock of reserves which can back the naira anytime there is pressure on it. Without a strong naira nobody will want to hold it for transaction anywhere. For convertibility the economy has to be highly productive. Productive in which event the rate of inflation is low, cost of producing goods and services low, and then the goods are competitive abroad. Consequently, the nation will earn a lot of foreign exchange. So, without these, currency cannot be competitive abroad. The underlying factor is that you need a strong economy for your currency to be appreciated by other people and for them to want to use it in their business transactions.
Otherwise when they tell you that they don’t need your currency again and that they want to exchange it for a foreign currency and you begin to make excuses, they will not listen.
