This devaluation ‘be like’ 419 – Part 1

The ‘419’ scam is well known in Nigeria for boasting empty promises of stupendous returns which induce victims to willingly part with their valued possessions. These fraudsters, ply their trade nationwide with targets which cut across the social spectrum and surprisingly include otherwise, highly successful businessmen and professionals, who are usually gullible and driven by the unreasonable expectation of clearly unrealistic returns on their ‘investments’. Ultimately, the bubble would burst and much pain and sorrow would follow.

Similarly, the IMF and other respectable international financial agencies and local economic experts, have commended the recent devaluation via a floating Naira exchange rate as ‘investments’ that would ultimately yield great dividends. We are encouraged to believe that the new forex regime will recharge our economy and sustain inclusive growth with increasing job opportunities, and also reduce our almost total dependence on export revenue from crude oil, by facilitating the realisation of a diversified economy.

It is also suggested that a floating Naira rate would create a level playing ground, and encourage marketers to reduce NNPC’s present unwieldy monopoly of fuel imports and also attract investors to build more refineries.

Nonetheless, the promise that the new forex policy would attract much needed foreign investment inflow is probably the most notable claim by supporters of the new regime. Consequently, CBN trusts that the reported $10-$15billion hurriedly evacuated from Nigeria when oil prices slumped, would be channeled back by foreign portfolio investors; sadly, however, the present level of uncertainty and insecurity sustained by our socio-economic tensions may not encourage a quick return of such hot money inflow, for now.

Incidentally, the desperation of foreign portfolio investors to evacuate their funds from Nigeria contributed in no small measure to the present battered Naira exchange rate. As usual, portfolio investors primarily target exceptionally high returns on CBN and Federal Government’s loans; thus, such investors may borrow at lower rates, below five per cent from offshore banks and reap a harvest of 10 per cent and much more in Nigeria, even when the proceeds of these loans have not been socially impactful. Expectedly, however, portfolio investors would still want to be assured that ultimately, their original profit projections would not be wiped out by another devaluation.

Furthermore, the elevated level of insecurity and Naira rate instability may also deter potential “foreign direct investors”, whose operations add value to our industries and infrastructure while also creating more jobs. Thus, the sharp depreciation and a floating Naira exchange rate will not immediately propel the expected return of over $10 billion earlier scrambled away from Nigeria; consequently, it would be clearly misleading to insist that a bountiful inflow of dollars will soon stabilise the exchange rate, as speculated by experts.

Conversely, barely eight hours after the commencement of the new forex regime, the cost of the “yet to be realised ‘regenerative’ benefits”, had already made horrendous dents on our economy. For a start, Nigeria’s erstwhile celebrated $510 billion Gross Domestic product, immediately crashed below $350 billion, while per capita income crashed from over $1000 to well below $600 as an attestation of deepening poverty. In addition, the dollar value of all equity listed on the Nigeria Stock market also plunged from almost $48 billion on Friday 17th June to below $25 billion on Monday June 20th, when the new forex regime commenced.

Invariably, all cash income and savings held in Naira, also immediately fell below 60 per cent of their dollar purchasing value overnight. Similarly, the equally celebrated over $25 billion accumulated national pension fund, also lost over $10 billion, just like that, to imperil the future welfare of our senior citizens; in truth, we were all literally cut to size with government consent within 24 hours, by the new forex policy and any offshore expenditure we all make, thereafter will require almost 50 per cent more Naira to fund.

Furthermore, all outstanding dollar denominated loans, (personal, corporate or government) 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 will be common. In such event, billions of dollars credit lines, which hitherto supportively restrained the cost of raw materials imports to local industries, may also be cut to compound 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 to raise the ratio between annual debt service charges and actual income well beyond the precarious level of 35kobo on every N1 revenue. Worse still, if the 2016 budget deficit of N2 trillion is also captured, we may ultimately need to allocate over 50 per cent of earned revenue to service our debts in the near future!
To be continued