The “419”, otherwise known as advance
fee fraud, scam is well-known in Nigeria for boasting empty promises of
stupendous returns which induce victims to willingly part with their
valued possessions. These fraudsters, ply their trade nationwide with
targets which cut across the social spectrum and surprisingly include
otherwise, highly successful businessmen and professionals, who are
usually gullible and driven by the unreasonable expectation of clearly
unrealistic returns on their “investments”. Ultimately, the bubble would
burst and much pain and sorrow would follow.
Similarly, the International Monetary
Fund and other respectable international financial agencies and local
economic experts, have commended the recent devaluation via a floating
naira exchange rate as “investments” 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 export
revenue from crude oil, by facilitating the realisation of a diversified
economy.
It is also suggested that a floating
naira rate will create a level playing ground, and encourage marketers
to reduce the Nigerian National Petroleum Corporation’s present unwieldy
monopoly of fuel imports and also attract investors to build more
refineries.
Nonetheless, the promise that the new
forex policy would attract much needed foreign investment inflow is
probably the most notable claim by supporters of the new regime.
Consequently, the Central Bank of Nigeria trusts that the reported $10bn
to $15bn hurriedly evacuated from Nigeria when oil prices slumped,
would be channelled back by foreign portfolio investors. Sadly, however,
the present level of uncertainty and insecurity sustained by our
socio-economic tensions may not encourage a quick return of such hot
money inflow, for now.
Incidentally, the desperation of foreign
portfolio investors to evacuate their funds from Nigeria contributed in
no small measure to the present battered naira exchange rate. As usual,
portfolio investors primarily target 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
harvest of 10 per cent and much more in Nigeria, even when the proceeds
of these loans have not been socially impactful. Expectedly, however,
portfolio investors would still want to be assured that, ultimately,
their original profit projections would not be wiped out by another
devaluation.
Furthermore, the elevated level of
insecurity and naira rate instability may also deter potential “foreign
direct investors”, whose operations add value to our industries and
infrastructure while also creating more jobs. Thus, the sharp
depreciation and a floating naira exchange rate will not immediately
propel the expected return of over $10bn earlier scrambled away from
Nigeria. Consequently, it will be clearly misleading to insist that a
bountiful inflow of dollars will soon stabilise the exchange rate, as
speculated by experts.
Conversely, barely eight hours after the
commencement of the new forex regime, the cost of the “yet to be
realised ‘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 as an attestation of
deepening poverty. In addition, the dollar value of all equity listed on
the Nigerian stock market also plunged from almost $48bn on Friday,
June 17 to below $25bn on Monday, June 20, when the new forex regime
commenced.
Invariably, all cash income and savings
held in naira, also immediately fell below 60 per cent of their dollar
purchasing value overnight. Similarly, the equally celebrated over $25bn
accumulated national pension fund, also lost over $10bn, just like
that, to imperil the future welfare of our senior citizens. In truth, we
were all literally cut to size with government consent within 24 hours
by the new forex policy and any offshore expenditure we all make,
thereafter, will require almost 50 per cent more naira to fund.
Furthermore, all outstanding dollar
denominated loans, (personal, corporate or government) will henceforth
require much 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. In such an event, billions of dollars credit lines, which
hitherto supportively restrained the cost of raw materials imports to
local industries, may also be cut to compound spiralling operational
costs and challenge the export competitiveness of Nigeria’s real sector.
The naira value of all external public
sector debt obligations will similarly increase to raise the ratio
between annual debt service charges and actual income well beyond the
precarious level of 35 kobo on every N1 revenue. Worse still, if the
2016 budget deficit of N2tn is also captured, we may ultimately need to
allocate over 50 per cent of earned revenue to service our 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
N145/litre, if the naira exchanges for N280=$1 or more. Indeed, unless
the NNPC accommodates a new round of subsidies, petrol will soon sell
beyond N200/litre. Invariably, marketers will defer their fuel imports
until the price issue is resolved, especially when they have to borrow
up to 50 per cent more with higher interest rates to fund fuel imports.
If however, in the interim, the NNPC’s congested import schedule
falters, severe supply shortages will resurface, and extended queues and
frustrating delays at fuel stations will return.
Nevertheless, since the budget 2016 made
no provision for subsidy, a deregulated price regime will certainly
spike petrol price and correspondingly propel inflation rate well above
20 per cent to create serious consequences for consumer demand and
investment, with collateral adverse impact also on employment.
In addition, the recently established
electricity tariff structure, predicated on naira exchange of N197=$1,
will become unsustainable, and a further hike in electricity tariff will
be inevitable, much against consumer expectation.
Sadly, the celebrated 30 per cent, 2016
capital budget, will also suffer, as the significant import components
usually required for infrastructure and equipment may now require almost
N300bn more to fully implement. Consequently, public expectation for
urgent infrastructural remediation will still have to remain on hold.
Furthermore, our desire to diversify
output and revenue sources away from crude oil will also become severely
challenged by irrepressible production cost, which will invariably
sustain inflation well beyond the current 16 per cent. In this event,
the CBN will 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.
With respect to improved security
infrastructure, the fiscal allocations voted to increase the capacity of
the armed forces and other agencies, will also become inadequate and
require additional appropriation to implement. Sadly however, our
presently distressed financial state will obviously make such a
supplementary allocation a challenge, unless we further deepen our
already oppressive debt profile.
Evidently, the new forex policy has
clearly exposed the increasing loss in naira purchasing value.
Incidentally, the N1,000 note which is currently our highest
denomination is presently worth about $3. Going forward, we will either
redenominate our currency profile, with say two decimal points or adopt
N2,000, N5,000 and N10,000 note denominations, to facilitate
portability. Regrettably, however, neither gimmick will stop further
depreciation, as the naira, clearly, no longer inspires much confidence
as a safe store of value. For this reason, the public will still prefer
to preserve the value of their income in dollars, even when they do not
import anything.
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
Comments