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Can CBN Save the Naira? [analysis](AllAfrica Via Acquire Media NewsEdge) There are genuine public concerns that with the receding sales price of crude oil in the international market, in recent months, our heavy dependence on oil revenue may diminish any promising prospect for inclusive economic growth in Nigeria. Although, sluggish economic growth in Europe and China and the rapid development of shale oil, together with increasing sources of crude oil supplies, have all combined to bring down crude oil prices, however, the precipitate price fall within the last four months, may, according to seasoned analysts, also be the result of the desperate auctions of crude oil at ridiculously low prices by successful warlords in strife torn nations in North Africa and the middle East. The regular theft of between 10-20% of Nigeria's annual crude output are probably also sold cheaply as goods which allegedly fell off the proverbial back of a lorry. Ultimately, the world community will become the real losers as such revenue accruals are deployed by contending warlords to purchase of weapons and critical support for terrorists and insurgents who seek to destabilise domestic and international security in the same manner that illicit funds from fraud, narcotics and human trafficking also adversely influence capital flows and the world economy. Indeed, if the current trend persists, and insurgency in oil producing nations also remain uncaged, crude oil price may actually fall below $50/barrel as in 2008, and wipe off over half of Nigerian's current budget revenue expectations. In such event, there will be a revenue shortfall of about N1tn which is normally allocated for capital expenditure in annual budgets; government may consequently become forced also to trim down its unpopular and insensitive recurrent budgets. In reality, workers' lay off will not be a welcome solution to revenue shortfalls as this may create industrial strife and make government more unpopular; furthermore, the National Assembly will also be reluctant to endorse any budget proposal that would reduce the huge, inappropriate income expectations, allowances, and slush funds to which Legislators and privileged civil servants have become accustomed. Thus, both Legislators and civil servants will seek to maintain their existing income levels if possible; nevertheless, government may acquire additional loans because of revenue shortfalls to fund its budget at existing levels; however, the accumulation of such loans could horrendously increase current annual debt service charges from about N600bn to closer to N1tn or over 20% of budget. Regrettably, in such event, government and its agencies will seek to borrow from external sources because of the attendant cheaper cost of such funds below 7%! There will however be problems between national sovereignty and the selfish dictates of powerful external creditors to contend with if we became heavily dependent on External loans! Alternatively, government may decide to make up for revenue shortfalls from crude oil by devaluing the Naira; in other words, where each state for example got N160m allocation for $1m dollar revenue, each state would now get N200bn for the same export revenue, if the Naira exchange rate became officially devalued, to say, N200=$1. Unfortunately, such a weaker Naira exchange rate will immediately increase manufacturing costs by over 20% and make made in Nigeria goods uncompetitive, against, often subsidised imports. Ultimately, Nigeria's industrial landscape will further contract as was the case after the oppressive devaluation of Babangida's administration. Naira devaluation will also instigate, higher production costs which will drive higher prices across the board for most goods and services; regrettably however, income earners, particularly the majority who currently live on less than $2/day will also become poorer as their N18,000 minimum wage will buy less and less goods and services from the market. Although, salaries and allowances of Legislators and public servants may remain the same, in nominal terms after devaluation, however, in real terms, the total income package will still not command the erstwhile purchasing value; in effect, both the rich and the poor will become relatively poorer! Worse still, further Naira devaluation will make it exceedingly difficult for us to avoid the wasteful payment of over $7bn on fuel subsidy annually; expectedly, the domestic fuel price will also shoot up to about N200/litre without subsidy; however it is, debatable whether the public would acquiesce to 100% increase on petrol. Nevertheless, the fiscal pressure to devalue the Naira is also propelled on the monetary front; market apprehension about Naira stability has increased the demand for the dollar as a safer store of value than the Naira; furthermore, political tensions and increasing rate of insecurity prior to the 2015 elections, particularly in the light of the predicted breakup of our country, may also move funds away from the Naira; current market indicators suggest a stampede by foreign portfolio investors to offload their Naira holdings and repatriate their funds in foreign currency. In reality, the Naira exchange rate is also eternally challenged by the constant excess of Naira liquidity pitched against CBN's monopoly of the forex market and the rationed dollar supplies to the market. Unfortunately, rather than address and control the real cause of the destabilising, ever present excess Naira supply, the CBN has failed with its strategies to restrain dollar demand and maintain a stable official exchange rate of about N155=$1 for about 5 years. Inspite of the fact that Bureau De Change (BDCs) constitute the prime sources of forex funding for laundered money and smuggling of those goods which constrain the growth of domestic industry, the CBN misguidedly, officially allocated billions of dollars to BDCs annually in order to support its fixed exchange rate. Although, this extremely liberal disposition to BDCs has been reviewed by significantly increasing the mandatory capitalisation, the Apex Bank has also reduced BDC weekly forex allocations; furthermore, last week, the CBN also stopped direct sales of dollars to Importers of electronics, Generators, Information Technology and Telecom equipment; such importers would henceforth source their dollars from the interbank market at a higher exchange rate of over 5% for now. Expectedly, the above measures will only drive forex demand into the black market and ultimately recreate the same multiple exchange rates structure that was condemned in the past and also further widen the margin between official and black market exchange rates; increased rent seeking would inevitably also increase and distort economic activities in the same manner that funds from human trafficking and illicit narcotics trade threaten to destabilise the world's economy. Instructively, however, the most plausible approach to save the Naira exchange rate will be to stop CBN's monopoly of the forex market and the attendant usual substitution of fresh Naira supply for monthly allocations of dollar revenue. Save the Naira, Save Nigerians! Copyright Vanguard. Distributed by AllAfrica Global Media (allAfrica.com). |