Nigeria’s economy and consequences of floating the naira

Now that the Naira has been floated by the Central Bank 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 several attempts have been made to float the exchange rate in response to the prodding by the International Monetary Fund and 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 materializing, panic sets in and we beat a retreat and reverse the process.

Often in response innovative approaches are dreamt up as escape routes. It is often so as besides the fact of the inflationary implications of the depreciating rate exchange, most leaders are worried about the judgement 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 is so badly mismanaged that we do seem to have much of a choice in the matter.

Unfortunately, this development is following closely in the footsteps of corruption-infested subsidy removal which has seen the 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 brought fuel in three 25 litre Jerry cans as well as filled the tank of my car.

I was staggered when the amount was indicated at 84,400 Naira. Of course, this 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 the truth must be told, has far more effect on the escalation of prices of goods and services across the 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 foreign exchange rates in determining the prices they charged and therefore the impact of floating the exchange rate on prices should not cut across the board. But there again, what do I know?

But a word of caution here about the pump price of petrol. What we needed to do is to allow the major marketers to source independently and import products under the oversight of the relevant regulatory bodies for purposes of guiding against collusion to fleece buyers 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 onstream, and for the local Refineries to be quickly privatized and for licenses 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 would be redundant as there would be no longer a need for importation. But as we have bitten the bullet, 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 rates movement at the Importer/Exporter Window. Banks can now buy at the going market rate 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 applicable rate would also be market determined based on the weighted rate on the previous day. Therefore travelling outside the country will now realistically going forward be strictly restricted particularly when you factor in out-of-reach costs of tickets.

For government transactions, the rates would also be determined by the market. And therefore to all intents and purposes, we have now berthed a 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 stabilize. What one suspects is that economic agents for now have tended to overreact as prices are increased. There are bound to be adjustments downwards as the impact on demands hits home. Therefore at the level of individual households, there will be the need for inevitable adjustments following negotiations.

At the fiscal authority’s level, this is where this development will have far-reaching implications. For the Budget it will translate to a 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 on the payments of phantom subsidies.

Otherwise, such inflows will double on paper under the prevailing scenario which should have an overall effect on the 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 were due to sources outside the country will double.

I have already seen figures being bandied around but suppose that is premature as the situation is yet to crystallize. Therefore all calculations of familiar indices; budget balance, debt to GDP, debt to revenue, and tax to GDP ratio remain uncertain until the situation settles.

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We hope that the touted rapid inflow of foreign exchange into the economy as well as Direct Foreign Investments would materialize to cushion the effects of escalating prices. Other related issues that will impact the economy should 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 foreign agents contesting Nigeria’s geographical territory and most certainly, that is the way forward.

Similarly, we must not underestimate the negative consequences of a 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 the 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 most certainly exciting times for the country as we experience these fast-step developments, even as we wish us all the very best of luck.