By Adefolarin A. Olamilekan
Regrettably naira depreciation does not hold any assurance of better things economically for Nigerians. There is the obviously misguided and unrealistic call that the naira be devalued in expectation that matching “official rates with parallel market exchange rates will attract foreign investors or ensure competitiveness of the Nigerian economy”. Conversely, foreign investors are ‘smart guys’ investing chiefly in economically and minimally risky but high-yielding Nigerian government’s bills and bonds. Out of the ordinary, financial experts and liberal economist have not been able to connect this in sub-Saharan Africa
Disappointingly, the production base alongside the exporting sector that was supposed to be the saving grace to naira depreciation is in comatose. In between, the manufacturing and allied fabrication sectors are less competitive, as serial naira depreciations of the past have determined higher production costs.
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Furthermore, our bubbling cottage industry in the countryside has shrunk significantly, courtesy of rising importation of everything including toilet tissue papers. Interestingly, the consequent explosion of all these has made the government drive for economic diversification and promotion of made-in-Nigeria goods unable to go beyond rhetoric.
In the past, the CBN spontaneously devalued the naira to reduce widening space between official and parallel exchange rates, even when these gaps were knowingly caused by the artificial, monopolistic market dynamics of demand and supply. Instructively, despite a series of naira devaluations, Nigeria’s economy remains neither diversified nor internationally competitive.
On the contrary, the broad gap between the official and parallel naira rates may have instinctively prompted the remark that Nigeria’s economy will only become competitive if the naira is devalued and brought closer to the street market rate. Today as I put this piece together, the naira exchange rate from the official CBN exchange platform is N410=$1,while at the unofficial platform it is being exchanged at N565=$1.
This has exposed a mass of citizens to deepening poverty, unemployment and high cost of living. Still with the news in town that our foreign reserve is hitting $42 billion US dollars, one is not sure if the increase could be sustained before the end of the year.
From the above state of affairs, the 2022 Appropriation bill, tagged Budget of Economic Growth and Sustainability, totalling N16.39 trillion was presented to the joint session of the National Assembly by President Muhammadu Buhari.
The budget is predicated on a conservative oil price benchmark of 57 dollars per barrel and a daily oil production estimate of 1.88 million barrels per day. However, the exchange rate is N410.15 per US dollar; and projected GDP growth rate is 4.2 per cent and 13 per cent inflation rate.
Meanwhile, the allocations to MDAs still followed the usual ritual lead with defence and security taking N2.41 trillion (15%), infrastructure N1.45 trillion(8.9%), Education N1.29 trillion (7.9%) health N820 billion (5%) and social development and poverty elimination N863 Billion (5.3%).
In the wisdom of the government, the above sectoral allocations were guided by the strategic objectives of the National Development Plan of 2021 to 2025 which are: diversifying the economy, with robust MSME growth; investing in critical infrastructure; strengthening security and ensuring good governance; enabling a vibrant, educated and healthy populace; reducing poverty; and minimizing regional, economic and social disparities. The summary of the budget suggests recurrent expenditure stands at N6.83 trillion (41.7 %), whereas capital expenditure N5.35 trillion (37.72%).
Admittedly, the 2022 budget is impressive though N16.39 trillion may not be enough for the enormous human and development challenges confronting us today.
We must take into cognizance the naira exchange rate N410 to $1, to the 2022 budget oil revenue of N3.16 trillion, particularly, if the 2021 turbulent challenges in the oil sector that lead to shortfall and poor performance of oil revenue relative to the budget projection replicate. For instance, in 2020 from 2.07mbpd in Q1 down to 1.61mbpd 2021. A further decline occurred in Q3 to 1.27mbpd lower than 1.38 mbpd recorded in July of 2021.
Another issue is the net inflow of foreign exchange rates from Q1 and Q2 of 2021, with overall balance of payments reading negative and the external reserves due to heavy forex demand pressures and weak forex inflows.
Critically, external sector aggregates of the Nigerian economy matters a lot, with our continued heavy dependence on the oil sector for export earnings and external reserves accumulation. We must however acknowledge the fact that to achieve a better budget performance, the heavy dependence of the country on the oil sector for foreign exchange and government revenues creates instability in the naira exchange rate.
Decisively shifting away from defective economic and budget management is to consider reviving, revamping and restoring the productive sectors to achieve higher competence output and viable manufacturing exports. That would in the long run tidy up our nation’s disbursement of scarce foreign exchange for import of finished goods, especially, where many of these imported items could be produced locally and reduce pressures on the naira.
The projected non-oil taxes estimation of N2.13 trillion is very diminutive compared to the reality if the governments mull over on the real productive sector.
Consequently, root causes of deliberate market disparity against the naira must be addressed with stringent measures by the CBN in checking round–tripping of forex amongst Deposits Money Banks (DMBs) to the parallel market.
Tackling excess demands for foreign exchange, that substantial part of it aimed at transferring funds out of the country that promote capital flights, illegal financial outflow and money laundering is also essential.
We must, however, acknowledge the fact that a country’s currency is determined by the strength of her economy in terms of its production capability, structure and diversification base. Therefore, the government’s support of local refining of petroleum products for domestic consumption and exports is key to stronger naira.
Nigerians must be cautious of any wiles that recommend naira devaluation as the remedy to our under pressure national currency. Rather, full implementation of the budget alongside oversight, evaluation and monitoring must be put into effect.
Olamilekan is a political economist and development researcher
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