Nigeria has been a mono-economy since independence, though recently, there has been a re-basing of the GDP, yet, the fact still holds that the economy is strongly import driven.
Oil has been the major source of revenue, constituting about 70% of budget revenue and over 90% of export earnings (often collected in foreign currency). Owing to this, from independence, the Naira has been on pressure in terms of volume, but majorly in terms of value. Devaluation has been the norm ever since the oil glut experience of 1980. Devaluation simply means a fall in the value of money, that is a fall in the purchasing power-what money can buy. In essence money is not really a “paper” but expressed in terms of how much/less can be acquired with little/more naira notes (value).
When less is acquired with more naira notes, we say the naira is been devalued, and vice-versa.
Due to the vulnerability of the economy to external shocks( majorly changes in oil prices), the federal government in 2003/2004 created the oil-based fiscal rule that also known as the benchmark budget price and the excess crude account, where the difference between the market price of oil and the budget benchmark is saved.
As at December 2014,the oil price had dropped drastically to $58 per barrel(pb), as against $114pb in June 2014. This with pipeline vandalism which occurred in January 2014, reduced expected total revenue to N2.72trillion (as at October 2014) as against the estimated revenue of N3.73trillion for the 2014 fiscal year. Thereby making the Naira exchange for N168 to $1 from a previous N155 to $1,which explains a clear case of devaluation, to manage for excesses. Before I proceed on the devaluation as it concerns us, I would explain a bit on the oil price menace, so as to help us appreciate this thought process.
Factors Responsible for Fall in Oil Price
United States, which happen to be Nigeria’s highest importer of crude oil started the successful exploration of shale oil and gas. Shale oil happens to be a good substitute for crude-oil. Shale oil now has a globally increased production to about 4million barrels per day.
Rising Geopolitical developments. This ranges from Saudi Arabia’s interest in keeping market share, reduced oil price in relation to shale oil, Russia political stand-off with the west and OPEC decision to sustain production levels.
The emergence of new regional producers in Africa like Ghana.
This effect has definitely led to fall in government revenue estimates in the 2014 fiscal year, shortfall in implementation of 2014 budget, shortfall in quality and delivery of proposed capital project, devaluation of the Naira, threat to developmental processes and more economic uncertainties.
Factors That May Cause More Oil Price Fall and Economic Uncertainties
The 2015 general elections, as investors, stakeholders and the public await the outcomes, to make important decisions.
The refusal to pass the petroleum industrial bill, owing to so much vested interest.
A reactive and sluggish approach of leaders to the diversification plan from 1980 till now.
One major step taken by monetary authority (by the central bank) in this regard has been majorly, THE DEVALUATION OF THE NAIRA. Increased monetary policy rate from 12% to 13% (which means CBN increased their lending rates to banks. This in effect could lead to a 1% increase in prime lending rate by commercial banks to the public) and cash reserve ratio from 15%-20% (this restricts the amount of private sector deposits banks can use for lending- drastically reduced by a further 5%). This basically reduce the amount of cash in the economy, which has occurred without a counter-stabilization fiscal policy (by the federal government), to manage the multiplier effects from oil price falls.
Effects of Naira Devaluation on the Average Nigerian and the Economy.
Devaluation makes imports expensive, and exports cheaper, which means that, if a country were exporting more than she imports, she would have made more local and foreign earnings combined, to cater for currency-value loss from expensive imports. But where the opposite has been the case for Nigeria, who clearly imports everything including finished goods from raw materials she owns, Imports will be expensive. This leads to a rise in prices of food items, gadgets, clothing and many more (both in the formal and informal markets thereby affecting the standard of living across various income class). The impact of this devaluation could also lead to forced inflation on locally made goods, as everyone capitalizes on exchange rate in order to retain or increase profits and maintain current standards of living.
Small and medium enterprise, will experience a growth challenge due to inaccessibility of loanable funds, and more uncertainties in business environment. Thereby reducing the possibility of creating more job opportunities.
Obviously expect increase in international and local traveling expense, increased cost in taking massive open online courses(MOOCs), and increased cost of transactions.
On the economy, since she is a mono economy, we expect more uncertainties. The 2015 budget cannot be fully implemented, if at all it will be. it is already threatened by its unrealistic estimates owing to market fluctuations and the outcome of the general elections.
Benefits of Devaluation and Solutions
The devaluation will strongly place a check on the spendthrift nature of the Nigerian economy and its populace. A nation that is highly consumption driven, will be forced to more financially prudent and accountable both on the sides of her administrative leaders and populace.
Devaluation makes exports cheaper, Nigeria and Nigerians will be forced to learn a lesson on this. We will need to improve and diversify our export base, that is, take diversification seriously by providing the necessary infrastructures (roads, environmental, telecommunications etc ) and human capacity development.
Pass the petroleum industrial bill into law, that dissolves extractive institution, and assure for economic inclusiveness on share of returns from natural resource.
Take out public sector administrative and operational misalignments (as noted in last article) that drain revenues and returns from natural resource.
Fix all structural defects in the economy, such by diversifying revenue base, restructuring public finance, restoring ethics, value and accountability, and many others.
Nigeria, might be in trying times, but I believe in her economic renaissance, as long as we commit ourselves to the needful and a strong back to basics program. CHEERS!