The Illusion of Time

After a careful review of the last four months since President Bola Ahmed Tinubu became Nigeria’s 16^th President, and the manner he is attempting to put back Nigeria’s macroeconomic stability, I thought to comment about the illusion of time.

I recall during the 8 years of President Muhammadu Buhari, some of us argued his economic policies and response to global economic shocks were awful, but his supporters doubled down. Now, no one is under any illusion anymore that Nigeria is going through one of its most troubling and existential economic crises. Indeed, President Olusegun Obasanjo described economic management in the last eight years as “reckless”.

Now, after two needed critical economic reforms – removal of fuel subsidies and the aggregation of all exchange rate windows into the exporters and importers window, about N1,000 is now required to obtain a US dollar on the streets. If you are lucky to access the I&E exchange, it is nearly N800. This is not sustainable and will not attract the needed foreign exchange supply because of the volatility that has ensued.

The foreign exchange volatility is made worse by recent growth data. The last two quarters have seen growth return to the 2% range. Both oil and non- oil categories and sectors are declining. The expectation is that Q3 and Q4 will not be better because incomes are squeezed. Indeed, the World Bank growth expectation for Nigeria is a miserable 2.9%.

While oil price extended beyond US $90 per barrel recently, Nigeria has not benefitted due to years of underinvestment and oil theft.

If we look at the current account trajectory since 2013, and compare it to five years before then, it shows a gap of about US $200 billion and it is no surprise that Naira is one of the weakest global currencies today.

On the demand side, there is little adjustment that can be made in the short term. It is largely driven by fuel imports, inputs into manufacturing and production, and speculative demand (the preservation of wealth), while oil theft, lack of FDI and collapsed remittances are affecting supply.

What can be done to stabilise the Naira?

There are three options, and they are all related. The first is to continue to pursue policy credibility and hope that the supply will follow. That is what the government has done by ending fuel subsidies, doing exchange rate reforms, and the release of CBN’s audited accounts. However, we have seen that supply will not respond in the short term.

The second option is sale of assets. It is not clear yet the speed at which the government wants to move in relation to the Ministry of Finance Incorporated portfolios but that cannot be fixed in the short term as well. The third option is to borrow. Yes, additional borrowing. This appears to be the best place to start because everything hangs on Nigeria’s exchange rate stability, including policy credibility.

I quite understand we are apprehensive about borrowing, but a worsening exchange rate crisis will not only lead to worsening economic crisis but can trigger unprecedented social crisis. But with needed boost to foreign reserves, albeit through borrowing, it gives us the best chance in the near term to stabilise exchange rate and gives the government breathing space to effectively pursue its policy credibility measures that further attracts foreign capital and space to sell assets effectively.

I thank you.