Muhideen Adesokan
25 October 2009
opinion
Abuja — 'Nairisation' of crude (crude oil, condensate and gas) describes how our oil receipts can be adapted as effective and cost efficient tool in the strategy to make Nigeria one of the world's top 20 economies by the year 2020.
'Nairisation' is a package of policies designed to strengthen the international purchasing power of the naira by leveraging Nigeria's crude oil sales and boost our economy. A key component of the package will be to require naira as payment for our crude oil exports. The objectives of the proposed policy package are to create international demand for the naira and strengthen it against the dollar and major global currencies; deliver purchasing power necessary for sustainable economic growth (infrastructure, manufacturing and export); create a new market locally for trading Nigerian crude oil; and actively manage Nigeria's foreign reserves to preserve its value and reduce gradual loss due to progressive devaluation of the dollar.
This policy package will require buyers of Nigerian crude oil to pay in naira (or a desirable basket e.g. 70% naira and 30% gold, depending on other policy objectives) and to bid for naira at CBN's Foreign Exchange Market (FEM).
It will also involve withdrawing naira oil receipts from circulation into government accounts with CBN, creating projects to channel gained purchasing power into target sectors to stimulate growth; establishing a Petroleum Exchange to trade Nigerian and other African crude oil, and active management and diversification of assets held in Nigeria's foreign reserves portfolio.
These will create demand for the naira from crude oil buyers, international banks, and currency speculators. To illustrate, Nigerian earned 111.67 million dollars and 124.94 million dollars in July and August 2009 respectively from Crude Oil sales (OPEC Monthly Oil Market Report, September 2009 pp7 and 32). Under 'Nairisation' these funds would have been used to bid for Naira at FEM sessions conducted by CBN. In addition to Naira to be used for spot transaction payments, international banks servicing buyers will begin to hold stocks of Naira in reserve to hedge against future fluctuations. Each session of FEM will see the Naira getting progressively scarce. The combined effect of these changes will be to strengthen the value of the naira against the dollar. Another advantage will be to inject another source of USD to FEM. CBN's activity as the only supplier depletes our national reserves of USD. Naira will also gain against the British pound, Euro and Yen due to the activities of international currency speculators. For example, assume the dollar falls to N100 from N140 while the rates between naira, British pound sterling and euro remain unchanged. A currency trader holding the pound or euro will immediately see that s/he could buy naira which is immediately used to buy dollars at the new low rate and then convert back into the pound or euro ending up with a greater amount than s/he started with. This arbitrage cycle will continue till Naira rises against the pound and euro to make it unprofitable.
This policy is necessary to realise the full benefits of the earlier policies in the larger economy. To speed up the attainment of Vision 2020 goals, government is advised to make strategic foreign acquisitions using our foreign reserves and adopt a more active support role similar to the practice in the UK and elsewhere. For example if policy makers decide that Steel or Power Generation is strategic (and they should) then Nigeria's foreign reserves could be used to acquire total or controlling interest in a very good steel or power engineering company (ABB, Amec or other smaller but efficient ones).
Such acquisitions will give Nigeria quick access to technology, internship opportunities for young Nigerians, the ability to dictate to the company to sell specifically to the Nigerian market or to locate a production plant here. The Malaysian government used this strategy to gain car engineering and design technology when they acquired a controlling interest in Lotus Engineering of UK for just £51m back in 1996. Malaysia's national car maker Proton has since benefitted immensely from Lotus' advanced technology through joint development of Proton's engines. Besides, Lotus opened a research and development laboratory in Malaysia. Another example is how the U.K stimulates growth in high-tech sectors like Nanotechnology. Their government-backed Regional Development Agencies support the projects directly through grants of up to 50% of new equipment or 70% of feasibility study costs. The grants are awarded through fiercely contested Calls and only the very best business ideas succeed. Even then, the grants are paid in arrears after the equipment has been installed or the studies concluded. Indirect support is also available through loan g Government could similarly pay part of the costs for mechanising agriculture and investing in capital intensive sectors like pharmaceuticals, electronics and Information Technology.
Establishing a petroleum exchange will enable Nigeria extract even greater economic value from our crude oil sales. It should create high income jobs and vast tax opportunities. Taxes should be imposed to deliver value comparable with global best practice. For example the UK Treasury earns a staggering £25m daily in taxes from just one oil pipeline. Does Nigeria earn anything close in taxes on a daily basis from our entire pipeline system? Furthermore, Nigeria is well placed to lobby for Gambia, Ghana, Gabon, Equatorial Guinea and Angola to trade their Oil exports on the exchange perhaps with an equitable share of the benefits. If Nigerian does not, Ghana is very likely to do so in due course and Bonny Light may well soon be traded on an exchange located in Accra instead of Port Harcourt.
To be concluded tomorrow.
Dr Adesokan is a researcher at Novartis Consulting, Leicester, UK
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An idea with some real potential. Particularly the part about doing technology transfer by buying companies. I eagerly await tomorrow's follow up.