Are advocates of further devaluation economic terrorists?

The increasing gap between official and parallel market naira exchange rates has lately propelled a fresh call from corporate financial establishments and diverse speculators (both local and foreign) for CBN to unhinge naira from the purported present ‘flexible’ peg of N305=$1, despite the horrendous social and economic deprivations which such a humble exchange rate has already precipitated nationwide.

Advocates of further Naira devaluation, as usual, insist that, in addition to serious distortions to the domestic economy, the wide gap between market rates will also discourage foreign investors (particularly the portfolio class), who can quickly improve dollar supply to reduce pressure on the naira exchange rate.

Instructively, however, with dollars presently in short supply, a free floating, totally market determined naira exchange rate, will invariably propel the official rate closer to the prevailing parallel market rate of almost N500=$1.

At best, the official market rate may temporally thereafter settle above N400=$1; however, the allegedly tenuous requirements for official documentation for genuine and authorized transactions, will always create a market space to satisfy forex demand of such customers. Invariably, the sustained constriction of dollar supply at the official market, for any reason, will ultimately inadvertently drive parallel market rates well beyond N600=$1, and trigger another cycle of vociferous calls to bridge the widening gap in rates with another round of Naira devaluation.

Readers will recall that, the horrendous immediate social and economic impact of deliberately devaluing the official naira rate from N195 to N300=$1 to reduce the gap between market rates in 2016, were discussed in an article titled “This Devaluation be like 419”; first published soon after CBN’s decision to float Naira exchange rate in June 2016 (See http://www.lesleba. com).

Hereafter, let us consider the aggravated impact that another huge naira devaluation in 2017 would have on the various subsectors discussed in that article. Please read on.

“Incidentally, barely 8hours after commencement of the new forex regime, the cost of the ‘’yet to be realized ‘regenerative’ benefits”, had already made horrendous 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 to deepen poverty. In addition, the dollar value of all equity listed on the Nigeria Stock market also plunged from almost $48bn on Friday 17th June to below $25bn on Monday 20th June, when the new forex regime commenced.

Invariably, all cash income and savings held in Naira, immediately also fell below 60% of their dollar purchasing value overnight. Similarly, the equally celebrated $25bn plus accumulated national pension fund, lost over $10bn, just like that, to jeopardise the future welfare of our senior citizens. In truth, we were all literally cut to size with government approval within 24hours, by the new forex policy; invariably any offshore expenditure we all make, thereafter will require almost 50% more Naira to fund.
Furthermore, all outstanding dollar denominated loans will henceforth also require much more Naira to service and repay, while additional assets would be demanded to supplement existing collaterals; consequently, widespread default on foreign loans and outstanding import bills, including fuel will be common. In such event, billions of dollars of credit lines, which hitherto supportively restrained the cost of raw materials imports to local industries, may also be cut to further instigate spiraling operational costs and challenge the export competitiveness of Nigeria’s real sector.

The Naira value of all external Public sector debt obligations would similarly increase and raise the ratio between annual debt service charges and total actual income well beyond the precarious level of 35kobo on every N1 revenue. Worse still, if the 2016 budget deficit of N2Tn is also captured, we may soon need to allocate over 50% of earned revenue to service debts annually!

Although the NNPC management has 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 ultimately sell beyond N200/litre. Nevertheless, since budget 2016 made no provision for subsidy, a deregulated price regime will certainly spike petrol price to correspondingly propel inflation well above 20% and create serious consequences for consumer demand and investment, with a collateral adverse impact also on job creation.

Additionally, the recently established electricity tariff structure, earlier predicated on Naira exchange of N197=$1, will become unsustainable, and a further hike in electricity tariff will become inevitable.

Sadly the celebrated 30%, 2016 capital budget, will suffer, as the significant value of import components usually required for infrastructure and equipment may now require an additional N300bn or more to fully implement; consequently, public expectation for urgent infrastructural remediation will remain on hold for much longer.

Furthermore, our desire to diversify economy away from crude oil will become severely challenged by irrepressible production cost, which will invariably sustain inflation well beyond the current 16%. In such event, CBN will be compelled to raise monetary policy rate to levels that will push cost of funds well above 30%, and unwittingly make import substitutes more competitive. Ultimately, real sector operations will become crippled and any hope of economic diversification will gradually fade.
On the security front, the fiscal allocations voted to increase the capacity of the security agencies, will also become inadequate and require additional appropriation to implement. Sadly however, our presently distressed financial state will obviously make such supplementary allocation a challenge, unless we further deepen an already oppressive debt profile.

Ultimately, the question must be why we readily surrendered a pound of our flesh in return for a platter of clearly unrealistic promises and benefits, just like the 419 scam.”

See also: “Economy: the flood gates have been breached”, published on 20th June, 2016.”
Understandably, if government again succumbs to the poisonous persuasion to further bridge divergent market rates and devalue the naira closer to the parallel market rate of about N500=$1, then poverty will clearly further deepen, as fuel price will double, cost of funds and raw materials will spike to make Nigerian goods much less competitive, while value of equities on the stock market will recede below $15bn, down from almost $50bn before June 2016 devaluation.

Furthermore, inflation will remain irrepressible below 20%, with oppressive social consequences, while Gross Domestic Product will fall nearer $200bn down from $510bn before the June 2016 devaluation. Worse still, the long awaited foreign portfolio investors may also fail to show up or bring their funds into any economy that is so badly challenged, while dollar denominated loans will become problematic to exit.



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