The Punch punched with a hard cover page today – “Economic Crisis: Naira to fall further in January, says CBN Report”. Largely, the Punch is correct. I had written on Dec 4, 2020 when the new Central Bank of Nigeria (CBN) remittance policy was announced: “This new policy will attain a full steady state in late Q1 2021 as there are many backlogs for foreign currency that any immediate supply would be swallowed up quickly.”
This new policy will attain a full steady state in late Q1 2021 as there are many backlogs for foreign currency that any immediate supply would be swallowed up quickly. Also, due to Christmas holiday coming, economic activity will slow down. But from March 2021, Naira will stabilize with the official and black rates fairly closer, provided Covid-19 does not add another shock in the crude oil market which may rattle the world oil demand. As I write, crude oil prices are hitting to close a 5th week of gain; a $50 per barrel on Brent crude is just around the corner.
Simply, markets will open after Christmas holidays, and since the CBN remittance dollar policy, the first time we would test demand supply equilibrium would be in January, not December, as the implementation was already late for importers to place global orders, before the holidays. So, what I expect to happen is this: more people will need US dollars and coupled with many backlogs, Naira will experience marginal pressure in January.
However, by the time we hit late March, those backlogs would have been served through more dollar supply, coming from the policy and that would begin to adjust the forex pricing equilibrium point. I expect Naira to stabilize to USD by late Q1, and then gain marginally from Q2 2021. But by January, it will lose marginally because demand will be huge with a flat supply base. That is fundamental economics.
Our main challenge remains inflation. Prices of some food items must stabilize and that is a more urgent policy focus for the apex bank. In short, in the last eight days, prices of some food items have started coming down with the opening of the border. I do not know if that is due to smuggling or legal imports, but prices will continue to fall as supply keeps getting into the nation via many borders.
A big challenge in Nigeria is how to fund new generation companies while managing inflation. Technically, our banks should lend at a low rate but that is not possible, as I have explained since they get the funds at around 11% from the apex bank (unlike peers in the US where the Federal Reserve ships money to commercial banks at 0.25%).
But in Nigeria, starting at 11% made it impossible for banks to match that. Because they have to move above 17%, it creates a vicious circle which makes things harder. See it this way – at that 17%, most SMEs cannot return whatever banks have given them, setting the banks up for losses. Simply, there are few businesses in Nigeria where you can make profits when your cost of capital is 17% before taxes to repay your loans.
Yet, before we begin to criticize CBN, it has to manage inflation and because of that, it cannot lend to banks at 1% which you can get in the U.S. as Nigeria’s economy is not structurally similar to the U.S. That paradox is the risk element in Nigeria. The rates we need to unlock entrepreneurial capitalism cannot easily happen without taking inflation to a level that would destroy the economy.
Inflation is the reason why the central bank cannot lend to Nigerian banks at 0.25%. But if there is a way we can overcome that paralysis, we will have resources for SMEs (small and medium scale companies ) and startups to fund the innovations and economic opportunities of the future.
(My position remains that Nigeria should map out $1 billion with matching funds with credible venture funds, private equity funds and banks, to invest in Nigerian companies. That is the Israeli model where the investors co-invest with the government and manage all aspects of that process. It will then make it easier for companies to have cheap capital while not affecting the apex’s bank ability to manage inflation. Simply, banks cannot efficiently fund the future Nigeria because the lending rates make no sense. But Nigeria can pick Israeli model and drop this $1 billion yearly and unlock the future in SMEs and startups. )
If we look at the Nigerian Stock Exchange, the companies established in early 1990s (GTBank, Zenith Bank, etc) remain dominant. Ideally, we ought to be creating such every five years but since that 1990 we have stalled. Interestingly, the miracle of the 1990s happened, due to the boom of finance houses, where funding was relatively in abundance, even though fraud was also rampant.
My point is this: let us have patience on this new policy; we ran it before, and it was largely positive in the economy. It has a really good chance of stabilizing the naira to US dollars, even as we plan to do the hard things which include a productive base. Managing currency without improving productivity and exports is an illusion. Diversifying our economy from crude and boosting production with exports are the core ways we can have a long-term solution to this currency paralysis. And if we achieve the targets, that desire of a $3 trillion economy will materialize.
It is very possible with the massive latent opportunities. And I want to put that in our minds as we close the 2020 chapter. Yes, Nigeria can grow to become a $3 trillion economy by 2035, from the sub-$500 billion of today. There are core critical pillars we need to pursue as a nation with dogged determination and fierce urgency of now.
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