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”.

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 

1. Massive industrialisation
2. An import substitution program 
3. Declaring a state of emergency on the power sector 
4. 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.

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, quoting the National Controller Operations, Independent Petroleum Marketers Association of Nigeria, Mike Osatuyi.

“What I am seeing is around N600 and above, depending on the exchange rate, the current crude price at the international market, and the landing cost. Those in Lagos will pay around N600, those outside Lagos around N600 plus, while those in the north would be paying anything from N700 and above,” he said.

The projected prices are based on the realities of the Nigerian forex market, which has seen the naira plummet to N770 against the dollar in the Investor and Exporter window. The last petrol stock of the Nigerian National Petroleum Company Limited is reportedly finished.

The forex market, which was floated earlier this month by the Central Bank of Nigeria (CBN), has impacted the cost of nearly all goods and services – especially petroleum products. Further hike in petrol prices means that the resulting economic hardship will be exacerbated.

Analysts have projected that the new forex and subsidy policies will stoke inflation (currently at 22.41%) up to 30% in the short term.

Before now, the hope of an adequate supply of affordable Premium Motor Spirit (PMS) hung largely on Dangote Refinery, whose products are expected to hit the market by July. Dangote Refinery, with the world’s largest production capacity of 650,000 barrels per day, was commissioned last month in Lekki, Lagos. But it is understood to be functioning at around 88% – slimming the hope of a quick cheaper PMS in the Nigerian market.

Experts said that the deregulation of the upstream and downstream sectors means that hence, market forces will determine the cost of petroleum products. This includes the federal government’s fresh move – imposing 7.5% VAT on diesel imports.

Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) said market competition will help drive the prices down in the long term. The agency said it has been issuing import licenses to companies interested in bringing in PMS, a move that will encourage competition.

The Executive Secretary, Depot and Petroleum Products Marketers Association of Nigeria, Olufemi Adewole, told The Punch on Tuesday that however, prices will be determined by market fundamentals.

“Prices of products will depend on market fundamentals, and as we speak, the Nigeria Customs Service is delaying some AGO (diesel) vessels because of the 7.5 percent VAT.

“And don’t forget, any cost incurred by marketers would be added to landing cost, and then to the pump price. The marketer would also have to add profit because they must make profit,” he said.

The odds stark against the FX market

There is hope that the CBN will soon stabilize the FX market through interventions. The apex bank said earlier this month that the FX market floatation is a managed one, which means that the exchange rates will not be fully determined by the market for now.

But having reached as high as N770.38 /$1 earlier in June, and hovering now around N756 – to N765/$1, it is not clear at what rate the CBN intervention will cause the market to converge.

Analysts believe the answer to stable FX rates is largely tied to adequate forex liquidity. But Nigeria has been struggling to find buyers for its crude oil, its major source of forex, in the past months.

The federal government’s recent faceoff with shipping companies over unpaid taxes from 2010 to 2019, has caused some vessel owners to shed loading oil from Nigeria – leading to a surplus of stranded oil from the country, according to a recent Bloomberg report. The report noted that the country is still looking for buyers for about half of its July loading.

Although the Federal Inland Revenue Service (FIRS) has granted shipping companies a six-month grace window to clear the retroactive taxes, the challenge remains. According to the report, about 20-22 cargoes worth of barrels, totaling about a million barrels, have remained unsold for July.

This, besides scuttling Nigeria’s chance to boost its foreign reserve from the dollar derived from the sales of oil, has bolstered shipping costs for Nigerian oil significantly. Nigeria’s daily shipping cost has risen to $53,463, above the year-to-date average, according to data from the Baltic Exchange.

The economic impact widens

The crippling effect of high FX rates on PMS prices is notable for the drastic reduction of vehicles on Nigerian roads. For instance, Lagos, which has approximately 2.5 million cars on its roads daily, has over the past weeks, seen the number drastically reduced.

Against this backdrop, there are growing concerns that if not urgently addressed; the situation will squeeze off what is left of Nigerians’ meager spending power.

The World Bank said in its June 2023 edition of the Nigeria Development Update (NDU), titled ‘Seizing the Opportunity,’ that more than four million Nigerians have fallen into poverty during the first six months of this year.

The report, which attributed the situation to the challenges posed by forex reforms, warns that an additional 7.1 million individuals could fall into multidimensional poverty if immediate steps are not taken to protect Nigerian households from the initial price shocks resulting from the petrol subsidy reform.

The World Bank said it has approved an $800 million loan for the Nigerian government to facilitate palliative measures, including cash transfers to poor Nigerians, to cushion the effects of the FX and subsidy reforms. But the $800 million is believed to be too meager to ameliorate the widespread impact of the reforms.

The Nigerian government is currently working with Civil Society Organizations to create a framework for a reviewed minimum wage that will boost the spending power of Nigerians. Economists believe that a sustainable minimum wage will help Nigerians to cope as the inflationary shocks of the policies take a toll in the short term.