Naira Exchange @ N815 To One Dollar – By Boniface Chizea, Guest Writer
That was the screaming headline on June 21, 2023 in the popular press. This will be the weakest point Naira exchange rate will attain in recent memory, all markets considered. A few days before, some commentators were in celebratory mood as they prematurely celebrated the narrowing of the rates between the official and parallel market rates. I thought that was complete misreading of the situation as the matter in hand remained rather fluid. But you know we have not seen nothing yet. We would hate to be doomsayers but the bottom is about to fall off the Nigerian economy!
The reality staring us all on the face is that the exchange rates sooner than later will fall through the 1,000 Naira benchmark. I have recently heard some analysts predict that the rates will settle at about 600 Naira to the dollar. That would be a most welcome development as with that occurrence the damage we now envisage that will be done to the economy will be controlled. But it is on record that we earlier cried out that this is not the way to go about solving the problem of dual exchange rates in the economy; devaluation and what we predicted is now what we are witnessing. We were mocked by dye in the wool economists who have turned berating the authorities for their reluctance to float the exchange rate of the Naira. It is fair to observe here that Adeola Fayehun of ‘Keeping it real with Adeola’ was on the same page as myself.
The point we made which bears repeating is that logically to solve a problem, it is trite to observe that for an effective and lasting solution, it should be a no brainer that you must tackle the problem from its root cause as in a trail of cause/effect. You want to ask yourself what is the root cause of dual/multiple exchange rates in an economy and the simple straight forward answer is lack of productivity.
And since the root cause of lack of productivity is multifaceted, it is not what you want to solve over night by simply depreciating your currency as we have just done. Your exchange rate will go into a downward spin/free fall as we are now beginning to experience. Mark you what is happening now is a tip of the iceberg!
When I read in the papers that there was rate convergence; I chuckled. The rates will not converge in the near term this I can tell you for free. Do we appreciate the extent of backlog in delayed transfers in the country waiting for dollar allocations? We were regaled with tales that as we float that there will be massive inflow of dollars which will stabilize the rates! That is a remote possibility. No one will rush to bring in their dollars just because of an announcement of floating the rate of exchange in an economy that has been thoroughly mismanaged over a very long time now. There must be the inevitable wait and see period before confidence is returned back to the economy, during which time considerable damage has been done with the unemployment rate and related poverty index deepened. It is already happening as I have never seen the extent of sudden leap in the prices of basic goods and services as has happened recently and once again, we have not seen nothing yet!
The position I have taken here is based on experience over the years. There is nothing that we are experiencing now which we did not see before. There has been all manner of tinkering with the approach to the determination the rate of exchange as pressure is mounted on the authorities by multilateral financial organizations backed with our dye in the wool local economists.
We hope there will be no costly reversals this time around. Because that is the route we have travelled severally in the past. And if I may add for cold comfort, Nigeria is not alone in making this mistake. Witness the experience of Latin America countries particularly Mexico and Venezuela! Inflation in these countries got out of hand, their currency lost so much value that it was almost worthless, there was wide spread scarcity of basic goods and service to the extent that citizens have to stand in long queues for essential requirements and as the environment became suffocating the citizen escaped to other counties under punishing conditions in droves. With over 200 million Nigerians, that is the fate that awaits us if we are not careful!
Someone will ask me what then should be done. Simple adopt a holistic approach to repairing the economy. Look for low hanging fruits; such as coming on stream of Dangote Refinery and banishing insurrection in parts of the country that had sentenced farm hands to spending their time in Displaced Persons Centres. Privatize local Refineries immediately without minding the nationality of the new shareholders. Drastically reduce abuse in the system as is today. I admit that the market is the best approach to checkmating abuse such as unauthorized smuggling. But if we changed those deep in these corrupt practices at the helm and adopt radical automation of our processes and procedures, we might make some effective progress.
The same argument goes for pump price of petrol. Increase in pump price of fuel has quick and devastating impact on inflationary pressure. The falling rate of exchange should not have the same level of impact because most economic agents hitherto determine their exchange rates taking a cue from the parallel rates except as we have now predicted that the rates will likely go into a free fall and go into uncharted territory. But even as we liberalize the petroleum market, we must get away from involvement with fixing the pump price. One is glad to note lately that more companies have been licensed to import and the pump price has begun to reflect this fact as the prices have commenced movement upwards. But should it not be better to target aggressively the availability of refined products locally, since with such development the issue of subsidy payment will be out of the question.
We all agree that subsidy is bad for any economy as it is a veritable misallocation of resources. And as with the Nigerian situation, you end up subsidizing the elites and it is one proven ground for rent seeking behaviors. Even if we decided that subsidy will go, we should have been intentional about it. What arrangements have we put in place to cushion the effect of sudden jump in transport costs? I just read in the papers, that those who patronized the water ways can no longer afford to do. Why did the government not target providing alternative modes of transportation such as rail lines and water ways transportation at affordable rates for the masses? Now, when we talk of palliative, our mind simply goes to salary increases. I read in the papers that the Revenue Mobilization, Allocation and Fiscal Committee has just proposed an increase of 114% for the Presidency, governors and sundry political appointees! Although this is now being denied but there is no smoke without fire. Preparations have been made pending approval. How insensitive can we be amidst the palpable misery index in the land particularly amongst the poor and down trodden. Even if we are able to effect salary increases; what percentage of the population (11%) will that touch?
There are of course some phantom benefits attributable to what is currently happening such as there will be quantum leap in the availability of Naira as proceeds are converted using the new exchange rate for the payment of enhanced salaries which had been negatively impacted by the roaring rate of rising inflation. We hope that now that subsidy payment has ended, NNPC Ltd. will be able to start making returns to the Treasury. But even as we discuss, we have not factored in the impact of depreciated currency on debt and particularly debt servicing, which hitherto consumed over 80% of revenue that led to the arguments lately whether the problem of Nigeria is the volume of the debt stock itself or lack of adequate revenue flows.
It will be most beneficial for the economy if we are able to manage this process without costly reversals. But the point I want to leave us with is that we must get down quickly to carrying out an urgent repair of the economy and returning to productivity. And all that we needed to do have been well advertised. All that is left is urgent, determined and focused implementation. Enhancing productivity is the one and only assured pathway and we should be on course to follow now
Dr. Boniface Chizea is a retired banker and top Economics and Business Development Consultant.
