The current exchange rate of the Naira at around N1,000 is only but an intermediate waypoint of a currency on a voyage to N3,000 by 2027. This is because none of the critical macro-economic variables or factors would have significantly gestated or mitigated by then.
As an economic equation, the exchange rate compares two economies. It translated the disparities in the macro variables between countries, such as infrastructure, technology, FDI, rule of law, military power and its projection, education, energy, healthcare, etc. Nigeria is economically disadvantaged relative to the US; therefore, the Naira must depreciate against the Dollar. The currency has plunged by a whopping 99.94% since 1978 and holds only six kobo of its original value. To break this down to scale, N100 back then is the equivalent of N250,000 today.
Nigeria’s downward economic trajectory was captured in a 1986 Financial Times of London (FT) publication titled “NIGERIA: LET THEM EAT THEIR FLYOVERS”. A frank but cynical commentary about a country on an unmitigated march towards the precipice as all the economic factors including education, infrastructure, energy, rule of law, etc. were headed south except the flyovers in Lagos, capital of Nigeria then. FT’s cynical remarks about eating flyovers drove the point home about the severity of the situation. Nearly forty years later, no significant course correction has been made to steer the country away from the edge of the cliff. Sadly, the political leadership is oblivious of the danger.
Firstly, Nigeria has a whopping $3 trillion infrastructure deficit according to the World Bank. FGN’s current revenue profile together with its borrowing capacity can only but widen the gap by an order of magnitude of a minimum $30 billion a year. Electricity supply has stalled around 4,500 megawatts since privatization in 2013; a far cry from the 20,000 megawatts required to energize the country into a middle-income economy. Fresh capital to close the $100 billion investment gap has not and will not come because of the deep subsidy in NERC’s Multi Year Tariff Order. One residential category pays N4/kWh ($0.0033). In contrast, the tariff in Rwanda and Gambia is $0.25/kWh and electricity supply is steady. Power Minister Adebayo Adelabu recently vowed to achieve 20,000 megawatts by 2027. (Pure propaganda). Grid electricity will probably go the way of the landline, to be overtaken by micro-grids and distributed electricity from renewables. Gas supply is barely 1 billion standard cubic feet per day compared to the demand of 5 billion. Gas too is not appropriately priced to attract fresh investments of about $20 billion to develop production, processing, storage, metering, compression, pipeline, and trading capacities. No gas storage to facilitate “Gas Liquidity or Gas on Demand”; Russia has twenty-nine. The Nigerian LNG for export was a serious economic miscalculation. New gas projects are adopting the export model to further starve the domestic market while exports thrive.
Secondly, Nigeria’s human capital development system is rigged to churn out a massive underclass. The per capita marketable skills index is less than 20%. More than 20 million children are out of school. According to UNESCO, the country ranks at No. 103 out of 113 on the Education for All Development Index in company with Bangladesh, Nepal, Pakistan and war-torn Liberia, Sierra Leone and DRC. UNESCO also reported that 59% of SS1 students are actually at the numeracy level of Primary 2. Then of the remaining 41%, less than 10% can hold their own in SS1. FT noted that the funneling of mediocre students into teacher training colleges was the harbinger of Nigeria’s education woes. Today, the chicken has come home to roost. More chickens are bound to come home to roost in future as JAMB maintains a lower cutoff point (140) for admission into education universities compared to 180 for Federal Universities.
Thirdly, the monetary and fiscal environment has been generally inclement to productivity. Equity is taxed through stamp duties. Ease of Doing Business is ranked at 131 worldwide. There are over 200 official and unofficial taxes. Exporters navigate several “tollgates” along the export chain. Customs, NDLEA, NAFDAC, NESS, etc. operate as “Head Kahunas” and rent collectors. Exporters are further stiffed by the official exchange rate which further debilitates their earnings. Twenty years later the CBN has not been able to break from the scheme masterminded by Western Union for banks to pay Dollars instead of Naira to recipients of inbound remittances. This scheme has partly fueled the hoarding of an estimated $50 billion that’s driving an underground currency speculative market. The FX regime is anchored on overvalued Naira since its introduction on January 1, 1973 thereby promoting imports to the detriment of local production, stifling exports and causing shortfall of FGN Naira receipts on the sale of Dollars. Nigeria’s inflation is primarily caused by a weak supply-side yet CBN adopts the Monetary Policy Rate (MPR) to target inflation which stifles the much-needed investments to boost the supply side to produce more goods and lower prices. As the cycle continues, stagflation becomes inevitable. Access to capital is highly constrained. Foreign Direct Investments-FDI is barely trickling in. Capital flight has consistently exceeded FDIs for decades. Free market principles and pricing mechanism are sidelined whenever the government is involved in the supply chain of commodities; electricity, gas, petrol, FX thereby causing structural defects in the economy. The financial market is underdeveloped thus lacking the capacity for long-term capital, mortgages and consumer credits.
Fourthly, the country’s pervasively warped value system has landed it at no 150 out of 180 countries on the Global Corruption Index. Rule of Law is negotiable. Political entrepreneurship and state capture is a fast growing sector of the economy. Security architecture is weak particularly in the farming and oil belts. The military cannot defend the country’s territorial integrity. On Regional Political Risk Index, Nigeria ranks below all 14 Sub Saharan countries surveyed including Angola, Cameroon, Ghana, Kenya, etc. except DRC, Sudan and Zimbabwe. The healthcare system is on life support; one leg is strapped to medical tourism causing an outflow of over $5 billion annually.
These are some of the factors shaping the value of the Naira with nothing in the horizon to reverse the trend. The economic headwinds remain unabated. There’s an upside potential for the headwind to gain gale force proportions should ECOWAS intervene militarily in Niger Republic.
It is very clear that Nigeria cannot compete with the West in these economic factors and as long as that persists, the Naira will depreciate. QED. The best The country can do is to slow the rate of decline by optimizing the fiscal and monetary environment, but its performance thus far has been abysmal.
Across the African continent, currency depreciation is pervasive. The francophone countries, with their French supported CFA franc, are sitting on an economic time bomb. Their currency is stupendously overvalued. To usher in a stable currency for Africa, currency unification that is backed by GOLD is an imperative. Africa is already used to regional currencies. The British West African Pound was introduced in 1907 in Nigeria, Ghana, Sierra Leone, Gambia and Western Cameroon and was in use until 1958 while the CFA franc was issued in 1945 and in use till date.
This write up is articulated with the assumption that there is going be political and social stability.
Credit the punch
