“The servicing and defense of the weakening naira with country’s accumulated foreign reserve is not sustainable with shrinking war chest.” – Emeka Chiakwelu, Policy Strategist at AFRIPOL
The state and wellbeing of Nigeria’s economy is gradually but steadily losing its momentum and steam, while simultaneously taking its casualty. The first casualty is naira and its deteriorating value. The crashing of naira is coming and it will not be a soft landing. The consequential effect of the strategic collapse of naira is enormous. Its tentacle will touch and metastasized into every aspects of Nigeria’s economy with immediate effects on inflation rate, unemployment and means of production.
The coming doom is inevitable as the policy makers resorted to outdated command economy of banning products and fixing currency rate. At the dawn of 21st century with globalized economy, free market economic model is the preeminence of the day. Nigeria with its slowing economic growth and its ineffectual effect on the global economy unlike China and America must play by the international rules and stipulations. On the second note, to avert the dwindling means of production; logical and pragmatic economic policies must come into a play.
O f course it must be acknowledged the nose-diving price of oil is making life difficult for Nigeria. The key issue here is that Nigeria has anticipated this scenario coming but chose to do nothing. This is not the first time that Nigeria has witnessed the perilous effect of falling oil price. But once the price of oil surge again she will forget what she has gone through in the past. Nigeria never learns from her past and chose to behave like there was no history. This times around with abundance of oil supply and geo-politics, the falling price of oil maybe the new normal.
The price of oil is hovering around $40 per barrel and it has a dwindling effect on naira because the speculators cannot be ward-off or even be tamed with our depleting and thinning foreign reserve. The currency speculation and speculators are fascinated to a currency without a bulwark to repeal aggressive and overzealous speculators. In case of Nigeria, currently the naira currency has been pegged at N 195 to a dollar from previously N168. But the trading rate at an open market is above N235 per dollar.
Godwin Emefiele, the CBN governor and the delegated chair of Nigeria’s Reserve apex bank announced the devaluation of naira in Abuja last year after the emergence meeting with the members of the Monetary Policy Committee. With this devaluation naira was pegged at the exchange rate of N168 compared to the previous rate of N155 to one U.S. dollar, which will hinged on the target band of naira between 160-176 to the US dollar, compared with the previously 150-160 naira to the US dollar. But it later adjusted to N195 to one dollar.
.Yes, Nigeria is in dilemma at the moment. Nigeria is literally between a rock and a hard place. With the weakening of oil price and its effect on naira, the IMF has recommended to Nigeria to further devalue naira but Buhari’s administration has refused The experience of naira devaluation in 1980s austerity measures cannot be easily be obliterated from our collective memory. It was hell on earth and has gone down as one of the greatest devastating experience of the inexperienced Nigeria on the global politics of currency devaluation.
The currency devaluation of 1980s brought the collapse of the country’s middle class and massive migration of Nigerian trained workforce to western world. The production lines of industrial companies were put to a halt due to lack of foreign exchange to import raw materials. Nigerian products were supposedly cheaper for foreign buyers but the reality is that the only major product that Nigeria can successfully export is crude oil. The economy is based on one-product economy which is oil and without diversification of the economy; the purpose of currency devaluation was defeated. Nigeria did not have arrays of products to be exported rather devaluation brought about higher inflationary trends and massive unemployment.
Now fast forward to 2015, Nigeria must make a serious decision before the investors repatriate their investments and perspective investors reject Nigeria. “An even bigger concern for many investors is the authorities’ naira policy. The Central Bank of Nigeria, with Buhari’s backing, has burned through $4.3 billion of reserves this year and choked off supply of foreign exchange to banks and their customers to defend the naira, even as major oil exporters such as Russia and Colombia have let their currencies slide. The restrictions prompted JPMorgan Chase & Co. to remove Nigeria from its local-currency emerging-market bond indexes, tracked by more than $200 billion of funds, in September, triggering a selloff in the nations’ assets” as Paul Wallace and Michael Cohen of Bloomberg analyzed.
Many international financial institutions including IMF and World Bank has projected that Nigeria should be growing at above 5 percent but momentarily Nigeria’s annual GDP growth is at anemic rate of 3.3 percent. That is disastrous for a country with many social problems especially youth unemployment. At this rate of economic growth the unemployment rate among Nigerians will be accelerating and that is not good news for country with all her instability problems ravaging the country.
Another problem is the coming inflationary trends. At the moment the inflation rate is less than 10 percent but expect that not to so in the nearest future. With depleting foreign reserve, the willpower to defend naira from aggressive speculators will wane. Nigeria will finally bow to the demands of IMF and naira will be further devalued. With the devaluation, the price of local products will go up and inflationary trends will commence to surge with the paying of N5000 to unemployed Nigerians as promised by Buhari administration.
What Kemi Adeosun and others must do:
Nigeria’s minister of finance -Kemi Adeosun is capable and intelligent. First and foremost, formulate and implement coherent economic policy that will attract and incentify investors to put their resources in Nigeria. Make it a priority of sitting down with IMF officials and discourage them on their recommendation for the devaluation of naira. Nigeria can utilize the superstar influence of Dr. Ngozi Okonjo-Iwela , as world renowned economist to convince the IMF about Nigeria’s standing on devaluation.
Nigeria must be serious about diversification and moving away from her total dependence on oil as the major source of foreign exchange. Nigerians in Diasporas have been sending large sums of dollars into Nigeria. It was reported last year that Nigerians living abroad remitted over $20 Billion dollars. That is an awesome amount and must be encouraged with a streamlined and favourable policy. This source of foreign revenue remittance must be nurtured and encourage with a policy that can tripled the remittance.
There is no easy way out but with sound monetary and fiscal policies together with a coherent, coordinated and streamlined economic policy, a prudent Nigeria that is sure of her future can emerge.
Emeka Chiakwelu is the principal Policy Strategist at Afripol. Africa Political and Economic Strategic Center (Afripol) is foremost a public policy center whose fundamental objective is to broaden the parameters of public policy debates in Africa. To advocate, promote and encourage free enterprise, democracy, sustainable green environment, human rights, conflict resolutions, transparency and probity in Africa.