ECONOMY: THE FLOODGATES HAVE BEEN BREACHED
BY HENRY BOYO
The Naira exchange rate was officially devalued by about 50percent last year, in deference to the presumed intelligent advice of financial experts who insisted that the much higher black market rate was a true reflection of the real Naira value. Regrettably, the distortional and oppressive impact of devaluation on our already ailing economy and beleaguered citizens was clearly not well thought out before adoption; consequently, we may have been stampeded to sacrifice a pound of flesh for no tangible benefit.
Alarmingly, despite the horrendous social agony instigated by the June 2016 devaluation, the experts in whom we reposed so much faith remain unperturbed and have suggested that further devaluation will again become necessary, because last year’s devaluation was apparently unduly delayed.
Indeed, if the Naira is further devalued to match the present almost N500=$1 parallel market rate, the gift of prophecy would be unnecessary to advise that the parallel market rate will approach or even exceed N1000=U$1 by December 2017. The title “Economy: The floodgates have been breached” was first published on this page on 20th June 2016, a summary of this article follows hereafter, please read on.
“The CBN’s decision to float the Naira in response to dollar demand and supply, in such austere times, will probably be ultimately remembered as another policy shift which breached the gates and unleashed devastating floods that swept away any flickering hope of economic diversification or credible inclusive growth. The serial devaluation inspired by the IMF’s Structural Adjustment Programme (SAP) in 1986, was another such event that disenabled our economy, traumatized our people and challenged our traditional value system in many ways.
Conversely, IMF and other reputable international and local experts had actually encouraged the belief that Nigeria’s economy will be enriched if we embraced SAP! Regrettably, thirty years later, the same IMF and cohorts have again commended our government for swallowing the bitter pill of 50percent Naira devaluation, which, as usual, they claim to be the strategic path to economic recovery.
Ironically, President Buhari who stoutly resisted devaluation between 1983-1985, and later also made Naira exchange rate parity, a campaign promise in 2015, has unexpectedly capitulated to the odious demand for more Naira devaluation, despite the contrary historical evidence of the unfulfilled expectations of a benevolent impact of this policy. President Buhari’s volte face is intriguing, particularly after his public admission that his Economic experts always talked above his head and never truly convinced him that devaluation would favor our economy.
Invariably, as the devastating impact of the present 50percent Naira devaluation paralyses industries and businesses, more Nigerian youths will still be propelled to join the desert caravan to North Africa en route Europe, choralled in suicidal bath tubs to cross the Mediterranean sea in search of job opportunities, which offer reasonable living wages.
Indeed, the only immediate apparent advantage of the present devaluation is an increase in government revenue, from the extra N100 that will be printed for every dollar earned from crude oil, notwithstanding the inflationary impact of such monetary expansion in a market where surplus Naira is already an existing challenge to CBN’S effort to battle inflation.
Nonetheless, the expected revenue shortfall from lower crude prices, should be significantly compensated by the 50percent increase in Naira allocations for each dollar shared. In effect, this cash bounty should significantly reduce or possibly eliminate the over N2Tn 2016 budget deficit. However, the subsequent revenue excess created by devaluation, may still be shared in addition to the proceeds from previously budgeted loans to fund the deficit, without enacting a fresh supplementary Appropriation bill to account for this expenditure.
Incidentally, in order to restrain the inflation rate, fuelled by the increased expenditure, the CBN, may ironically be propelled to increase its debt burden with further borrowing to sterilize part of the Naira surplus. Ultimately, the commercial banks, specifically, will earn close to N500bn annually from the high interest paid by CBN to remove such “troublesome” excess funds from the market.
Indeed, such fiscal rascality has prevailed since 1999, when revenue expectations were usually deliberately understated, with inappropriately low crude oil price benchmarks, to contrive fake budget deficits, which were subsequently approved and processed as public debt, despite the suspiciously high double digit interest rates, which were clearly inappropriate for such sovereign loans. Indeed, if more realistic crude benchmarks had predicated the same budgets, such oppressive, additional government loans would have been happily avoided; conversely, the culture of fiscal irresponsibility is further magnified with the increased allocations from the excess revenue consolidated from the higher than the budgeted benchmark for crude oil prices.
Hereafter, we will assess the direct impact of the present 50percent Naira devaluation on critical factors such as inflation, productivity, employment and public confidence in holding the Naira as a store of value.
Inexplicably, the additional revenue from naira devaluation, would ultimately provide little succor for the economy, as it will further fuel inflation and reduce the purchasing power of all incomes and consumer demand. Furthermore, since local industries are still also largely dependent on raw material imports, all import bills will invariably also rise by about 50percent if N300=$1. Additionally, the industrial sector’s already disenabling production cost burden, will unfortunately, become compounded with another 50percent price increase for the diesel and gas required to power their plants. Worse still, with inflation approaching 20percent and increasing production cost, the bloated working capital, consequently required to sustain businesses will unfortunately also attract well over 20percent rate of interest to ultimately make Nigeria’s industrial output less competitive against import substitutes.
Labour agitation for wage increase will also become strident to further threaten already ailing businesses. The predictable outcome would be serial retrenchments and business closures, with serious implications for our economic and social security, while Faith organizations, may again become beneficiaries of increasingly vacant factory/warehouse spaces.
Nonetheless, retirement will also become a nightmare for wage earners whose pension contributions, will depreciate by more than 50percent; sadly, pension earners may become near destitudes if inflation exceeds the current 16percent, especially if petrol also sells for N300/litre without subsidy and electricity tariff inevitably also spikes by over 50percent, because of the magnitude of devaluation.
Furthermore, investment values in the stock market will depreciate from over $45bn when $1 exchanges below N200 to less than $25bn with N300=$1 exchange rate. Indeed, the value of our homes and all Naira denominated assets, including the cash in your pocket and savings accounts have all now lost up to 50percent of the previous dollar value, while the oppressive burden of paying outstanding import bills, and other dollar denominated loans may send such debtors to early graves. Frankly speaking, our collective net worth has now been cut in half, with just a stroke of the pen, but it is unlikely that the speculated inflow of foreign exchange, from portfolio investors will ever approach $20b as speculated before this devaluation.
However, since the CBN’s devaluation policy is fixated on dollar demand and supply, and obviously denies the pivotal role of systemic Naira surplus, as the prime cause of devaluation, further Naira devaluation will become inevitable, and the economy will sadly unravel. Invariably, if the surplus Naira syndrome remains untamed, a Naira exchange rate beyond N500-$1 will be possible this year. Incidentally, the N1, 000 currency note is now valued just over $3 in the official market. Surely, the Naira will never command public confidence as a safe store of value and will continue to slide, so long as CBN continues to auction the dollar for higher Naira bids, in a market already plagued with excess Naira supply.”
SAVE THE NAIRA,SAVE NIGERIANS!!