From every indication, it seems the worst is not bad enough as the naira took another nosedive last Friday, dipping past N300 per dollar for the first time ever. Bloomberg reported that the naira fell 2.3% to N300.25 per dollar, raising fears the Central Bank of Nigeria (CBN) will trigger a recession by raising interest rates to attract foreign capital and curb the soaring inflation which now stands at 16.5%. Late last month, CBN Governor Godwin Emefiele finally unpegged the naira from the US dollar, which sent the naira down 30% to about N280 per dollar. In fact, the naira is now the worst-performing currency in Africa. Globally, only the currencies of Venezuela and tin pot Suriname have fared worse.
The Nigerian economy is in dire straits and will get worse if sound political and economic judgement is not brought to bear on fiscal and monetary policy. Given the pent-up demand for dollars after the CBN restricted supply in a bid to defend the naira, many analysts expect the naira to plummet as low as N350 per dollar; more or less stronger than the black market rate which is a more accurate representation of the naira’s value. The President has rejected calls to devalue the naira; hoping unpegging the naira and diversification from dollar to yuan will alleviate forex pressures. However, this can only buy more time; it would neither diversify Nigeria’s economy, nor avert what will eventually be a tsunami devaluation of the naira. Saving the naira demands the CBN to end the dollarization of the economy.
Experts agree that the CBN’s policy of defending the naira has been disastrous, bringing factories to a standstill for want of imported inputs. With significantly depleted foreign reserve, a huge population of over 170 million and crashing oil prices; for the mono-product Nigerian economy, the impact is only better imagined if all the fundamentals, including human discipline are not mustered to manage this situation. For the fifth consecutive time this year, the Consumer Price Index (CPI) has continued to rise; giving effect to the precarious situation Nigerians find themselves with regard to the decrease in their purchasing power. The National Bureau of Statistics (NBS) announced last week that the CPI has reached 16.5% in June from 15.6% recorded in May, which further affirmed the present reality that prices of goods and services are no longer affordable.
Some analysts have noted that even after unpegging the naira from the dollar, the currency is a lot less free and they argue that the naira probably needs to fall far below N300 per dollar, even as inflation is expected to surpass 20% by Christmas. They blame the free fall of the naira on the CBN Governor, who, for 16 months, stubbornly held on to a peg of N197 per dollar, which hurt the economy. The galloping inflation is largely attributed to supply-side factors notably high costs of fuel, electricity, transport, food and imported items. This should worry the Organized Private Sector (OPS) as turnover and profit margin outlooks become weaker. The unusual combination of slow growth and rising inflation present a difficult policy challenge for economic managers.
The character of the present inflation is more of cost-push inflation, arising from forex challenges, growing energy costs and logistics costs in terms of movement of goods and people. The present inflationary trend is putting pressure on businesses as the cost of operations has risen, even though such costs can no longer be passed to consumers; whose purchasing power has been further weakened as businesses are producing for people who cannot afford it. Already, the IMF latest forecast expects GDP to shrink 1.8% this year and grow 1.1 percent in 2017. Compared with 2.1% growth in the 4th quarter of 2015, the economy contracted 0.4% in the first quarter of 2016.
Nigeria’s inflation trend is fueled by the appetite for foreign goods and services. Many Nigerians are addicted to foreign products, especially those who can afford them. This needs to change. Government has to come up with policies to stimulate patronage of locally made products. The only way to curb the current rising inflation in the country is through attitudinal change. That means we must develop local content, especially in manufacturing and patronize them. The alternative is a further devaluation of the naira, which will spell the death knell of a comatose economy on life support. And for good measure.
Firstly, with further devaluation of the naira, business relations would be so lopsided that irrespective of the quality of goods and services, transactions in naira would be to the advantage of foreigners: Nigerian goods would be far cheaper for foreign investors, while foreign goods would be very expensive for Nigerians. Nigerians would have to pay more for foreign goods, while foreigners would buy Nigerian goods for a pittance. This is by every means detrimental to the economy.
Secondly, the price of oil which is the main source of forex is determined by forces of demand and supply in the global oil market, while supply quotas are dictated by the Organization of Petroleum Exporting Countries (OPEC). Given such control mechanism, it is hardly the case that devaluation would result in more forex for Nigeria. Conversely, devaluation would increase the cost of production since the consumable for this highly technological industry are foreign products.
Thirdly, naira devaluation, in this circumstance, is a device contrived by the predatory economic strategy of the Bretton Wood Institutions like the World Bank and IMF, whose insistence on devaluation as a basis for economic development is a bogus tactic of pauperization and enslavement. This is a re-echo of the infamous Structural Adjustment Program (SAP) and the horrors it wreaked on the Nigerian economy.
Overall, the problem of the naira is not so much the product of international currency markets as much as the product of a domestic forex market, which has been consciously, skewed against the naira by CBN’s monopoly of Nigeria’s dollar reserves. The mismanagement of the naira springs from dollarization of the economy, which involves illegally printed deficit-financing naira funds that the CBN substitutes for withheld dollar amounts from the Federation Account (FA) oil receipts. This has given rise to high inflation, constant depreciation and periodic devaluation, thereby eroding the quality of the naira as a dependable store of wealth (a critical function of money).
It bears repeating for the sake of emphasis that the economy wears the hostile conditions and hallmarks of an economy steeped in unbroken excessive fiscal deficits, with forex from oil sales squandered in the name of defending the value of the naira in the sham forex market. If CBN abandons its obstinacy with policies that contradict the prescriptions of economic theory for dealing with fiscal and monetary policy defects; including dollarization, the ever-present ghost of excess liquidity will be laid to rest; interest rates and inflation will fall drastically, and the naira would begin to appreciate. Nothing short of a drastic turnaround of the nation’s economic fortunes will satisfy Nigerians.
