Nigeria must move to create demand for naira

VICTOR OGIEMWONYI 

Victor Ogiemwonyi, a retired investment banker, is a former Governing Council member of the Nigerian Stock Exchange (NSE), now Nigerian Exchange Group (NGX Group). He sent this contribution from Ikoyi, Lagos. He can be reached via comment@businessamlive.com 

A national currency is one of the things that make a country sovereign. It should be the pride of a nation, its strength, its purchasing power; and, therefore, guarded with all at its disposal. The acceptability of its legal tender (national currency) is important and has vast economic implications. 

In a recent conversation, with my friend and market colleague, Mr Sonnie Babatunde Ayere, he reminded me that the word “current”, in any national currency, implies the flow of energy in business activities which is tied to a country’s currency. The more the activities in your national currency, the more the demand for it, and therefore, the value. In his view, when the only thing the world really wants to buy from a country is not sold in that country’s local currency, then the currency is doomed. The consistent depreciation of the naira, regardless of the levels of reserves and import cover, attests to this. Simple economics dictates that value rises where there is consistent demand. This is something he says he has been canvassing for years on end.

In our discussion, the issue of the value of naira came up. He believes selling our oil in naira was the solution. Why shouldn’t a Vitol or Trafigura (oil traders who frequently buy our oil) sell its dollars to our newly created FX Market (EFEM) to buy naira and then use the naira to pay NNPC Limited for our oil? After all, NNPC is now a private Nigerian company and legally should accept naira for its products. The coming on stream of the Dangote Refinery has done Nigeria and Africa great pride. Selling oil to it in naira for refining, is the right thing to do. We should complete the cycle by selling all our oil in naira. 

This point, mirrors the position expressed by Mr Femi Falana SAN, a prominent lawyer, who brought this up sometime in 2023. Although his concern at the time was more about the dollarisation of transactions in Nigeria by those who transact here in dollars. Also, earlier this month, a Bill that is now being considered, emerged in the National Assembly, seeking to ban transactions in dollars in Nigeria. I think this law will not be necessary, once we have a market priced naira. 

Any time you make a law to ban something this nebulous, implementing it is usually, almost impossible. The effort to monitor and enforce it, will usually take away the oxygen in the idea. The call to have the naira, as the only transaction currency in our economy, is grounded in good economic logic and on its merits, and a move in the right direction, that is deserving of a considered look. 

Selling our oil in naira, for instance, will have huge positive implications. These positive implications will help in stabilising the currency. Let those who buy our oil, convert to the naira and pay us in naira.

Let’s move from our current approach and fixation with increasing the supply of dollars to our economy and, instead, focus on getting more demand for the naira. 

We do not have much to sell in dollars. We are a consuming nation that may always import, and, consequently, always importing inflation with our dollar purchases from abroad. It will take many years to produce enough to significantly reduce our dependence on imports. 

We can immediately focus our energies on creating demand for the naira to generate an uplift in value and create dollars to be supplied into our economy in a significant way. Oil is our main product to the world, let us leverage it, to boost our national currency. It is a quicker and more effective way to enhance the value of the naira. 

Let’s put in perspective the recent smart decision by the government to sell crude oil to Dangote Refinery in naira. This means that the nearly 60 percent of our FX demand for importing refined petroleum products into Nigeria disappears from our dollar demand, thereby putting less pressure on the naira. If we can finally persuade those who insist that they must import what we produce to ensure “competition” even though that means importing dirty fuel from a blending plant in Malta with unknown owners that has mysteriously appeared from nowhere, and now the largest facility for importing fuel into Nigeria, the dollar demand will reduce even further. As they say, if you understand Nigeria, then you don’t know Nigeria. 

We should also wean the NNPCL off their love for borrowing dollars with crude oil swaps. It does not matter to them that they cannot now supply Dangote Refinery with its crude oil requirements. Nobody has been able to explain to us the new Nigerian phenomenon of importing crude oil to refine locally, despite now having the capacity to refine our own crude oil to save FX and reduce our demand for dollars. 

I was surprised a few years ago on my visit to Kenya and found that Kenyan taxi drivers are not excited to be paid their fares in dollars. They will direct you to a Bureau de Change to change the dollars and pay them in their Kenyan Shillings (their national currency). 

No matter how rich you are in dollars, you can only buy and pay for goods and services in pounds in the UK, Euro in Germany, and Yen in Japan. They will not accept dollars for any physical payment. 

Companies report their activities in their currency, even when some of those activities occur outside their home country, where the company headquarters are located. Nigerian companies report in naira. Even NNPC that is so much in love with borrowing in dollars to swap for oil, also reports its financials in naira. 

Funding government budgets in Nigeria today is by selling oil in dollars and then converting to naira for sharing at FAAC. Why not sell our oil in naira and avoid the run around of first selling in dollars, and exchanging back to the naira? 

This current trade flow kills the value of the naira as it does not, by design, create demand for the naira. The flow to create demand should be for buyers of oil to sell the US dollars to buy naira (creating daily demand for large quantums of naira). This demand should, over time, bring about levels of naira scarcity and eventually, naira begins to require more dollars to be availed to it, therefore increasing naira value. 

Recent examples of creating demand for national currency, like in Russia, have proven positive; since Russia started demanding that its oil be paid for only in Ruble (their national currency). Two years down the line, and despite the crippling sanctions, the Russian Ruble, has not fallen from the sky as was expected. It has strengthened and has also remained stable.

We now have a market price for the naira. All our contracts should accordingly be priced and paid in naira. Importing inflation with these dollar denominated contracts no longer makes sense. 

A true Nigerian FX market will emerge once the demand for the naira goes up. Imagine selling two million barrels of oil everyday in the market at N1500, this will translate to a demand of N30 billion daily, and also automatically translates to $2 billion inflow daily, effortlessly. Those buying our oil will need to sell dollars to get the naira they need to pay. 

A $2 billion market daily transaction, just from oil alone, will transform the value of the naira, increase dollar liquidity and improve the overall economy. It will help moderate inflation, promote strong growth, and stabilise the naira. 

We recognise that oil is sold in dollars, we will sell in dollars but receive payments in naira. Since our oil buyers will have to come to the Nigerian FX market to buy the naira, the true value for the naira will emerge from a market mechanism, leading to true price discovery. The buying and selling activity in the market will make the naira a trade-able currency in the international market. It will also give the naira more visibility and enhance its status.

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