The tragedy of the Naira is that it has a single source of strength and many pulldowns. Its energy hails from the foreign exchange earnings from crude oil exports. 95% of the foreign exchange that enables us to make purchases overseas relatively conveniently are from this source alone. Other sources of foreign exchange such as diaspora remittances and earnings from petroleum gases, agricultural exports, constitute less than 5% of the entire foreign currency-denominated income. Tragically, the coronavirus pandemic by depressing the global demand for crude oil and the attendant price wars that followed has in recent times frustrated our chances of competitively selling our oil at relatively higher prices. Despite the declining earnings, Nigeria’s import appetite stays high. By mid-2019, the import bill was approximately 47% of Nigeria’s total foreign trade. In the list of the top five, commodity imports are refined petroleum, wheat, raw sugar, and rice. In 2015, food imports made up a whopping $8 billion. Import spending on refined oil is currently five times that of wheat and is not abating. Until recently, there were discriminatory rates of foreign exchange for the government’s official activities as well as for some selected sectors and the rest of the country. Such biased foreign exchange management helped in facilitating some measure of round-tripping that equally hurt the Naira.
The American dollar does not appear to be losing its primacy any time soon, despite the inauspicious economic developments across the globe. Regardless of the modest weakening of the US dollar index, it will likely gain strength over time as the coronavirus pandemic weakens the economies of countries that make up the index’s currency basket. In the past ten years, the US dollar formed approximately 65% of global reserves. In recent times, given the economic havoc occasioned by the coronavirus, the dollar appears to be the haven of safety for many investors. The demand for the dollar remains reasonably reliable as a haven for many investors and economic agents. This flight to safety is not likely to change anytime soon. There is a hiked level of ongoing conversion of private investments in Nigeria in favour of the dollar-denominated assets. Even the recent Shanghai cooperation has not shown sufficient muscle to restrict the ascent of the dollar in the short term. So far, it is not clear whether the pact among the members of this cooperation to trade in their local currency has become entirely feasible. While that is still in the works, the dollar remains in demand by most countries of the world. Analysts speculations still hold on to the likelihood of the dollar losing some fraction of its leadership of reserve currencies. Two strong reasons give a fillip to the position. The first is the weakening economy of the United States in the face of the coronavirus. There is also the likely dumping of the dollar by China in favour of the Shanghai cooperation. Consistent with the expectation, a secure alternative to the dollar may emerge. In the interim, however, it remains the most reliable currency haven most countries and private investors
At least, the demand for the dollar will persevere through four channels: our import-dependent consumption pattern, import-dependent production, money-laundering, and the flight to safety. The elitist consumption pattern that we inherited since the start of the oil boom has not yet abated. Therefore, the satisfaction of our tastes and preferences regrettably depend a lot on imports. Additionally, we rarely produce enough of what we consume and therefore have to rely very much on imports to meet our domestic consumption requirements. Similarly, our production is import-dependent. We import most of the intermediate inputs in our manufacturing process. Therefore, we can hardly produce without sourcing the critical raw materials, the technology and sometimes the human resource expertise required for a successful production abroad. There is, therefore, a serious dilemma; both our consumption and production needs are satisfied through imports.
Again, several capital market instruments, as well as the dollar and other foreign currencies, are popularly used instruments for money-laundering. The one-time viral video of the Kano state governor receiving millions of Naira in its dollar-denominated equivalents is a good case in mind. That opprobrious culture has not vanished. On the contrary, we will expect much of that happening in the next couple of months. We very much know that a significant driver of corruption in the country is economic uncertainty. With that by the corner, many corruption-prone individuals will naturally cover their tracks by leveraging the flight for safety in the dollar. The recent macroeconomic events evidence the fact that the Naira will not store the value of previously earned wealth as efficiently as the dollar would. The Naira will, therefore, continue to depreciate against the dollar at least in the medium term.
While we have several dollar-demand and expenditure channels, we have by far fewer channels for earning it. The short-term future of the dollar supply in Nigeria is easily predictable. Earnings from the native crude oil receipts are down already and will likely remain so for a long time. We do not have an immediate primary replacement for crude oil earnings. In the medium and long-term, there are many exploitable resources such as natural gas and vast solid mineral deposits that can easily make up the differences. Nonetheless, it requires much vision from the leadership to make that difference to happen. Diaspora earnings are also expectedly abysmally low. A globally economically inactive world will unlikely deliver income surpluses that are remittable to the home country. Again, we may have to wait a little longer before we can expect substantial sizes of remittances from Nigerians in the diaspora. Historically too, not much used to be earned from our non-oil commodity exports.
First, we do not have many of them apart from cocoa that has a significant demand outside of Nigeria. Secondly, many of the ex-portable primary commodities with lots of prospects not only face myriads of before the border challenges but are also poorly processed and handled. The cumulative effects result in low quality and un-competitively priced products. Thirdly, our primary commodity exports face many hostilities with many countries putting in place after the border restrictions to curb their purchases. Aggregative, these supra-mentioned considerations limit our capacity to earn enough dollars to take care of our dollar needs sufficiently.
Moreover, it does not appear as if it is something we can wish away very quickly. Since 2019, we have had a trend of current account deficits which got more potent with each passing day. By the last quarter of 2019, our current account deficit has risen to $7 billion from about $3 million that was the deficit in the preceding quarter. This trend has not abated and can only get worse with each passing day. The dilemma is that these deficits are not necessarily for financing intermediate inputs for enhanced production. Such would have been laudable as we would have been able to procure more machines, raw materials and other factors that enable us to produce more. However, that is sadly, not the case. Foreign direct investment, as well as foreign portfolio investments, have also been nosediving. Since April 2019, foreign direct investment as a percentage of GDP fell from about 1.2 in April to 0.38 in December of the same year. Nigeria’s foreign portfolio investment had also decreased by $6 billion in December 2019.
The worsening disequilibrium and the ever-rising debts are easy to understand and need no further explanation. It is a bad mix. This depressing future is particularly true when the depleting foreign investments and current account deficits that were not necessarily for enhanced production are married. The offshoots are crisis. The pressure is clearly and forcefully gathering around our external reserves. The threats are so palpable that they even fed into the credit conditions given by the IMF for its $3.4 billion credit. However, how far can we keep the naira currency from relapsing through incessant borrowing? It is well-known that knocking on the door of the IMF under some of the conditions mentioned already signposts further levels of the devaluation of the naira currency. The downward journey of the Naira is on. Hopefully, our economic managers will not allow it to assume the hyperinflationary stature of the Zimbabwean money under Mugabe.
Finally, our economy, no doubt, is already like a woman who is seriously in labour. Recent poverty statistics confirm Nigeria’s leadership of global poverty. It is a well-known yet shocking statement of our perennial taste for value destruction and veering off the tracks of prosperity. An increasing number of persons are tumbling off from low income to below the poverty line levels instead of the reverse. There have been several concerns about the possibility of the government defaulting on some of its obligations. While that may not be a possibility in the near term, such likelihoods are not entirely off the table. No economic agent survives eternally on debt. The naira value is already sliding seriously. The fears that this may persist over more extended periods are intense and very palpable. It is equally real and is no longer dismissible with government media hypes.
Nigeria’s economy needs urgent surgery. The flights to the dollar for safety has accentuated strongly. Although it did not start in the last couple of months, it is, however, racing towards a crescendo. Even small income earners are keeping their money in the dollar currency. The increasing dumping of the Naira due to perceptions of its eventual continuous devaluation may result in actual correction of the value of the Naira. We cannot completely predict the CBN. However, it does appear as if the apex bank is locked in on this one and may eventually bow to the pressure.
Frontpage January 15, 2020