• Friday, March 29, 2024
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Nigeria takes stance on defending Naira, subsidy at FDI’s expense

Economic Growth

If there is anything Africa’s biggest oil producer is more concerned about, is on maintaining a multiple exchange rate to defend the naira and providing for a subsidy even though such policies are unfavourable to attracting direct foreign investments (FDI).

Since 2015 when the country introduced a policy where investors could seek dollars at a market-determined rate of N360/$ or an official window where the rates are held at N305/$, direct inflows otherwise known as “sticky money” into the country has headed south.

FDI into the country at $2.1 in 2018, touched its lowest levels in 13 years with Ghana which economy could be likened to one that of Lagos, attracting the largest inflow into West Africa, according to data from the United Nations Conference on Trade and Development (UNCTAD)
“Ensuring the exchange rates will send a positive signal to investors. Hence the government should work out best options to achieving this rather than saying a total no to it” said Ayodeji Ebo, MD/CEO at Lagos-based investment and financial firm, Afrivest.

Amid having a multiple exchange policy, Africa’s second-largest economy in dollar term (suppose the market determined rate is used) over time has continued to provide for a subsidy that has exposed the woes and inefficiency of the state-owned and only importer of its petroleum product, NNPC.

This is despite recommendations by the International Monetary Fund (IMF) and the World Bank to say the economy is growing at a much slower pace than what is needed to lift the number of its citizenry leaving below $1.90 per day.

READ ALSO: Naira to remain stable next week on CBN sustained intervention

The IMF, however, noted in its article IV the need for strict reforms by scrapping the multiple tax system that has deterred the growth of the business as well as review power tariffs and remove the cap on petrol prices, which the federal government has shunned.

Nigeria’s Minister for Information and Culture, Lai Mohammed in an interview with Reuters said the current policy of multiple exchange rates for its currency, the naira, is working well, and the government is unlikely to change it anytime soon,

Inflation is slowing down at 11.25 per cent—the lowest in six months—while the reserves are up. Hence we are in a better position to defend the naira, according to Mohammed.

In the same manner, Zainab Ahmed, Finance minister said though the Washington based-lender recommendation seems plausible, however, there are no imminent plans to remove petrol subsidy.

“In principle that is a fact. but in Nigeria, we don’t have plans to remove fuel subsidy at this time because we have not yet designed buffers that can enable us to remove fuel subsidy and provide cushions for our people. So there is no plan to remove fuel subsidy”, Zainab said
“We will be discussing with various groups. If we have to, what are the alternatives? We have not yet found viable alternatives. So we are not yet at the point of removing fuel subsidy.”

By capping the prices at which the price of its oil is sold, Nigeria is among the 10 cheapest worldwide, according to data from GlobalPetrolPrices.com.

Ebo explained that the government should try in making out for palliatives which entail subsidizing transport as this would affect more on the masses than the petroleum. “What we have observed is that by capping fuel prices, we are indirectly subsidizing PMS for neighbouring countries due to smuggling”.

In 2018 alone, Nigeria spent some N730.9 billion—slightly over eight per cent of its N9.12 trillion budget in the year– on subsidy which it stylishly called Under-recovery cost, to data obtained from the financials of NNPC.

This amount could have made giant stride if they were channelled into the funding of the educational sector and the provision of basic health care services as both sectors have been starved of funds by both the government and banks.

Brent crude which accounts for about 90 per cent of Nigeria’s export earnings has stayed at an average of $65 in the larger part of this year, according to data obtained from Bloomberg terminal.

The bank of America Merrill Lynch, in a note, has predicted the price to touch as high as $100 in the later part of the year as countries brace up for the new marine fuel regulation.

These gains from rallying oil prices are expected to be eroded for Nigeria as a higher oil prices mean a high landing cost which is currently over N185, according to a statement by the Minister of state for petroleum, Ibe Kachikwu.