Past policy inconsistencies will weigh on Nigeria’s recovery
After the contagion, the government must stay the course of reform
Policy uncertainty and inconsistency has been a major culprit among several fundamental factors that have kept both local and foreign patient capital away from the Nigerian economy, it is the reason why investors take speculative positions in the capital markets and why a chunk of our foreign reserves is flighty. Investors worry about the inability of the Nigerian federal government to maintain clear and consistent policies pursued when a crisis happens, only to revert post crisis.
This behaviour is not market friendly and must stop if we must advance as an economy.
The current COVID-19 pandemic has forced the Nigerian authorities (fiscal and monetary) to roll out policies in a bid to ameliorate the impact of the virus on the economy. The NNPC announced earlier this year that there will be no more subsidy, and how a new “price modulation” mechanism will be used to ensure that they do not have any under-recovery. This is not a new development in the history of Nigeria.
Subsidy removal has always been a response to a crisis, say, when oil prices plummet, and yet after the crisis, it is reversed when prices begin to trend upwards. A refusal to fully deregulate the downstream sector, put an end to price fixing, is a refusal to open up the space for private investment which would spur healthy competition and growth in the industry.
The Central Bank of Nigeria too is very much guilty of policy inconsistencies. Especially its defend-the-naira-at-all-cost strategy. So far, the CBN has reluctantly devalued the naira to N380/$1 from N306 earlier this year while still unwilling to unify Nigeria’s multiple exchange rates. It also allowed the rate at the Importer and Exporters (I&E) window to adjust to N380 in response to market developments. However, are there any institutional changes to guarantee that when this crisis is over, the CBN won’t revert this policy?
Every economy runs basically on two wheels; the trade wheel and the liquidity wheel. Prior to the outbreak of the novel coronavirus, COVID-19, in the fourth quarter of 2019, the global market was flooded with cheap capital due to the large liquidity injections by the central banks of the US, the UK and EU. Smart and proactive economies joined the race to attract these cheap sources of capital while Nigeria slacked, its policies weren’t perceived as favourable.
Now with the outbreak of COVID-19, not only has the pandemic depressed export, it has halted production and claimed lives in their thousands. It has also increased further liquidity glut in the global economy as governments across the world respond to the crisis by throwing money at it.
Here could be another opportunity for Nigeria to get its fair share of the glut, but her weak fundamentals make this at best a mirage. Standard & Poor (S&P), a rating agency, downgraded Nigeria from stable to negative on the back of the country’s weak buffers. Likewise, the International Monetary Fund (IMF) has announced that the Nigerian economy would witness a deeper contraction of 5.4 percent and not the 3.4 percent it projected in April 2020. It predicts that inflation is likely to increase while terms of trade and capital outflows will make our external position more vulnerable. Hence, the need to grow revenue.
Oil prices are still depressed. While Nigeria borrowed recklessly when oil prices were stable, it doesn’t have such luxury today given its weak earnings, besides the proportion of its revenues spent on repaying and servicing debt has ballooned.
Nigeria must unlock value from its dead assets. The federal government owns stakes in companies, owns lands and other assets which are wasting away and can be unlocked to attract foreign capital. These assets can be sold, securitised or leased.
Above all policy clarity and consistency are paramount to boost investors’ confidence.