FX unification, competitive discipline as way to post-pandemic recovery

The world as we now know it has changed from what it used to be before COVID-19 struck. A reversal to pre-pandemic times seems to be the primary goal for most countries globally, but this may not be too easy for countries whose economy was already trending downwards before the global virus attack.

Pre-crisis, Nigeria had been experiencing economic stress in various quarters: per capita income was falling, the exchange rate of the naira relative to the dollar was falling, the inflation rate was on the rise, public debt was piling up, and socio-political tensions were thickening.

During the time, the International Monetary Fund (IMF) had warned major African economies of the risk of a slow-growth trap, and global growth projections were downwardly reviewed. The hope for African nations seemed dimmer than their developed counterparts, and global economic obscurity loomed, and then came the pandemic without a forewarning.

Undoubtedly, COVID-19 placed the world at a critical juncture, and worldwide supply runs halted. At the same time, demand had to be forced to a complete stop. Quarantine measures permitted only essential services to operate while search for a cure was expressly sought after. The virus indeed brought the world to its knees, and countless souls were sacrificed on the altar of doom created by the dreaded monster.

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It can be argued that Nigeria’s share of the rotten pie dished out by the global pandemic was not as severe. Still, the economic lash back is not unnoticeable. However, marginal improvements are being noticed, and the economy is projected to see a rebound in the coming times.

Post-COVID-19 led to contraction in the second and third quarters of 2020, GDP growth turned positive in the fourth quarter. By Q1’2021, GDP growth had reached 0.5 percent, year-on-year. This growth was spurred by activities in the agriculture and services sectors, respectively.

While employment levels fall below pre-COVID-19 times, the inflation rate stands at 17.9 percent, signalling a slight improvement by about 0.1 percent from Q1’2021 record. While imports still far outweigh exports, pressure on the balance of payments (BOP) seems to be reduced due to the recent recovery in the global prices of crude oil and a rise in foreign remittances.

Investor bias favouring investment inflows into the country seems to be unfavourable since foreign exchange scarcity prevails. While inflation pressure persists, it is expected to go southbound towards 15.5 percent due to the recent border reopening order and the elimination of base effects from high food price levels.

Resurfacing government subsidy programmes and a slack revenue collection structure still worsens the nation’s fiscal burden. Spending on COVID-19 vaccination and financing the lead against insecurity in the country further exacerbates the country’s fiscal position. Nigeria’s fiscal deficit is projected to linger around 5.5 percent of GDP, the IMF asserts.

The IMF recently announced that Nigeria is expected to experience a gradual trend towards recovery. Real gross domestic product (GDP) is expected to be at 1.5 percent if pre-pandemic recovery must be realised by 2022. Restricted oil-related activities due to a sluggish global recovery, the decarbonisation trend and OPEC quota in place are prefigured to ensure that oil prices and government revenue are decently low.

To speed up the recovery process and push the country towards a post-pandemic miracle, the IMF has advised the country to prioritise foreign exchange and economic diversification policies.

According to the IMF mission to Nigeria, the current foreign exchange system in the country creates uncertainties for the private sector, which constitute the main investment drivers of the country. The presence of multiple exchange rate windows and a non-transparent rule for allocation of exchange rate makes it difficult for private investors to predict economic trends favouring investment decisions.

To gain policy credibility, the government has been advised to unify the multiple exchange rate windows into one market-clearing window. If this is allowed to occur, the efficiency of the price mechanism will ensure appropriateness in the value of the foreign exchange and a clear FX policy will help gain investor confidence, which will drive private sector-led recovery through increased foreign capital inflow.

Furthermore, the IMF points that a successful recovery programme will require more trade openness and competitiveness. In particular, export diversification and import substitution strategies are praised for being solution drivers in the quest to attain sustainable growth.

With vast economic resources at the nation’s disposal, Nigeria can sufficiently produce exportable products that will match global competition by volume and quality. With massive job creation at the centre of a highly diversified production capacity, Nigeria’s unemployment rate is expected to experience a phenomenal decline. At the same time, the country’s GDP will doubtless, throttle up.

Therefore, to tackle unemployment in Nigeria, the fund advocates that Nigeria should focus on creating at least five million jobs each year over the next decade. This can only be achievable if the government relaxes its focus on the oil economy alone and commits to develop agriculture, industry, services and education sectors of the economy.

If Nigeria must truly grow, it must wean itself from overdependence and overreliance on a single product and conform to the recommended foreign exchange option as offered by the IMF.