5 Reasons That Support Calls for Naira Devalution


In recent times, our economy is being managed as if we are the sole country in a new planet setting the economic and money management policies for “our” planet.

The CBN has been under intense heat to devalue the naira further and while they have put up a good battle to postpone the evil day, it is my opinion the effect in due course might turn out with greater consequences than if handled earlier. A stitch in time saves nine and like everything that requires “patching” the scar will be there, but it is left for us to decide if we want a big scar or a smaller scar.

Talking about scars, the CBN is greatly worried about the scar further devaluation will leave on the economy and this concern is very valid. Devaluation is not a one pill solution to the economic problems we face, but the question is: on what grounds are we asking for a rematch when the last fight was a knockout?

The idea of crippling trade to achieve stability only portends great danger for us as we are unknowingly filling the labour market with “new” members and may earn a record of being the country with the most “exported” business in a short while.

I do not preach devaluation because others are devaluing. I will attempt to state in simple language the reasons why we may need to shun pride and face realities.

  1. Further drop in Oil Prices (Petrodollar)

While it is an undisputed fact that inflow of petrodollars has a huge impact on the value of the country’s currency, the level of the country dependence on petrodollar as a source of national income and as a source of funds for Government projects will determine the impact of an increase or decrease petrodollar flow has on an economy. All other thing being equal, the country’s level of development also determines the impact of the hit. For example, a county with 50% of the population living below poverty lines will not have the same impact as a country with just 10% living below poverty lines. For the sake of repetition, we failed to diversify the economy and we are largely dependent on oil sales for national income and as a major source of funds for Government projects. The oil price drop gets scarier every day and is still projected to drop even further.

 

At 2.4m bbl / day, the monetary value of $1 drop in oils price translates to a loss of about $2.4 million daily. Nigeria is an amazing market and a toast to lots of foreign investors. However, with our current economic quagmire, these foreign investors are losing interest. Oil prices dipped below $40 a barrel (1st time since 2009, 6.5 years) with signals of further decline, heading toward $30 / bbl. Oil revenue comprises 40% of our GDP and about 80 – 90% of Government earning.

  1. Stronger Dollar

The United States apart from increased explorations and new inroads into shale oil exploration has not had any significant activity to warrant a stronger economy. The strength more or else is  derived from the weakness of the EURO and UK economy and also the weakness of other economies prompted by the drop in petrodollar and other economic factors. In times of economic uncertainty around the world, investors flee to the USD and pull out investments from other economies, which either fulfills the fears or exacerbates the problem.

On explorations, the USD has consistently grown its daily production and with 13.97 million bbl / day as at the end of 2014, it has overtaken Russia and Saudi Arabia to be the world highest producer of oil once again, with a 15% share of the market leaving Saudi Arabia and Russia with 12% each. Note: Nigeria with 2.4million bbl /day has 3% share of the market.

  1. The Chinese Action.

China is the 2nd largest economy and biggest energy consumer in the world. They recently devalued their economy by 2% to boost exports. I also need to point out that this “magic” while it works for China, will not work for Nigeria. China

With the drop of over 6% drop in their stock market, consumption will be greatly reduced and as the largest consumer of energy in the world, the price of oil will be affected in no small way.  Secondly most of our undocumented / middle level trade happens with China and with their slowing economy, most manufacturers demand 30-50% down payment before manufacture starts and with the ban on FX transfers, that trade condition cannot be met legally. (This has created an opportunity for unwholesome practices and will only leave the CBN being reactive once again.

  1. Foreign Reserves:

We are spending our future savings, defending the indefensible or spending our future development defending our pride. With the continued oil price drop and our dwindling earnings and disappearing foreign exchange reserves, battling to save the Naira and continued dip into our FX reserves is just a battle in futility and only translates to saving up losses for the future. We have a choice to gradually bear the impact of this situation or take a one time hit that will make recovery more difficult. With a Human Development Index of 187,  growing population and poor state of infrastructure we have a lot of work to do with the little reserves we have. With a population of 178 Milion people, Nigeria’s reserves is currently around $30b, while Angola with 24 Million people also maintains $33B in reserves. (Norway 5m, $65B; Russia 147m, $357B; Colombia 48m, $46.5B; Brazil 204m, $368B)

  1. Supply / Demand Interplay; Regulatory Pressures:

CBN regulations are greatly reactionary and in some cases targeted at the wrong culprits ( you cant buy FX or let banks wire money for non valid, but you can spend with POS at long as it doesn’t exceed $50k daily and CBN/ Bank still pays it. The products  are not banned, but sourcing cash is restricted. This has also aided by the new parallel market for “inflow funds” and as I earlier predicted are available to the highest bidder. The fact remains that there is an overwhelming gap between demand and supply of USD  and as long as that gap exists, CBN will continue fighting a lost battle. The supply side is plagued by drop in oil price, decades of outstanding developmental needs, import dependence and  mismanagement, which is magnified by the global economic downturn.

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