The current exchange rate of the naira at over N1,000 to $1 is only but an intermediate waypoint of a currency on a voyage to N3,000 by 2027 because none of the critical macroeconomic factors would have significantly gestated or mitigated by 2027.
As an economic equation, the exchange rate compares two economies. It translates the disparities in the economic factors between countries, such as infrastructure, technology, Foreign Direct Investments, rule of law, military power and its projection, education, energy, healthcare, etc. Nigeria is poor relative to the United States; therefore the naira must depreciate against the dollar. The currency has plunged by a whopping 99.94 per cent since 1978, holding only six kobo of its original value. To break this down to scale, N100 back then is the equivalent of N250,000 today.
Nigeria’s downward economic trajectory was captured in a 1986 Financial Times of London publication titled “Nigeria: Let them eat their flyovers.” It was a frank but cynical comment about a country on an unmitigated march towards the precipice as all the economic factors including education, infrastructure, energy, rule of law, etc. were headed south except the flyovers in the Lagos capital of Nigeria then. FT’s cynical remarks about flyovers drove the point home about the severity of the situation. Nearly 40 years later, no significant course correction has been made to steer the country away from the edge of the cliff. Sadly, the political leadership is oblivious of the danger. What are their blind spots?
Firstly, Nigeria has a whopping $3tn infrastructure deficit according to the World Bank. The Federal Government’s current revenue profile together with its borrowing capacity cannot close the gap. Electricity supply has stalled around 4,500 megawatts since privatisation in 2013; a far cry from the 20,000 megawatts required to energise the country into a middle-income economy. Fresh capital to fill the $100bn investment gap has not and will not come because of the deep subsidy in NERC’s Multi-Year Tariff Order. One residential category pays N4/kWh($0.0033).
In contrast, the tariff in Rwanda and Gambia is $0.25/kWh and supply is steady. Power minister, Adebayo Adelabu, recently vowed to achieve 20,000 megawatts by 2027. Grid electricity will probably go the way of the landline, to be overtaken by micro-grids and distributed electricity from renewables. Gas supply is barely 1 billion standard cubic feet per day compared to the demand of five billion. This too is not appropriately priced to attract fresh investments. The sector needs about $20bn investments to develop production, processing, storage, metering, compression, pipeline, and trading capacities. There is presently no gas storage to facilitate “gas on demand”; Russia has 29. The Nigeria Liquefied Natural Gas for export was a serious economic miscalculation. New gas projects are adopting that model to further starve the domestic market while exports thrive.
Secondly, Nigeria’s human capital development system is rigged to churn out a massive underclass. The per capita marketable skills index is less than 20 percent. More than 20 million children are out of school. According to UNESCO, the country ranks 103 out of 113 on the Education for All Development Index in the company of Bangladesh, Nepal, Pakistan and war-torn Liberia, Sierra Leone and the Democratic Republic of the Congo. UNESCO also reported that 59 percent of SS1 students are actually at the numeracy level of Primary 2. Then of the remaining 41 percent, less than 10 percent can hold their own in SS1. FT noted that the funnelling of mediocre students into teacher training colleges was the harbinger of Nigeria’s education woes. Today, the chicken has come home to roost. More chickens are bound to come home to roost in the future as the Joint Admissions and Matriculation Board maintains a cut-off mark (160) for admission into universities.
Thirdly, the monetary and fiscal environment has been generally inclement to productivity. Equity is taxed through stamp duties. On the ease of doing business, Nigeria is ranked 131 worldwide. There are over 200 official and unofficial taxes. Exporters navigate several “tollgates” along the export chain. The Nigeria Customs Service, National Drug Law Enforcement Agency, National Agency for Food and Drug Administration and Control, Nigerian Export Supervision Scheme, etc. operate as the “big Kahunas” in regulating the production and export of goods. Exporters are compelled to exchange their proceeds at the lower official market.
Banks pay in dollars instead of naira to recipients of Western Union remittances. An estimated $50bn, some say, is driving an underground currency speculative market. The FX regime, anchored on the overvalued naira since its introduction on January 1, 1973, has continued to enhance the promotion of imports to the detriment of local production, thereby stifling exports and causing a shortfall of naira receipts on the sale of dollars. Nigeria’s inflation is primarily caused by a weak supply side, yet the Central Bank of Nigeria adopts the Monetary Policy Rate to target inflation which stifles the much-needed investments to boost the supply side to produce more goods and lower prices.
Each cycle of rate hikes lowers productivity and induces inflation. As the cycle continues, stagflation becomes inevitable. Access to capital is highly constrained. FDI is barely trickling in. Capital flight has consistently exceeded FDIs for decades. Free market principles and pricing mechanisms are sidelined whenever the government is involved in the supply chain of commodities; electricity, gas, petrol, FX, thereby causing structural defects in the economy. The financial market is underdeveloped; thus lacking the capacity for long-term capital, mortgages and consumer credits.
Fourthly, the country’s pervasively warped value system has landed it at 150 out of 180 countries on the Global Corruption Index. Rule of Law is negotiable. Political entrepreneurship and state capture are fast-growing sectors of the economy. Security architecture is weak, particularly in the states notable for farming and oil exploration. The military cannot defend the country’s territorial integrity. On the Regional Political Risk Index, Nigeria ranks below all 14 sub-Saharan countries surveyed except DRC, Sudan and Zimbabwe. The healthcare system is on life support; one leg is strapped to medical tourism, causing an outflow of over $5bn annually.
These are some of the factors shaping the value of the naira, with nothing on the horizon to reverse this trend. The economic headwinds remain unabated. There’s an upside potential for the headwind to gain gale force proportions should ECOWAS intervene militarily in Niger Republic.
We cannot compete with the West in these economic factors and as long as that persists, the naira will depreciate. The best Nigeria can do is to slow the rate of decline by optimising the fiscal and monetary environment, but its performance thus far has been abysmal. Across the African continent, currency depreciation is pervasive. The francophone countries, with their French-supported CFA franc, are sitting on an economic time bomb. Their currency is stupendously overvalued. To usher in a stable currency for Africa, currency unification that is backed by gold is imperative.