George Wakama
Russia the No two oil producer decided that Saudi Arabia is not serving its purpose so it acted in a manner it feels will enhance its interest.
The Saudi’s responded in kind and Oil prices crashed from $60 to less than $30 /barrels within days.
The timing couldn’t be any worse – the world is facing a Corona Virus pandemic – physically interactive commercial activities likewise industrial activities are on the shutdown…
Nigeria, a major exporter of oil and the producer of the global premium-grade Crude Oil is in reeling pains from this double-edged sword and the reason is this.
Let me take away (subtract) Incompetence and cluelessness from the equation, this is the time to solve a problem. That problem is our biggest problem right now which is our ECONOMY.
The problem is here because We are NOT OPERATING ( running our Economy) in line with modern trends. We are still a natural resource-based economy where our wealth is subjected to price outcomes in the global market.
If prices of commodities are high, we make money and if they are low, we suffer deprivations. We are still fixated in the old ways of natural resource exports to gain FX inflows. Therefore, we are tied to the traditional FX inflows modules of:
1. Foreign Portfolio Investments FP
2. Foreign Direct Investment FDI
3. Oil exports /Non Oil exports proceeds( commodity exports)*
4. Diaspora remittances
As our sources of FX inflows which personify the weakness of our economy and the level of development we are at present, well that should not be the case if we understand that economies are no longer held captive by such occurrences
We need to understand income generation no longer depends on Natural resource output, neither does it depend on the real sector (Manufacturing /Industrial sector)
So the 4 streams of incomes I listed must have a new stream which can stand alone and dwarf the 4 known streams if a push comes to a shove. The 4 known streams must as a necessity undergo some measure of tweaking because for you to generate higher incomes, two things must occur:
a) Costs must come down
b) Revenues streams must expand
In this case of cost reduction, I am referring to reduce the demand for FX –using economic tools instead of interventionist rationing of FX. For an import depended economy, we need to understand how economics works. We have to stop defending the naira which technically means devaluing our currency. Currency devaluation by implication means our imports would be a lot more expensive than our exports. Whereas cheaper exports come with the advantage of gaining significant market share in the economies we are exporting our goods to, the downside is we would lose money/revenue from our exports – WHILE WE WILL SPEND MOST of OUR WEALTH ON PAYING FOR A LOT MORE EXPENSIVE IMPORTS.
Unfortunately, we are not benefitting at least from gaining significant market share in the countries we are exporting our goods to because we actually don’t export much except the smaller West African market that we are the backbone of. For us to ease the pressure on FX and have our currency appreciate, understanding of economics comes to play:
I) As a counter, we have to export more in terms of quantity of goods to counter the rate of low prices of our exports.
II) Reduce the number of imports at a rate faster than the rate of price increase in imports.
Essentially two conditions have to be in place. In consequence, devaluation by a country whose exports and imports are not priced elastic leads to the continued impoverishment of the nation vis a vis its trading partners.
The second, and sufficient condition is therefore that the combined price elasticity of demand for exports and imports must exceed unity.
WHERE INCREASED EXPORT QUANTITY MEANS INCREASED PRODUCTIVITY AND JOB CREATION
SOMETHING WE ARE YET TO ACHIEVE SO WE CAN’T REDUCE OR FUNDING OF IMPORTS WHEN WE HAVE NOT MET LOCAL DEMAND OR BECOME SELF RELIANT ESPECIALLY IN FOOD PRODUCTION.
Since the Export/Import matrix ( balance of payment option) is not possible for now what do we do for now? We switch to the application of the use of Financial products –o reduce the demand for FX.
The products we had to apply must be applied as a bundle they are namely:
1. Import Invoice mediation-
2. Forfaiting –
3. Liabilities management of FX denominated debt
4. Securitize your In-ground natural assets or a section of your export proceeds assets to be traded in international securities markets and platforms.
