The increasing gap between official and parallel market naira exchange rates has lately propelled a fresh call from corporate financial establishments and diverse speculators and experts (both local and foreign) for CBN to unhinge the naira from the purported present ‘flexible’ peg of N305=$1, despite of the horrendous social and economic deprivations which such a humble exchange rate has already precipitated nationwide.

The advocates of further Naira devaluation, as usual, insist that, in addition to fundamental distortions to the domestic economy, the wide gap between market rates will also discourage foreign investors (particularly the portfolio class), who can quickly improve dollar supply to reduce pressure on the naira exchange rate.

Instructively, however, with dollars presently in short supply, a free, floating, totally market determined naira rate, will invariably propel the official rate closer to the prevailing parallel market rate of almost N500=$1. At best, the official rate may temporally settle above N400=$1 thereafter; however, the allegedly tenuous requirements for official documentation for genuine and authorized transactions, will always create a market space to sell forex at a higher price to itinerant as well as largely compromised customers. Invariably, sustained depletion of dollar supply at the official market, will ultimately, inadvertently drive parallel market rates beyond N600=$1, to trigger another cycle of urgent calls to bridge the widening gap between the rates with yet another round of Naira devaluation!

Readers will recall that, the horrendous immediate social and economic impact of deliberately devaluing the official naira rate from N195 to N295=$1 to reduce the gap between rates last year, was discussed in an article titled “This Devaluation be like 419” which was published soon after CBN’s decision to float Naira exchange rate in June 2016(See www.lesleba.com).
Hereafter, let us consider the aggravated impact that another huge devaluation beyond the present N305=$1(January 2017) would have on the various subsectors discussed in that article.

“Incidentally, barely 8hours after the commencement of the forex floating rate, the cost of its ‘’yet to be realized 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 17th June to below $25bn by Monday 20th June.

Indeed, all asset values denominated in Naira including our houses and every other property, also immediately fell below 60 percent of their dollar purchasing values overnight! Similarly, the equally celebrated $25bn plus, accumulated national pension fund, 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 percent more Naira to service and repay, while additional assets would be demanded to supplement existing collaterals; consequently, widespread default on foreign loans and outstanding import bills will become common. Thus, billions of dollars credit lines, which hitherto supportively restrained the cost of industrial raw materials imports, may also be cut, to further instigate higher operational costs which will inevitably challenge the competitiveness of Nigeria’s real sector, and adversely affect job opportunities. 

The Naira value of all external Public sector debt obligations would similarly increase to raise the ratio between annual debt service charges and aggregate income well beyond the precarious level of N35 on every N100 revenue. Worse still, if the 2016 budget deficit of N2Tn is additionally captured as debt, we may ultimately need to allocate over 50 percent of earned revenue to service our national debt annually!

Although NNPC management has remained unexpectedly reticent on the impact of the new forex policy on fuel prices, however, petrol price 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 NNPC accommodates a new round of subsidies, petrol price should 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 percent and reduce consumer demand, while cost of funds will conversely rise, with a collateral adverse impact on real sector investments and job creation. 

In addition, the recently established electricity tariff structure, earlier predicated on N197=$1, will become unsustainable, and a further tariff hike will become inevitable.

Evidently, the celebrated 30 percent, 2016 highest ever capital budget, will also suffer, as the significant import components usually required for infrastructure construction 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 the economy away from crude oil will also become severely challenged by the increasingly irrepressible production cost, which will invariably sustain inflation well beyond the current 16 percent. CBN will therefore be compelled to raise monetary policy rate to levels that will push cost of funds well above 30 percent, to unwittingly make import substitutes more competitive. Ultimately, real sector operations will become crippled and any hope of economic diversification or increasing employment will gradually fade.

On the security front, the fiscal allocations voted to increase the capacity of the security agencies, will become inadequate and will require additional appropriation to implement, unless we further deepen an already strangulating 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 floating exchange rate; clearly, any offshore expenditure, including payment of school fees, will hereafter require almost 50 percent 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 unfortunate reality is that the wheels of the economy were, sadly already actually in reverse gear before the devaluation, which will further spike the prices of fuel and most goods and services. Invariably, an inflationary pressure will subsist for the rest of 2016 while the unfortunate collateral of higher MPR and cost of funds, rising poisonously beyond 30 percent will dampen any hope of early economic recovery.” See also: “Economy: the flood gates have been breached”, also published in June, 2016 at www.lesleba.com.

Sadly, any frenzied attempt to stimulate spending and regenerate the economy with sectoral cash interventions, may also ironically challenge CBN’s attempt to restrain inflation, as constitutionally mandated, if perennial excess naira liquidity and an even weaker naira exchange rate prevails.”

Understandably, if government again succumbs to the poisonous persuasion to further bridge divergent market rates and devalue the naira closer to the parallel market rate of about N500=$1, then poverty will clearly further deepen, as fuel price will double, increasing naira loans will be required to fund all imports; cost of raw materials will spike to make Nigerian goods much less competitive, while value of equities on the stock market will further recede below $15bn, down from almost $50bn before devaluation of June 2016. Gross Domestic Product will also further plummet below $200bn also down from $510bn before the June 2016 devaluation while implementation of 2017 budget will be grossly dislocated.

Furthermore, inflation will most likely remain irrepressible below 20 percent and this would have oppressive social consequences for all static income earners and pensioners welfare will be particularly threatened. Worse still, the long awaited foreign portfolio investors may also fail to bring more dollars into any economy that is so badly challenged and where security remains weak.