Nigeria’s floating of its currency, while progressive, will cause severe perturbations in the economy – and a stable state may not come as most experts have predicted: “The cost of petrol is expected to further rise as much as N700 per liter in northern Nigeria, and around N610 in the south from July, The Punch reports.” You will see state-wide comparative advantages emerge with energy cost making most northern areas less appealing for localization of “industries”. Read my take on why Uyo has a promise ahead.
In his O’ Level textbook on economics, AO Lawal explained demand and supply and the movement of price on the demand-supply curve. If I apply what he explained in that book, floating naira with no capacity to earn USD dollars will kill Naira, because there is an asymmetric imbalance on demand and supply of USD in the Willing Buyer, Willing Seller nexus. In other words, two people may each have $100 to sell while twenty people want to buy each $100. If you do not close that number to near parity, the equilibrium point will keep shifting and I do not see how Naira will stabilize because demand outweighs supply here.
I have read many theses on how Naira will stabilize to N680. Good luck. But if you visit Marina Street in Lagos, and climb one of those tall buildings (I have friends who give me access whenever in Lagos), look at the far habour, count the number of ships coming into and leaving Nigeria – and then examine their capacities. Most come loaded, most depart empty! What does it say? We spend more US Dollars than we can “create”.
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I call on the Nigerian government to focus on policies which will create more US dollars by deepening our industrialization policy. But to think that we can float Naira and it can stabilize over time by pure financial engineering is an illusion. AO Lawal would have graded any suggestion “P8”. Factories, warehouses, etc for physical, digital and services will strengthen Naira, and nothing more, and Nigeria needs to get into that.
Good People, Nigeria must FLOAT industries (yes, companies) to get Naira to fight globally! And here floating companies mean starting enterprises across industrial sectors and growing them to the point they become public companies because they have become super successful.
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You are not absolutely correct, for diaspora remittance, in country growth of online work spaces and indigenous digital content products will be the major drivers of dollars earnings and return to Nigeria in the next four years.
— Edon Bassey (@edon_bassey) June 30, 2023
My Response: You have a point there and I do agree to a level. The challenge now is that you can get a US bank while living in Nigeria and ask those US companies to pay your US bank account. So, those funds unlike in the past are not coming to Lagos. But it could be solved if the government deepens our tax policy so that those foreign firms are mandated to keep Nigeria’s “personal” income tax withholding for Nigeria.
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Comment 2: My argument at the onset of ill-researched policy supports this position.
Just the way I think that a good and welfarist leadership should have funded Subsidy for another 6-12 months and within that time frame enter a robust crude for refined goods swap with Dangote as well as making at least one refinery very functional and probably privatize them in the medium or long term.
Also this emerging monetary policy exercise that devalues the Naira without corresponding programs that incentives huge capital importation as well as robust export programs that hinges on
- Massive industrialisation
- An import substitution program
- Declaring a state of emergency on the power sector
- Targeting few commodities with heavy importation costs and giving incentives for their local production and possible exports too…. is dead on arrival.
Elementary economics tells us that devaluation only helps an export-oriented economy but will naturally cause a balance of payment crisis for an importing economy like Nigeria, not to mention the ravaging Hyper inflation that flows with it.
Nigeria is in danger now and the suffering may continue unabated when our leaders wield power and make deep reaching policy pronouncements without carefully looking at options and deep consideration of the welfare of the already impoverished Nigerians. We need something more intelligently fundamental!
Comment 3: This maybe a case for the law of unintended consequences.
Some comments here have implied naive or careless approach to policy making. That’s not what I see.
It is quite possible to argue that the current policies of the Nigerian government are intended to free up revenue trapped in various subsidy regimes enabling real infrastructural development, which in itself is a driver of economic growth.
While a viable route – in the long term. In the medium to short-term, it does not bear the marks of a nation-centred program reflective of where we are today as a country.
The immediate need of a man with an active heart attack is resuscitation, not an advert on a transplant register!
A rapid route to economic recovery is what we need. One can literally see that SME’s up and down the country are being strangled as the cost of living and doing business tightens like a hangman’s noose.
How does a nation grow economically without a flourishing, teeming base of small and medium scale businesses?
My Response: How does a nation grow economically without a flourishing, teeming base of small and medium scale businesses?” – will be tough. If we take 20% of the savings from subsidies and pump into SME development and lending, making sure they’re formalized, most SMEs will create products (light manufacturing) to substitute most imports. That will help balance of payment, and improve the Naira.
Comment 4: You said and I quote “you will see state-wide comparative advantages emerge with energy cost making most northern areas less appealing for localization of “industries”. My question has to do with the value of sub-national competitiveness. Considering that companies down South would have to compete with cheaper and better quality products produced outside the country in countries with better conditions for manufacturing especially in places like China where high energy price is not a barrier to productivity and manufacturing, do you think that industries down South would really have any real advantage over the ones up North? Beyond energy prices, there is high interest rates, high taxation, poor/non-existent infrastructure which also affects businesses generally.
My Response: Relatively, within Nigeria, if you do not have electricity which is the case in Nigeria, to set up a factory you have to use generators. If the cost of energy is 30% more in the North, you may consider building that company in the South. To make that call, you have to compare the cost of raw materials like raw tomatoes etc assuming agro-allied FMCGs, AND the cost of operating the plant in the North. I posit that running the plant with higher energy cost will win. The transportation cost inflation cannot be compared to drums of diesel required to keep a factory running. So, it will be cheaper to transport the agro stuff from the North to the South because energy cost will be a real factor.
Comment 5: GDP= C + P + I , its a fundamental equation that connects to exchange and interest rates.
Nigeria has a lot of C = consumption, very little of P=Production and I= investments. In a global economy , there is an interplay among all these factors.
Question is rather simple for those who are of the school of thought that P & I are not important and this is it – Is there any example of a successful economy that is based on just C? Maybe Nigeria could learn from that country .
My Response: ‘Also, have a “stronger naira” does not seem like a useful goal or conclusion.’ It is actually when you are import-dependent. In other words, when you import most things, you are better with a stronger currency. But if you are export-dependent, then a weaker currency makes sense. So, it is indeed correct for Nigeria to pursue a stronger currency regime.
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Floating industries requires both intellectual rigour and staying power, two traits that are grossly in short supply. It is way beyond theatrics and sophistry which political oratory can be loaded with. You are now calling for substance, with high dose of capabilities that go before it.
The sorry naira is too vulnerable to dream of any meaningful stability, because it has no power over the forces bearing down on it, but people are told to keep believing, even when it’s the most pointless thing to do.
The foundation remains education, the sort of education that empowers you to think and take initiative, not just complaining about all the obstacles and lack of success.
For a start, Nigeria does not deserve CIT of 30% (33% actually, when you put the add-ons). If subsidy goes, naira floated, energy cost reviewed upward, the minimum any responsible government can do is to drastically reduce corporate taxes and other extortions this sorry economy is replete with; they undermine productivity and job creation.
You cannot be raking in rewards for job not yet done, that is what Nigeria is currently known for. The land is not competitive in terms of flow of capital, yet it poses as though it’s the best place on earth to drop money.
Like you said to comment 3 or 4 the only solution for Nigeria is to support SME in the agro economy get the manufacturing and production of these products up to more than we need increase the minimum wage to balance production every other part of the economy will balance it self out