New Forex Policy: This devaluation ‘be like’ 419
The ‘419’ scam is well known in Nigeria for boasting empty promises of stupendous returns which induce victims to willingly part with their valued possessions. The perpetrators of this fraud, ply their trade nationwide with targets which cut across the social spectrum and include otherwise, successful businessmen and highly educated professionals, who are usually gullible and driven by the unreasonable expectation of clearly unrealistic returns on their ‘investments’. Ultimately, the bubble would burst and much pain and sorrow would follow.
Similarly, the IMF and other respectable international financial agencies and local economic experts, have commended the recent devaluation and floating Naira exchange rate as ‘investments’ that would
ultimately yield great dividends.
We are encouraged to believe that the new forex regime will recharge our economy and sustain inclusive growth with increasing job opportunities, and also reduce our almost total dependence on export revenue from crude oil, by facilitating the realization of a diversified economy.
It is also suggested that a floating rate would create a level playing ground, and encourage marketers to reduce NNPC’s present unwieldy monopoly of fuel imports and also attract investors to build more refineries locally. Nonetheless, the promise that the new forex policy would attract much needed foreign investment inflow, is probably the most notable claim by supporters of the new regime.
Consequently, CBN trusts that the reported $10-$15bn hurriedly evacuated from Nigeria when oil prices slumped, would be channeled back by foreign investors; sadly, however, the present level of uncertainty and insecurity sustained by our internal socio-economic tensions may not encourage a quick return of investors as yet.
Incidentally, the desperation of foreign portfolio investors to evacuate their funds from Nigeria contributed in no small measure to the present battered Naira exchange rate. As usual, portfolio investors primarily target the unusually high returns on CBN and Federal government’s loans; thus, such investors may borrow at low rates below 5% from offshore banks and reap a harvest of 10% and much more in Nigeria.
Expectedly, however, portfolio investors would naturally still want assurances that ultimately, their original profit projections would not be wiped out by another devaluation. Furthermore, the elevated level of insecurity and Naira rate instability may also deter potential “foreign direct investors”, whose operations would positively add value to our industries and infrastructure and also create additional job opportunities locally.
Thus, the sum of the above narrative is that, the present devaluation and floating Naira exchange rate, may not immediately propel the expected return of over $10bn outflow from Nigeria; in this event, it would be misleading to suggest that the Naira rate will soon become stabilized by a bountiful inflow of dollars, as presently speculated.
Conversely, barely 8 hours after the commencement of the new forex regime, the cost of “yet to be realized speculated benefits”, had already made significant dents on our economy. For a start, Nigeria’s erstwhile celebrated $510bn Gross Domestic product, immediately crashed below $350bn, while per capita income crashed from over $1000 to well below $600 as a clear testimony of deepening poverty.
In addition, the dollar value of all equity listed on the Nigeria stock exchange also plunged from almost $48bn on Friday 17th June to below $25bn at the close of business on Monday 20th June, when the new forex regime commenced. Invariably, all cash income and savings held in Naira, also immediately fell below 60% of their dollar purchasing value on commencement of the new forex policy.
Similarly, the equally celebrated over $25bn accumulated national pension fund, also lost over $10bn, just like that, to imperil the future welfare of our senior citizens; in truth, we were all literally reduced to size within 24 hours and any offshore expenditure we make, thereafter will henceforth require almost 50% more Naira to fund.
In addition, all outstanding dollar denominated loans, (personal, corporate or government) will immediately also require much more Naira to service and repay; consequently, widespread default on foreign loans and outstanding import bills will prevail.
Thus, foreign credit lines, which hitherto supportively reduced raw materials import cost to local industries, may also be cut to further compound already spiraling operational costs and instead challenge the export competitiveness of Nigeria’s real sector. The Naira value of Public sector external debt obligations would also increase and raise the ratio between annual debt service charges and actual income well beyond the present 35kobo on every one Naira revenue.
Although the NNPC management had remained unexpectedly reticent on the impact of the new forex policy on fuel prices, however, the pump price of petrol cannot remain at N145/litre, if the Naira exchanges for N280=$1 or more. Indeed, unless NNPC accommodates a new round of subsidies, petrol will inevitably sell well above N200/litre shortly.
Invariably, Marketers would also defer their fuel imports until the price issue is resolved; if however, in the interim, NNPC’s congested import schedule faulters, severe supply shortages will resurface, and extended queues and frustrating delays at fuel stations will return.
Nevertheless, since budget 2016 made no provision for subsidy, a deregulated price regime will spike petrol price and ultimately propel inflation rate well above 20% and create serious consequences for consumer demand and investment, with collateral adverse impact also on employment. In addition, the recently established electricity tariff structure, which was predicated on Naira exchange of N197=$1, will become unsustainable, and a further hike in electricity tariff will be inevitable, much against consumers’ expectations.
Sadly, the earlier commended 30% budget for capital expenditure, will also suffer, because the import components for infrastructural enhancement may now require almost N300bn more to fully implement; in other words, public expectation for urgent infrastructural remediation will still have to remain on hold.
Furthermore, our desire to diversify output and revenue sources away from crude oil, will also become severely challenged by unstoppable rising production cost, which will invariably drive higher inflation rates and, in turn, compel higher CBN monetary policy rates, to push cost of borrowing well above 30%. Ultimately, the operations of the real sector will become crippled and any hope of economic diversification will also become dimmed.
On the security front, the fiscal allocations voted to increase the capacity of the Armed Forces, will invariably also become inadequate and would require additional appropriation to implement. Sadly however, our presently distressed financial state will obviously make such supplementary allocation a challenge, unless we further deepen our already oppressive debt profile.
Ultimately, the question must be why we agreed to readily sacrifice so much as a pound of our flesh on a mere platter of yet to be realized promises and benefits.
Written by Henry Boyo of Vanguard News
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