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By Henry Boyo
“The IMF and other respectable International financial agencies and local economic experts, have commended the recent devaluation via a floating Naira exchange rate, as an ‘investment’ that would ultimately yield great dividends. We are encouraged to believe that the new forex regime will recharge our economy, sustain inclusive growth with increasing job opportunities, and also reduce our almost total dependence on crude oil, by facilitating the actualization of a diversified economy. It is also suggested that devaluation would create a level playing ground and attract investors to build more refineries and similarly encourage marketers to import fuel.
Nonetheless, the promise that the new forex policy would attract much needed foreign investment inflow is probably the most notable claim by supporters of a weaker Naira.
Consequently, CBN trusts that the estimated $10-$15bn hurriedly evacuated from Nigeria when oil prices slumped, would be channeled back by foreign portfolio investors; sadly, however, the present level of uncertainty and insecurity sustained by our socio-economic tensions may not encourage a quick return of such ‘hot’ money, for now.
Traditionally, portfolio investors primarily target exceptionally high returns on CBN and Federal government’s loans; thus, such investors may borrow at lower rates, below 5% from offshore banks and reap a harvest of 10% and much more in Nigeria, even when the proceeds of these loans are not socially impactful.
Furthermore, the elevated level of insecurity and Naira rate instability may also deter potential “foreign direct investors”, whose operations add value to our industries and infrastructure while supportively also creating more jobs. Thus, a floating Naira exchange rate and sharp depreciation will not immediately propel the expected return of over $10bn earlier scrambled away from Nigeria; consequently, it would be clearly misleading to insist that a bountiful inflow of dollars will soon stabilize the exchange rate, as speculated.
Incidentally, barely 8hours after the commencement of the new forex regime, the cost of the ‘’yet to be realized ‘regenerative’ benefits”, had already made horrendous dents on our economy. For a start, Nigeria’s erstwhile celebrated $510bn Gross Domestic product, immediately crashed below $350bn, while per capita income crashed from over $1000 to well below $600 to deepen poverty. In addition, the dollar value of all equity listed on the Nigeria Stock market also plunged from almost $48bn on Friday 17th June to below $25bn on Monday 20th June, when the new forex regime commenced.
Invariably, all cash income and savings held in Naira, immediately also fell below 60% of their dollar purchasing value overnight. Similarly, the equally celebrated $25bn plus accumulated national pension fund, lost over $10bn, just like that, to jeopardise the future welfare of our senior citizens. In truth, we were all literally cut to size with government approval within 24hours, by the new forex policy; invariably any offshore expenditure we all make, thereafter will require almost 50% more Naira to fund.
Furthermore, all outstanding dollar denominated loans will henceforth also require much more Naira to service and repay, while additional assets would be demanded to supplement existing collaterals; consequently, widespread default on foreign loans and outstanding import bills, including fuel will be common. In such event, billions of dollars of credit lines, which hitherto supportively restrained the cost of raw materials imports to local industries, may also be cut to further instigate spiraling operational costs and challenge the export competitiveness of Nigeria’s real sector.
The Naira value of all external Public sector debt obligations would similarly increase and raise the ratio between annual debt service charges and total actual income well beyond the precarious level of 35kobo on every N1 revenue. Worse still, if the 2016 budget deficit of N2Tn is also captured, we may soon need to allocate over 50% of earned revenue to service our debts annually!
Although the NNPC management has remained unexpectedly reticent on the impact of the new forex policy on fuel prices, however, the pump price of petrol cannot remain at N145/litre, if the Naira exchanges for N280=$1 or more. Indeed, unless NNPC accommodates a new round of subsidies, petrol will ultimately sell beyond N200/litre. Nevertheless, since budget 2016 made no provision for subsidy, a deregulated price regime will certainly spike petrol price to correspondingly propel inflation well above 20% and create serious consequences for consumer demand and investment, with a collateral adverse impact also on job creation.
Additionally, the recently established electricity tariff structure, earlier predicated on Naira exchange of N197=$1, will become unsustainable, and a further hike in electricity tariff will become inevitable. Sadly the celebrated 30%, 2016 capital budget, will suffer, as the significant value of import components usually required for infrastructure and equipment may now require an additional N300bn or more to fully implement; consequently, public expectation for urgent infrastructural remediation will remain on hold for much longer.
Furthermore, our desire to diversify economy away from crude oil will become severely challenged by irrepressible production cost, which will invariably sustain inflation well beyond the current 16%. In such event, CBN will be compelled to raise monetary policy rate to levels that will push cost of funds well above 30%, and unwittingly make import substitutes more competitive. Ultimately, real sector operations will become crippled and any hope of economic diversification will gradually fade.
On the security front, the fiscal allocations voted to increase the capacity of the security agencies, will also become inadequate and require additional appropriation to implement. Sadly however, our presently distressed financial state will obviously make such supplementary allocation a challenge, unless we further deepen an already oppressive debt profile.
Ultimately, the question must be why we readily surrendered a pound of our flesh in return for a platter of clearly unrealistic promises and benefits, just like the 419 scam.”
The above article was first published soon after CBN’s decision to float Naira exchange rate in June 2016. Two months later, the National Bureau of Statistics has expectedly confirmed that Nigeria’s economy had indeed recorded unyielding negative growth rates between January–June 2016; thus, in place of promised growth, the unfortunate reality is that the wheels of the economy were, sadly, actually already in reverse gear during the period preceding the odious devaluation, which inadvertently further spiked the prices of most goods and services well beyond the levels which existed before the Naira crash.
Invariably, an inflationary spiral will inevitably subsist for the rest of 2016 and the collateral of higher MPR and cost of funds, poisonously rising beyond 30% will dampen any hope of early economic recovery and will also restrain the creation of more job opportunities. See also: “Economy: the flood gates have been breached”, published on 20th June, 2016.
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