Henry Boyo is a renowned Economist and Managing Director, Cocosheen Nigeria Limited, Ikeja, Lagos State. In his latest opinion piece, he writes on the devaluation of the naira in the forex market by the Central Bank Of Nigeria.
This devaluation ‘be like’ 419!
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 and sustain inclusive growth with increasing job opportunities, and also reduce our almost total dependence on crude oil, by facilitating the actualisation of a diversified economy. It is also suggested that devaluation will create a level playing ground to attract investors to build more refineries and similarly, immediately encourage marketers to import fuel to reduce the Nigerian National Petroleum Corporation’s present monopoly.
Nonetheless, the promise that the new policy would attract the much needed forex inflow is probably the most notable claim by supporters of a much weaker naira. Consequently, the Central Bank of Nigeria trusts that the estimated $10bn-$15bn hurriedly evacuated from Nigeria, when oil prices slumped, will be channelled back by foreign portfolio investors. Sadly, however, the present level of uncertainty and insecurity induced by our socio-economic tensions may not encourage a quick return of such hot money, for now.
Traditionally, portfolio investors primarily target the exceptionally high returns on the CBN and the Federal Government’s loans. Thus, such investors may borrow at lower rates, below five per cent from offshore banks and reap a net harvest of 10 per cent plus in Nigeria, even when the proceeds from these loans are not socially impactful.
Unfortunately, the clearly elevated level of insecurity and naira rate instability may also deter potential ‘foreign direct investors’, whose operations invariably add value to our industries and infrastructure while supportively creating more jobs. Thus, the sharp naira depreciation with a floating exchange rate may not immediately propel the expected return of over $10bn earlier scrambled away from Nigeria. Consequently, it is clearly misleading to insist that a bountiful inflow of dollars will soon stabilise the exchange rate, as often speculated by some experts.
Incidentally, barely eight hours after the commencement of the new forex floating rate, the cost of its ‘yet to be realised speculated ‘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 mass poverty. In addition, the dollar value of all equity listed on the Nigeria Stock market also plunged from almost $48bn on Friday, June 17 to below $25bn on Monday, June 20.
Invariably, all asset values denominated in naira, also immediately fell below 60 per cent of their dollar purchasing values overnight! Similarly, the equally celebrated $25bn plus accumulated national pension funds lost over $10bn, just like that, to imperil the future welfare of our senior citizens.
Furthermore, all outstanding dollar denominated loans will henceforth also require almost 50 per cent more naira to service and repay, while additional assets will be demanded to supplement existing collaterals. Consequently, widespread default on foreign loans and outstanding import bills will be common. Thus, billions of dollars credit lines, which hitherto supportively restrained the cost of raw materials imports to local industries, may also be cut to further instigate higher operational costs which will also challenge the export competitiveness of Nigeria’s real sector.
The naira value of all external public sector debt obligations will similarly increase and raise the ratio between annual debt service charges and total actual income well beyond the precarious level of N35 on every N100 revenue. Worse still, if the 2016 budget deficit of N2tn is additionally captured, we may ultimately need to allocate over 50 per cent of earned revenue annually to service our national debts in the near future!
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 the pegged price of N145/litre, if crude price remains steady above $45/barrel and the naira exchanges for N280=$1 or more. Indeed, unless the NNPC accommodates a new round of subsidies, petrol price will exceed N200/litre.
Nevertheless, since budget 2016 made no provision for subsidy, a deregulated price regime based on a floating exchange rate will certainly spike petrol price and correspondingly propel inflation well above 20 per cent to reduce consumer demand while conversely raising the cost of funds, with a collateral adverse impact on investments and job creation.
In addition, the recently established electricity tariff structure, earlier predicated on N197=$1, will
become unsustainable, and a further hike in electricity tariff will be inevitable.
Sadly the celebrated 30 per cent 2016 capital budget will also suffer, as the significant import components usually required for infrastructure may now require an additional loan of N300bn or more to fully implement. Consequently, public expectation for urgent infrastructural remediation will sadly remain on hold.
Regrettably, our desire to diversify economy away from crude oil will also become severely challenged by increasingly irrepressible production cost, which will invariably sustain inflation well beyond the current 16 per cent. The CBN will therefore be compelled to raise monetary policy rate to levels that will push cost of funds well above 30 per cent, to 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 become inadequate and require additional appropriation to implement. Sadly, however, our presently parlous financial state will obviously make such supplementary allocation a challenge, unless we further deepen an already oppressive debt burden.
In truth, we were all literally cut to size with a stroke of the pen by government’s precipitate approval of the new forex policy. Invariably, any offshore expenditure we all make hereafter will require almost 50 per cent more naira to fund. 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 a gullible victim of a 419 scam.”
The above article was first published soon after the CBN’s decision to float naira exchange rate in June 2016. Ironically, Nigerians immediately lost over $30bn from the grossly depreciated international currency value of stock market capitalisation and the national pension funds in the hope of attracting an uncertain $15bn from characteristically predatory, nimble footed foreign portfolio investors! Sadly, these values will increase as the naira exchange rate plunges below N300=$1.
However, two months after the naira float, 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 growth, the unfortunate reality is that the wheels of the economy were, sadly, already actually in a 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 pressure will subsist for the rest of 2016 while the collateral of higher MPR and cost of funds, rising poisonously beyond 30 per cent will dampen any hope of early economic recovery and certainly restrain the creation of more job opportunities. See also, “Economy: The flood gates have been breached”, published on June 20, 2016 at www.lesleba.com.
Sadly, any frenzied attempt to stimulate spending and regenerate the economy with selected sectoral cash interventions, may also ironically challenge the CBN’s attempt to restrain inflation in a market that is already threatened by the unusual burden of persistent excess naira liquidity. Consequently, if the naira exchange rate also continues to slide, it will certainly be a miracle for the CBN to achieve its prime mandate for price stability.