Nigeria and Bank of America’s timely warning

Undoubtedly, Nigerians have been swamped and are weary by the barrage of policy pronouncements by the new federal administration in the country in the past one month. Unexpectedly, these new policies or ‘reforms’ have left the economy worse off than in the first five months of the year. Indeed Nigeria’s economic situation has become a subject of global interest, attracting analyses, reviews, critiques and ‘warnings’ from nations and institutions across the world. Multilateral financial institutions like the World Bank, the International Monetary Fund (IMF), African Development Bank (AfDB), among others, have all in various forms and manners expressed their views about the ‘supersonic’ pace of ‘reforms’ ongoing in Nigeria.

In line with this trend, Bank of America (one of the world’s leading financial institutions), a few days ago, warned that Nigeria’s hyper-inflation rate may hit 30 percent by the close of this year. In an interview with Bloomberg, the bank’s sub-Saharan Africa Economist, Tatonga Rusike said, “at the current trend, inflation may quicken to 30 percent by the end of the year from 22.4 percent in May.” He advised that “the Monetary Policy Committee of the Central Bank of Nigeria (CBN) may need to increase interest rate by at least 700 basis points before the end of the year to curb inflation.” Rusike then warned that “if this decision is not taken, foreign investors might exercise caution before investing in the country.” In sum, he said, “if the negative real interest rate is not reversing, then it is less likely to see foreign inflow coming into the country,” and raised a doubt that “it is less likely the CBN will do such level of interest rates increases.”

These admonitions by the Bank of America (BoA) largely contain all the pains and hardships so far unleashed on Nigerians by the economic ‘reforms’ of the President Bola Ahmed Tinubu administration in the past one month. Run-away inflationary trend, impoverishment of the populace, low/diminishing foreign investment inflow, quantum Naira devaluation, rattled apex bank that is muzzled by political expediency, etc., have all become features of the economy since May 29, 2023. Although desirable, the sudden removal of petrol subsidy immediately led to skyrocketing prices of goods and services beyond the reach of the majority of the citizenry. The purchasing power of the masses (especially, salary earners and others on fixed incomes) as well as their standard of living dropped very sharply. Many businesses (Micro, Small and Medium Enterprises, MSMEs) were forced to close shops owing to escalating costs — rooted in high prices of Premium Motor Spirit (PMS) which powers their operations.

As these ugly unintended consequences were unfolding, the Tinubu administration, apparently driven by heroism or playing to the gallery, forced the merger of exchange rates to happen. The CBN, already cowed by the suspension of its (former) boss a few weeks earlier, did the puppet’s job of not only forcing the merger of the exchange rates but also dismantling ‘every support’ for the local currency. By every economic consideration, the closeness of petrol subsidy removal and exchange rates unification and ancillary actions amounted to a ‘suicide’ of sorts. A country in pursuit of an export-led economic growth can devalue its currency to make its goods and services attractive.

But clearly for Nigeria, an almost wholly import-dependent and largely mono-product economy — a wholesale floating (or devaluation) of its currency is certainly counterproductive to economic progress. From time immemorial, a large proportion of the citizenry have preference for foreign goods and services; manufacturers import machineries and raw materials; Nigerians in their numbers go for foreign degrees and certificates as well as medical tourism — all paying in hard currencies. This culture and preferences have existed side-by-side with the shortage of dollars and other foreign currencies over the years. As a largely mono-product economy — depending almost entirely on earnings from crude oil export, Nigeria has no substantial foreign exchange inflow from the export of non-oil items. Indeed, successive administrations had over the years paid only lip service to diversification of the national economy.

Unfortunately, the oil and gas sector — the mainstay of the Nigerian economy — is consistently bogged with motley intractable problems: crude oil theft, to which the country loses over 70 percent of her oil output; widespread vandalism of oil installations and assets; outright sabotage, among others. All these have whittled the nation’s oil production capacity — leading to inability to meet her OPEC-allocated quota for a long time now. Again, all these have led to diminishing earnings (forex inflow) from crude oil sales. And only a minuscule amount comes from non-oil exports!

In a manner of throwing away the baby with the bathwater, the Tinubu administration’s ‘reform hurricane’ also pulled down the well-packaged non-oil export drive/incentives put in place by the CBN early last year. Tagged ‘RT200’, the initiative with its bouquet of incentives for non-oil export promotion had gained the buy-in of stakeholders in the past one year. Within the period, it had recorded substantial foreign exchange inflow — an addition to crude oil sales. But the CBN has been ‘forced’ not only to cancel this effort but also to liberalise access to domiciliary accounts by their owners — with authorization to withdraw cash to a maximum of ten thousand dollars daily. So far, the result of all these has been a lingering acute shortage of foreign exchange in the forex market: gross undersupply of forex vis-à-vis huge rising demand. And the Naira keeps crashing in value against the dollar and other foreign currencies.

The continued weakening Naira translates to (high) cost-push inflation as producers of goods and services factor in huge (unplanned) volume of the local currency for forex procurement. The more Naira they commit to acquiring forex, the higher their overall cost of production, ultimately. In turn, worsening forex scarcity translates to more Naira per dollar — now standing at about N760/$, up from N460/$ a month ago! This collapsing Naira value — and implied inflationary pressure — translates to declining purchasing power and impoverishment of many citizens. This trend is yet likely to be worsened by the federal government’s plan to license more companies to import PMS, rather than the fast-tracking of the re-streaming of the existing local refineries.

The PMS importers will obviously utilise volumes of dollars, and thus add pressure to the already scarce forex, and their (selling) prices will surely reflect the high exchange rate. This will likely keep pushing up the prices of goods and services in the polity — in the form of runaway inflation as warned by the Bank of America. But beyond the dreaded high inflation, Nigeria’s overall investment climate is anything but attractive. Widespread insecurity, barrage of new policies, multiplicity of taxes and levies, ever weakening consumer demand, deeply entrenched corruption, among others are serious disincentives to investors — local or foreign.

Indeed, Nigeria remains uncompetitive in the world of investments; it is only hope for a better future that keeps some optimists going — businesses and individuals alike! They are looking forward to the Eldorado that may never come, because in the words of the revered Economist, Maynard Keynes: “in the long run, we are all dead.” In truth, the Tinubu administration is yet to place before Nigerians and the entire world its full economic development roadmap. What is happening now is more of a whimsical arbitrariness and staccato disruption of the economy. Some kind of ‘dismantling’ of perceived ‘ugly’ past, in the face of uncharted future pathways. We hope it doesn’t end up as a mere grope in the dark!