Lamentations of Naira: Implications for the Nigerian Economy
It is no longer news that the Nigerian local currency–Naira–has been on an increasing descent since mid-June last year when crude oil price peaked at $115/bl before embarking on a shattering crash thereafter, thus culminating in halving of the international price of the black gold to $57.7/bl in December 2014 and effectively ending a 4-year consecutive run of $100-plus oil price. While the domestic legal tender traded at ₦155/$ and ₦162/$ at the official and interbank segments of the foreign exchange (FX) markets respectively in mid-June 2014, it fell to ₦168/$ at the official market following the devaluation by the Central Bank of Nigeria (CBN) five months after (i.e. November 2014) and ₦186/$ at the interbank market.
Chief among the reasons for the unabating decline in the Naira value is the FX supply shortfall for imports which is further exacerbated by weakening oil receipts occasioned by the slump in the international price of crude oil as the precious commodity accounts for more than 90% of Nigeria’s export earnings, is a major contributor to the country’s external reserves and funds upwards of 70% of the National budget.
Following the continuing gyration in the price of crude oil in 2015 and the stickiness of the FX supply shortfall, the CBN having realized the non-sustainability of the use of the external reserves to defend the local currency, tacitly devalued the Naira to ₦198/$ by shutting the official (RDAS) market thus harmonising the official and interbank segments of the FX market. While the CBN harped its decision –which is a step in the right direction as it was long overdue–on the need to curtail the ‘round-tripping, speculative demand, rent-seeking, spurious demand and other inefficient uses of scarce dollars’, that have characterised the Nigerian FX market for decades, the measure has done little, if any, to stem the tide in the depreciation of the Naira.
As of the end of the third week in February 2015, Naira traded at ₦202/$ and ₦225/$ at the interbank and parallel markets respectively. We can attribute this to a crisis of confidence in the market as businesses are yet unclear if further devaluations are not in the offing following two devaluations in the space of 4 months in spite of consistent assurances from the CBN Governor to the contrary. As such, a lot of businesses are front-loading their transactions while private individuals are also buying up dollars as a store of value. The risk of political uncertainty posed by the upcoming general elections may not also be unconnected with the abnormally high demand for the greenback.
With this background, the implications for the Nigerian economy and by extension, the citizens are not far-fetched. Nigeria being an import-dependent economy where virtually everything is imported including toothpick faces the risk of imported inflation. Though inflation has been at single digit since 2013, if there is not a significant recovery in oil price in the near term, the Naira may depreciate even further thereby spurring inflation into the double-digit region.
Inflation indicates erosion in purchasing power which increases cost of living while also reflecting negatively on the standard of living of the common man. From the business perspective, worsening consumer spending power will hurt business sales and the retail sector in particular; lead to decline in profitability and ultimately triggering job cuts if sustained for a considerable length of time. Aside these, there would be a build-up of imported inventory whose replacement costs are rising beyond the reach of the average citizen, industrial capacity underutilization, cut-back in planned capacity expansions with attendant losses of would-have-been new temporary and permanent jobs among others.
As banks are financiers of the economy, business failures and/or difficulties may trigger increase in non-performing loans and consequently, deterioration in banks’ asset quality with attendant increase in impairment charges. This may also trigger a wave of retrenchment that may rise to the level last seen during the 2008/2009 global financial crisis.
It is already common knowledge that on the back of the decline in fiscal revenues of the federation and resultantly lower federal allocation to states which is further worsened by the weak internally generated revenue by many state governments, a handful of states are already defaulting on salary payments to civil servants while some now use overdrafts to pay salaries. If state governments are struggling to pay salaries and allowances which are recurrent expenditure items, what then is the fate of capital expenditure–both on-going and planned–which is desperately need to plug the infrastructural gap that have prevented Nigeria from realizing her true economic potential and the much-vaunted ‘inclusive growth’ storyline?
Large-scale retrenchment in civil service and growth in the spate of abandoned projects loom in the horizon. Should all of these crystallize and Nigeria becomes incapable of covering her imports due to the unceasing attrition in aggregate fiscal buffers which stood at $35bn as of mid-February 2015, down $15bn (30%) from $50bn in December 2013, the current situation may degenerate into a full-blown economic crisis.
The Way Forward
Is there any glimmer of hope? Yes! There is. This is the time for the country to look inwards and implement an Effective Import Substitution Program (EISP), one driven by a ‘Proudly made in Nigeria’ mantra. Unfortunately, while Nigeria’s past and serving leaders continue to acknowledge that the implementation of an EISP is the way forward, very little if any, has been done in this regard for more than four decades.
Nigeria must change the fundamentally flawed structure of her economy from an import-dependent and commodity-based one to an export-oriented economy producing a wide array of processed (i.e. secondary and tertiary) goods and services. The government must eliminate operating inefficiencies and revenue leakages by divesting from state-owned commercial enterprises thereby leaving businesses to the private sector and concentrating instead, on its role of administration, regulation and national security.
The starting point for the divestment is the immediate sale of the four state-owned refineries which have constituted a drain on the fiscal revenues of government rather than a net-income generator. With this, Nigeria will put to an end to the importation of refined fuel which accounts for more than 20% of Nigeria’s import bill while making Africa’s largest economy a net exporter of both refined and crude oil. Until this and many more are done, the locally currency will continue to wobble with attendant negative impact on the standard of living of Nigerians.