The original headline for this piece, which came in the form of a question, (Are market forces failing Nigeria?), was necessitated by the bouquet of economic policies of the President Bola Ahmed Tinubu administration since its inception, as well as the resultant gloomy macroeconomic outlook of the country in the near term. Without a doubt, this new government that took off on May 29, 2023, gave full effect to the reign of the free market: total removal of decades-old petrol subsidy, liberalisation of the foreign exchange market (otherwise called Naira floatation), among others. Incidentally, giving full sway to market forces (demand and supply) in the economic management of the country has been the core prescription of the Bretton Woods institutions (The World Bank and the IMF) over the years. It is therefore not so surprising that the new Tinubu administration in its ‘wisdom’ took the recommendations hook, line and sinker.
By definition, a (free) market economy is one in which the allocation of resources and the prices of goods and services are determined by market forces, primarily supply and demand. This implies little government intervention; allowing private ownership to determine all business decisions concerning how a business is run. Therefore, to a very large extent, this was what the new Tinubu administration commenced via fuel subsidy removal and foreign exchange rates unification or Naira floatation. But it has become apposite to say that these policies rather than making any good impact on Nigerians, have so far taken the populace to the nadir of hope and literally sunk the economy into an abyss. Thus, in a timespan of slightly over three months, all economic indicators have practically gone haywire — apparently, contrary to the government’s expectations.
Prices of all goods and services in the country have quadrupled (at least), with the price of petrol (Premium Motor Spirit, PMS) spiking from N185 per litre (before subsidy removal) to N650 per litre. This price spike quickly fed into transportation, foodstuff, house rents and sundry services. On the aggregate, these translated into a consistent runaway inflationary trend, standing at 24.08 percent at the latest as at end-July 2023 — the highest since September, 2005. Inflation rate was 19.64 percent a year earlier.
The huge jump in inflation translated into a spike in cost of living; sharp drop in standard of living for many Nigerians; weak disposable income and very low purchasing power for the populace. Indeed, as foretold by the World Bank and the IMF, millions of Nigerians have gotten forced into poverty — courtesy of the effects of the removal of subsidy on PMS by the new government. At the same time, the Naira floatation was unwittingly wreaking its own havoc on the economy. At the outset, the new foreign exchange (forex) market introduced a “willing seller, willing buyer” regime — implying that the market forces (demand and supply) would be determining the exchange rate.
However, so soon after the Central Bank of Nigeria (CBN) commenced the unified exchange rate regime, the Naira crashed against the US dollar and other major currencies across the globe. Before the new order, the Naira was exchanging at about N460/US$, but in a matter of few weeks, it had dropped to N850/US$. In the so called parallel or ‘black’ market, the Nigerian currency had declined to over N900/US$ by end-August, 2023. And the crashing goes on!
While these may not be the intention of the Tinubu administration, these outcomes that have been inflicting pains on the citizenry, put a heavy question mark on (the efficacy) of the policies. So, are market forces failing Nigeria? Corporate operators in every sector of the economy are turning in awful half-year 2023 results essentially due to the devastating impact of the economic policies of the new government.
Financial results published by many blue chips quoted on the Nigeria Exchange (NGX) Limited show them making huge losses largely due to the new forex regime. Big names like MTN Nigeria, Nigerian Breweries, Nestle Nigeria, Guinness Nigeria, Unilever Nigeria, Dangote Sugar, among many others, recorded huge “forex losses” during the first six months of the year. Already, two of the blue chips (GlaxoSmithKline and PZ Cussons) have opted to close shop in Nigeria due to the scorching business environment. Many others are virtually on the verge of bankruptcy, for the same reasons.
In the banking sector, while a few made losses, many reported a quantum leap in their performance indices owing to “incomes revaluation” necessitated by the new forex regime. However, in an unprecedented move, the CBN has promptly placed a caveat on the ‘gains’ made by these banks. Apparently, due to fear that the banks’ performances are ‘not real’ or sustainable, the apex bank in a memo dated September 11, 2023, warned that “banks shall not utilise such forex revaluation gains to pay dividend or meet operating expenses.” The CBN said “banks are encouraged to build capital buffers to increase resilience against potential volatility and/or economic shocks.”
All these go to show that the CBN neither has confidence in its Naira floatation policy nor the outcome — which has translated into some ‘windfall’ for many of the deposit money banks (DMBs), so far. Already, many of the DMBs have started having rapidly increasing Non-Performing Loans (NPLs) in their books — indicating that much of their loan portfolio, as the year goes by, is likely to become ‘troubled’. This means that many of the corporate loan beneficiaries could be defaulting in servicing/repaying them, as the economic crunch worsens. And this is the ineluctable reality, given the subsisting policies of the government.
In the aviation sector, most airlines (both local and foreign) are beleaguered; already, the market is faced with shortage of aeroplanes and scheduled flights cancellations. Most of the Nigerian airlines have a large number of their aircraft undergoing some maintenance stranded abroad due to inaccessibility or scarcity of forex to pay the bills. Even for the planes undergoing repairs locally, shortage of forex remains a major impediment to importing essential parts to complete work on them. As for the foreign airlines, close to a billion dollars of their (ticket) revenues could not be repatriated in the past couple of years. Due to shortage of forex, such money has been ‘trapped’ at the CBN. According to the International Air Transport Association (IATA), Nigeria is the worst culprit of all their markets in ‘trapping revenues.’
In sum, although the Tinubu administration could be said to have shown courage and political will in liberalising the forex market and ending fuel subsidy, managing the implementation of those policies is fraught with loop-holes. But, really, could the Naira have been floated, in the first place, given the well-known lingering scarcity of forex in the country? The CBN practically retains the monopoly power on the supply side of the forex market; yet, the Nigerian economy remains a highly import-dependent one. On the PMS issue, should the government have removed the subsidy and still depend fully on the importation of the product?
Even now that the government is licensing more persons to be importing PMS, does it not translate to more pressure in the forex market, since these importers still source dollars? The end result of all these is that the landing cost of PMS is likely to be rising; thus, giving impetus for further increases in the pump price of PMS. So, really, is it the market forces that are failing Nigeria?