Former CIBN president wants Nigerian banks to promote export, import substitution

• Can diversify forex earnings base
• To keep forex in-country
• Helps institutionalize management of reserves

 Charles Abuede

A former president of the Chartered Institute of Bankers of Nigeria (CIBN) has challenged Nigerian banks to concentrate their activities on the promotion of exports and import substitution for the purpose of keeping foreign exchange in the country and diversifying the earnings sources for foreign exchange in Nigeria.

Segun Ajibola, a professor of economics and past president of the institute (CIBN) said this in a keynote to the second edition of the Guest Lecture Series webinar organised by the Abuja branch of the CIBN, which focused on the impact of foreign exchange reserves on macroeconomic stability in Nigeria, and monitored by Business A.M.

“Soludo, during his leadership as CBN governor, attempted to appoint banks to be holders of the foreign reserves as a way to help reform the forex management. This became an opportunity cost for the holding of foreign exchange.  On the role of banks, they need to be transparent. Banking activities should be seen to be import substitution and export promotion oriented. Promote export because this needs to be institutionalized,” Ajibola stated.

According to the past president of the bankers’ body, “Whatever happens to our foreign exchange reserves determines what happens to our domestic economy. It is a major way of optimizing the nation’s resources with the aim to maximize the growth of the economy. To pursue or achieve growth, develop your export sector by linking the real sector with the monetary policies made to develop them. Diversify sources of forex earnings in the economy”.

Drawing on historical statistics, Ajibola said global foreign exchange reserves stood at $1.2 trillion in 1995 but was growing at 80 per cent annual growth rate. But he added that, however, “the decline in Nigeria’s external reserves has made us understand that between 2015 and 2017, a total of $80 billion in form of foreign portfolio investment (FPI) came into Nigeria.

“On the other hand, external reserves as managed by the central bank plays a role in exchange rate adjustment. The external reserve is used for financing domestic foreign exchange needs,” he said, adding that these are external assets available in an economy for:

• Maintaining confidence in the economy
• Used to support the local currency in the currency market
• It is a form of self-protection and enables the CBN to cushion external shocks
• It is used to finance import, maintain the exchange rate at a certain rate.

Therefore, Ajibola added, “external reserves are essential and if well managed judiciously, can help manage inflation, output level”.

The major challenge experienced by the external reserves, according to the former CIBN president, is revenue from crude oil, as well as infrastructure and security challenges.

He stated that the outbreak of COVID-19 pandemic and the falling oil price, also created problems for the external reserves, hence its depletion. Over the years, Nigeria’s external reserves figure has been inconsistent: In 1992 – $0.7 billion; 1993 – $1.3 billion; 1996 – $4.10 billion; 2002 – $9.99 billion. But, as at the start of January 2020, Nigeria’s external reserves stood at $38.53 billion; March – $35.1 billion and at the close of the first half of the year, the total reserves were standing at $35.8 billion.

The professor of economics further stated that for Nigeria to stabilize its forex, it must first stabilize the economy.

“A major determinant of your forex is your trade openness. A depreciated currency translates to a higher cost of doing business. The resultant effect is cost-push inflation which can lead to unemployment and also high inflation.

“In the area of multiple exchange rates, there has been a dislocation, which has also seen disruptions from the fiscal and monetary apparatuses. The complex framework will help to improve wealth while enhancing growth. Economic stability is a prerequisite for economic growth.

“However, about 90 per cent forex earnings came from

oil.

“Fundamentally, there are international regulations on the minimum amount of external reserves you must keep for financing 6 months import bill to enable trade partners to trade with you. If your external reserves stand below 6 months, such a country will be termed illiquid, but when below 3 months import bill financing, it will be termed insolvent.

“If we consume what we produce, it will help accumulate more foreign reserves and also reduce our vulnerability to the holding of forex. Our major source of foreign exchange reserve is vulnerable. The confidence level from trade partners and multilateral lenders will be dependent on the level of forex reserves,” professor Ajibola concluded.