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This devaluation be like 419! – Part 2

By Henry Boyo
13 July 2016   |   5:28 am
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.
Naira depreciation

Naira 

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 soon sell beyond N200/litre.

Invariably, marketers would defer their fuel imports until the price issue is resolved, especially when they have to borrow up to 50 per cent more with higher interest rates to fund fuel imports. If however, in the interim, NNPC’s congested import schedule faulters, severe supply shortages will resurface, and extended queues and frustrating delays at fuel stations will return.

Nevertheless, since budget 2016 made no provision for subsidy, a deregulated price regime will certainly spike petrol price and correspondingly propel inflation rate well above 20 per cent to create serious consequences for consumer demand and investment, with collateral adverse impact also on employment.

In addition, the recently established electricity tariff structure, predicated on Naira exchange of N197=$1, will become unsustainable, and a further hike in electricity tariff will be inevitable, much against consumer expectation.

Sadly the celebrated 30 per cent, 2016 capital budget, will also suffer, as the significant import components usually required for infrastructure and equipment may now require almost N300 billion more to fully implement; consequently, public expectation for urgent infrastructural remediation will still have to remain on hold.

Furthermore, our desire to diversify output and revenue sources away from crude oil will also become severely challenged by irrepressible production cost, which will invariably sustain inflation well beyond the current 16 per cent. In this event, CBN will be compelled to raise monetary policy rate to levels that will push cost of funds well above 30 per cent, to unwittingly make import substitutes more competitive. Ultimately, real sector operations will become crippled and any hope of economic diversification will gradually fade.

With respect to improved security infrastructure, the fiscal allocations voted to increase the capacity of the Armed Forces and other 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 our already oppressive debt profile.

Evidently, the new forex policy has clearly exposed the increasing loss in Naira purchasing value. Incidentally, the N1,000 note which is currently our highest denomination is presently worth about $3. Going forward, we will either redenominate our currency profile, with say 2 decimal points or adopt N2,000, N5,000 and N10,000 note denominations, to facilitate portability. Regrettably, however, neither gimmick would stop further depreciation, as the Naira, clearly, no longer inspires much confidence as a safe store of value; for this reason, the public will still prefer to preserve the value of their income in dollars, even when they do not import anything.
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.
• concluded

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6 Comments

  • Author’s gravatar

    On 23 March 2015, Buhari promised to make the one naira equal to one dollar. From the look of things, it is safe to conclude that ‘water don pass garri’. And nobody in the opposition PDP is reminding Buhari that he has reneged on his election promise. Sai Buhari!

  • Author’s gravatar

    We have to take statements by the CBN and FGN in economic matters with a pinch of salt, in other words, don’t believe them at face value. The Devaluation was not a proper devaluation but a “guided” one. The rate was arrived at by the CBN before the bidding by “advising” banks to bid at the rate they decided, which is significantly lower than the real (or parallel market) rate.
    With all their good intentions, especially in reducing corruption, this government is responsible for the (possibly) irreversible damage they have caused to the economy by trying to keep the exchange rate at an artificially low rate, with all the attendant policies of restrictions in forex, which has scared, and continues to scare, foreign investors, both the genuine and the hot-money ones. And by maintaining this artificial system of not allowing the Naira to float, they continue to erode the already fragile economy we have. The majority of Nigerians are suffering because of these wrong policies. And the country as a whole is going backwards.

  • Author’s gravatar

    Certainly, the floating of the Naira is very good for the Nigerian economy. We must know that the monetary policy does not drive the economy but the fiscal policy. The behaviour of the Naira is a reflection of the attitude of Nigerians towards it. Just as money is a measure of value the behavior of the Naira also measures the economy. Any attempt to control the Naira will be the actual “419”. The CBN has done its bit, it’s the government’s turn now. The government should work on its fiscal policy. This is the best time for government to implement a policy of outright privatization and liberalization of the economy through the NSE (Nigeria Stock Exchange) by way of IPO (Initial Public Offer). This will bring about transparency, accountability and productivity in the economy. This will encourage local production of whatever the country needs, as imports will be expensive and local production will be cheaper. This is key to self-sufficiency. This is the best time to sell (privatize) NNPC, Emele petrochemical company, Kaduna refinery, Port-Harcourt refinery and Warri refinery and Ajaokuta steel to Nigerians through the NSE by way of IPO. It is time the Nigerian people manage their economy while government focus on regulation and policy.

    • Author’s gravatar

      I do not agree o! Outright privatisation of parastatals will end up putting these corporations in the pockets of the goons. When we are clamouring for more refineries. The government should create a level ground for for private sector to participate more. That is how to beat down the exchange rate and add value to our naira.

      • Author’s gravatar

        Outright privatization and liberalization of the economy through the NSE (Nigeria Stock Exchange) by way of IPO (Initial Public Offer) means that NNPC will become NNPC Plc. You will own its shares even if it means 100 units. I will own its shares even if it means 50 units. We all (those interested) will own NNPC Plc and these shares will be listed on the daily trading list of the NSE. We all will know what is going on at NNPC Plc. It will become accountable to us, the shareholders, thus making it transparent and productive. Not only will we enjoy annual dividends we will also enjoy capital appreciation of our shares. There will be no more story telling, no more hanky panky. Fuel scarcity will be a thing of the past and its price will be stable. There will be employment (direct and indirect). Certainly, government tax revenue from NNPC Plc will be excellent. This will naturally reflect in a stable and strong Naira. This is only NNPC. The same result will be gotten from Eleme petrochemical company Plc, Kaduna refinery Plc, Port-Harcourt refinery Plc, Warri refinery Plc, Ajaokuta steel Plc, and other such enterprises. Outright privatization and liberalization of the economy through the NSE by way of IPO is the way forward. Nigerians will do well in managing the economy while government concentrates on regulation and policy.