Floating The Naira – By Boniface Chizea, Guest Writer
Well, now that the Naira has been floated by the Central Bank of Nigeria in response to the directive by Mr. President in his inaugural address, we wish that our experience this time around will be different and that we are able to stay the course.
I say so because severally in the past, attempts have been made to float the exchange rate in response to the prodding by International Monetary Fund with the appreciation of the sheer difficulties with demand management; but as the consequences begin to unfold, the authorities did not have the political will to persevere and stay the course.
This is so because nobody wants to be accused of unleashing hardship on the citizens as inflationary pressures pile up. And therefore, like it or not, as the rates fall and the Naira appears to be going into a free fall and the touted benefits are slow at materialising, panic sets in and we beat a retreat and reverse the process.
Often in response, innovative approaches are dreamt up as escape route. It is often so as besides the fact of the inflationary implications of the rates, most leaders are worried about the judgment of history when it is going to be recounted how the exchange rate depreciated under their watch. But at this point in time, the reality of the Nigerian economy, so badly mismanaged, is that we do not have much of a choice.
Unfortunately, this development is following closely on the footsteps of corruption infested subsidy removal which has seen pump price of fuel increase in some instances by over 200 per cent. The full impact of the extent of this increase in price was brought home to me when I went to buy fuel just after the increase. I bought fuel in three 25 litre Jerry cans as well as filled the tank of my car. I was staggered when the amount to pay was indicated at 84,400 Naira. Of course, it is the first time in living memory that I will have to pay such a staggering amount at a fuel pump!
The fuel pump increase, if truth must be told, has far more effect on the escalation of prices of goods and services across board. And the impact is almost instantaneous as no sector of the economy and no one for that matter is excluded. But for compatriots wanting to cash in and take undue advantage, most economic agents already used the parallel market rates in determining the prices they charged and therefore the impact of floating the exchange rate on prices should not cut across board. But there again, what do I know?
A word of caution here about the pump price of petrol. What we needed to do was to allow the major marketers to source independently and import products under the over sight of the relevant regulatory bodies for purposes of guiding against collusion and for product quality assurance; and no more. By this approach the market will then determine the prevailing pump price at each point in time. There are indications already that this is the planned approach going by recent pronouncements.
But in my earlier paper, afraid of the consequential impact on the misery index in the land I had argued that the best way forward was to aggressively push for Dangote Refinery to come on stream, and for the local refineries to be quickly privatised and for licences for modular refineries to be issued generously so that capacity for local production of fuel will be boosted.
And while we are at it we must not forget the imperatives of climate change and the need for cleaner sources of energy such as solar, wind, thermal etc, and therefore we should be gearing up aggressively to develop these sources as energy sources of the future. My position was that if we were able to do all that, the issue of subsidy payments will be redundant as product importation will no longer be necessary.
But as we have bitten the bullet now, we must struggle to avoid any costly reversals; although it is obvious that what the pump price will be in the near future will depend on the extent to which the authorities are able to resist the inevitable pressures that are bound to be piled up by entrenched interests.
The Central Bank it has been reported, has now removed the cap on rate movement at the Importer/Exporter Window. Banks can now buy at the going market price and sell subject to a spread of one Naira. For travel allowances for both businesses and individuals, those in need will still approach the banks for their requirements. The rate would also be market determined based on weighted rate from the previous day. Therefore, travelling outside the country will now realistically going forward be strictly restricted particularly when you factor in, the out-of-reach costs of tickets.
For government transactions the rates would be also be determined by the market. And therefore, to all intents and purposes we have now berthed single rate of exchange in the country depending on to what extent we are able to manage the inevitable challenges along the way. What would now be of interest is for us to speculate on the likely far-reaching consequences.
Some of the consequences are already manifest, such as erratic price increases which we hope will soon stabilise. What one suspects are that economic agents for now have tended to over react as prices are increased. There are bound to be adjustments downwards as the impact on demands hits home. But at the level of individual households, there will be the need for inevitable adjustments following negotiations.
At the fiscal authorities’ level, this is where this development will have far reaching implications. For the budget, it will translate to quantum leap in revenue calculations. Therefore, all estimations of revenue flows from oil will increase in Naira terms by more than 200%. Unfortunately, for some time now the revenue from oil, we were told, was spent for the payments of phantom subsidies. Otherwise, such inflows will double on paper under the prevailing scenario which should have an overall effect on the whole position of our budget and therefore there should be the possibility of a balanced if not surplus budget.
On the other hand, our debt stock to the extent that they are due to sources outside the country will double. I have already seen figures being bandied around but suppose that it is premature as the situation is yet to crystallise. Therefore, all calculations of familiar indices; budget outcome, debt to GDP, debt to revenue, tax to GDP ratio remain uncertain until the situation settles.
We hope that the anticipated massive inflow in foreign exchange with related Direct Foreign Investments will materialise to cushion the inflationary effect of sudden price increases. Other related issues that will impact the economy will be tackled, particularly insecurity which has negatively impacted the agriculture supply chain. I have heard the President allude to the fact that he will be open to collaboration with the international community for the urgent need to end banditry, kidnappings and other organised foreign militant agents contesting Nigeria geographical territory and most certainly, that is the way forward.
Similarly, we must not underestimate the negative consequences of lack of reliable infrastructure such as power on the fortunes of the economy. In the case of power availability, it is a welcome development that power supply is now on the concurrent list. Therefore, sub national entities can now generate, transmit and distribute power. This is a welcome development expected to be impactful in this regard.
We must also arrest the big elephant in the house: CORRUPTION. It is a welcome development that the President has taken off on the right note in this respect. These are exciting times for the country as we experience these fast-paced developments, even as we wish us all the very best of luck.
Dr. Boniface Chizea is a retired banker and top Economics and Business Development Consultant.