NIGERIA has been in the throes of an economic tsunami of sorts for the past 11 months. The adverse economic headwinds caused by weak demand in major oil importing economies of the world and a burgeoning supply of oil exports occasioned by new oil exporting countries and the shale oil revolution in the US has ensured that Nigeria is in an economically precarious position of having less revenue accruing to the Federal, state and Local governments (due to significantly reduced incomes accruing from the sale of Nigeria’s oil) and our inability to fully replace the USA as the destination of most of our oil exports.
Iran’s return to the world economy will exacerbate Nigeria’s revenue challenge because India used Nigeria as a short term replacement to Iran pending the lifting of world sanctions against that country.
The present government has not been helped by some of the actions of its predecessor. The wholesale acquisition of debt, the depletion of Nigeria’s savings, the failure to reduce the size of the Federal Government bureaucracy, the yearly increase over the last 4 years of the Federal Government budget and the reckless waivers given to companies engaged in activities that provide no economic benefit to Nigeria has only helped to render Nigeria’s finances increasingly precarious and porous.
The sum total of lower oil prices, weak finances, depleted savings and the absence of a strong enough non oil sector has meant that the Naira has increasingly come under adverse pressure. The CBN has opted to reduce the demand for foreign currency by depriving the manufacturing sector of vital access to foreign exchange in order to reduce pressure on the Naira and thereby artificially increase the value of the Naira. That policy has led to JP Morgan removing Nigeria from its traded index and has led many potential investors rethinking or delaying a decision of whether or not to invest in Nigeria.
Nigeria (to all intents and purposes) is now in a recession. Its vaunted GDP growth, though estimated to be less than 2.75% next year, will more than likely enter into the negative territory. Nigeria (like UK in the 1990s) is attempting to buck the market with its present ill-advised Naira policy. As a recap, Britain in 1990 wanted to stay within the ERM and deployed substantial amounts of money to stay within a given foreign exchange value band despite its economy being very weak. Norman Lamont (the then British Chancellor) burnt through billions of dollars trying to maintain an unrealistic exchange rate. Eventually, Britain realised that the actions were futile having recklessly lost billions of dollars trying to buck the market.
Nigeria is spending its limited reserves of foreign currency to artificially maintain an unrealistic exchange rate and at the same time it is contracting the domestic economy by depriving manufacturers of vital foreign exchange needed to produce its goods for the market place. Allied with these policies, the CBN has maintained a very high interest rate environment that is inimical to startup business owners or to established businesses looking to invest more in their businesses. When this is considered beside the new consolidated government policy of having all money moved away from various banks and into one account with the CBN even less money is available for lending to businesses or individuals. It becomes clear that the business and demand environment within Nigeria is being clobbered by external factors (low price of oil and demand for our oil), and government driven fiscal (FG) and monetary (CBN) policies.
Nigeria has insufficient foreign exchange to be able to maintain an artificially strong exchange rate with the dollar or indeed the sterling. In the process of trying to maintain an unrealistic exchange rate it will (like Britain in the 1990s) burn through most, if not all of our foreign exchange savings and whilst doing this will significantly contract the domestic economy by pushing Nigeria into a deep recession leading to the contracting of Nigeria’s GDP. Once Nigeria has depleted its savings on this misplaced policy, the Naira will then fall to its natural level in any event.
Nigeria has, over the last 16 years, spent its time pursuing forward looking market centered economic policies that has taken its GDP from $35billion in 1999 to $521 billion in 2013. The last thing we want as a country is to start to put forward well- intentioned but economically misplaced policies that will send Nigeria back to where we were in the 1980s when Nigeria’s GDP contracted from a size of $45 billion in 1979 to a GDP size of $35 billion in 1999 (a $10 billion contraction over a 20 year period).
Whilst all Nigerian are aware that Buhari’s government has not caused the economic difficulties Nigeria is currently facing, his government (through its acts and omissions) are exacerbating the downturn that Nigeria will inevitable face and are currently facing.
Whilst I concede that the proposed $25 billion Infrastructure Fund (that Vice President Osinbajo is proposing) will act to reflate parts of the economy depending on how much is actually spent and where those amounts are spent and the possible multiplier effect of spending those funds in the way envisaged.