THESE are not the best of times for the Nigerian economy. It is buffeted on all sides by a weak local currency, declining industrial production, massive job losses, escalating cost of living, worsening insecurity and difficulties in transportation, among others. Combined, they present a dangerous slide towards economic meltdown. The President, Major General Muhammadu Buhari (retd.), needs to act decisively to arrest the drift.
Dangerously, the national currency has been in a free fall. It tumbled to a new low of N610 to US$1 last week in the parallel market, heightening fears of a further devaluation by the Central Bank of Nigeria. The rate at the Importers and Exporters Window was, however, N415.75 on May 23, widening the exchange rate spread to N194.25. This sustains the prevalence of illegal arbitrage and upturns fiscal planning in the public and private sectors.
As businesses and citizens fretted over the foreign exchange volatility and its attendant negative effects, the CBN, a day after, raised the benchmark interest rate to 13 per cent for the first time in two years from 11.5 per cent to 13 per cent, a 150 basis points jump. This will invariably push inflation further up.
The naira is weakening steadily due to increased speculation, falling external reserves, and low forex inflows. External reserves fell by $313 million in March, says the CBN. The increase in the tempo of political activities is seen also as a key factor in the depreciating exchange rate. Meanwhile, politicians are reportedly mopping up dollars for the 2023 electioneering.
Undoubtedly, Nigeria’s leadership is not managing the headwinds effectively. The country remains import-dependent and continues to rely on crude oil for over 80 per cent of the foreign earnings. Conversely, it is not benefitting from the rising oil prices fueled by the Russia-Ukraine war. Primarily, this is due to a lack of capacity to increase production because of massive crude theft and receding investment.
Diaspora remittances, which represent a major source of forex inflow into Nigeria, have been on the decline, lately from $12.3 billion in the second half of 2018 to $9.3 billion in the first half of 2021, according to CBN data.
The crashing naira is a problem foretold. The haphazard way the CBN has been managing the economy has been a cause for concern for years. The system is rife with inconsistency, cronyism and corruption. Analysts fear the naira may crash further to N1,000 to $1 soon.
The CBN’s multiple exchange rate regimes fuel massive corruption and arbitrage; connected persons and operators make huge profits, while genuine users of such as manufacturers and small-scale industrialists and other producers can hardly obtain forex. They are forced to source dollars from the parallel market as the official channels hardly meet 10 per cent of their needs.
The CBN Governor, Godwin Emefiele’s recent reckless plunge into the murky waters of politics has eroded the little confidence that Nigerians and international investors have in the CBN’s ability to steer the economy on the path of growth, and manage inflation, forex and interest rates.
The National Bureau of Statistics said inflation jumped to 16.82 per cent in April, the highest in eight months, following a similar uptick recorded in the previous month on the back of higher energy and food prices. Inflation was 15.92 per cent in the previous month.
In another critical segment, Nigeria’s total public debt rose to N39.55 trillion in December 2021, representing N1.55 trillion or a 4.1 per cent increase in three months from N38 trillion in September 2021. The regime’s appetite for borrowing is unprecedented. In April, Buhari requested approval for an increase in the 2022 budget deficit to be financed through domestic borrowing a few days after the Debt Management Office released a schedule of the Federal Government’s N720 billion domestic borrowing plan for the second quarter of 2022.
Factory closures and the attendant job losses, congestion at the ports, as well as rising JET-A1 price that has almost crippled the domestic aviation industry, are clear signs of a collapsing economy.
The Federal Government should apply the brakes on borrowing in another spurious bid to fix the moribund refineries, the Ajaokuta Steel Company and other wasteful expenditure. Buhari has not undertaken the privatization of a single public enterprise in his seven years in office. Asset sales offer a way to turn the money-gulping enterprises into profit-making ventures that can yield benefits to the economy. Government should privatize the ports and airports through honest concession arrangements.
The low tax collection rate hurts the economy. It should be reversed. Although Value Added Tax collection hit N2.07 trillion in 2021, it is mainly because the rate was raised from 5.0 per cent to 7.5 per cent from February 2020. Tax income in 2020 was N8.8 trillion. Taxes are under-collected as are income from revenue-generating agencies.
Overall, Nigeria’s 6.1 per cent tax-to-GDP ratio (2019) is among the lowest in the world. It is far behind the 16.5 per cent tax-to-GDP for 30 African countries and the 32.9 per cent average in the Organization for Economic Cooperation and Development countries. Therefore, public agencies not remitting revenue to the government coffers must be compelled to comply with the extant laws. The government must recover money owed the country by International Oil Companies in line with a Supreme Court judgement it has so far failed to enforce.
It must plug all revenue leakages; reform the Nigeria Customs Service to minimize smuggling, which is badly hurting the economy. Maintaining nine presidential aircraft in a struggling economy goes against rationality. The wasteful distribution of money to people that cannot be identified through the dubious ‘conditional cash transfers’ should stop. Instead, target single-digit credit to micro-businesses and small farmers. The CBN should scrap the catastrophic multiple exchange rate regime.
Power is a major problem for industries. This sector needs urgent, radical reforms. An economy in trouble needs expert input and strong collaboration between the public and the organized private sector. Buhari should mobilize all stakeholders to rescue the fragile economy.