A weakening Naira, shrivelling reserves, and economic saboteurs
Depending on whom you talk to, the Nigerian economy is either hurtling down Shit Creek sans paddle, or is the victim of malcontents who may be seeking to leverage adverse external economic conditions to propel the economy down the former path. According to the latter perspective, it matters that the Central Bank of Nigeria (CBN) recently read these economic saboteurs the riot act. We have barely come out of the last recession, and because the recovery is far from assured, it wouldn’t take too much to tip the economy back into contractionary territory.
But then, this is precisely the point made by those currently betting against the economy. The last recession suffered by the economy was triggered by the bottom falling out of the oil market in 2014. We may have eased onto the path of recovery over the last two years, but as the output numbers for 2019 clearly show, this is again largely because the domestic production and global price of our main export item ― crude oil ― have recovered somewhat. In terms of the economy’s basic structure, nothing significant has changed ― the much-fancied non-oil sector plateaued all of last year.
Indeed, it may well be argued that a lot worse has happened to the economy over the last couple of years. If you add debt owed by government-owned enterprises and the CBN’s ways and means advances to the stock of our public debt (which proper accounting suggests we should), our debt service-to-public revenue ratio leaves us with barely enough fiscal room for anything. Especially the large public sector salary burden and the myriad subsidy regimes. Meanwhile, rumours abound of how fraught the central bank’s balance sheet has become. Of course, much of these susurrations would be the work of economic saboteurs.
However, it would be only patriotic to ask how the central bank accounts for the credit risks associated with its many intervention programmes. This question matters in the light of the current size of the apex bank’s retail lending activity ― far bigger than any of the domestic money banks that it is regulator of. But a far bigger concern looms. With the fiscal side of the macroeconomy fraught, the monetary authority was always going to bear a sizeable burden in any adjustment that the economy will have to make. If there are no buffers available in the monetary space, then, perhaps, the “Shit Creek” imagery is not overdone.
There are also worries around the size of another entry in the central bank’s books ― the balance on the gross external reserves. The CBN’s latest press release on this matter makes the point for a positive take on this aspect very strongly. “The size of Nigeria’s foreign exchange reserves remains robust and comfortable, given the current realities of Nigeria’s genuine and legitimate FX demand”, the release argues. But how could we have forgotten so soon that the governor of the central bank’s option on naira devaluation included two conditions: reserves reach US$30 billion and the price of crude oil in the global markets fall below US$45 per barrel.
The oil price touched US$30 per barrel. Over the last couple of months, we have seen the gross external reserve shrivel. Add to this potent mix the fact that our oil earnings, the major source of replenishing the reserves, would be way less than this year’s appropriation act anticipates, and you’d be forgiven for wondering how soon before the central bank’s self-imposed triggers for adjusting the naira’s value are activated.
At least, that is what most rational persons should do. As with Zaphnath-Paaneah’s advice to the Pharaoh (biblical Egypt), ahead of lean times, the wise and the prudent hoard their surpluses. This is one reason ― both the precautionary principle and the profit motive are non-negotiable conditions for the proper functioning of markets ― why the apex bank’s promise to mete “…the full weight of our rules and regulations” on these speculators, “…including, but not limited to, being charged for economic sabotage”, rings hollow.
The problems the country faces on the economic front today may be existential. But they are of a supply-and-demand, scarcity-and-choice vintage. They do not present a law-and-order challenge. The main test that policy making must pass, especially at difficult times like this, is how to structure domestic incentives in order to bring about the appropriate supply and demand responses. And in an environment in which resident economic entities are loath to hold on to the naira for too long, what should be done? Unfortunate is the analyst who concludes that the criminal justice system is the tool for resolving this problem.
For a currency is useful only because it can be used to settle transactions, to account for a business’ performance, or as a store of value. Breach any of these and it is just a potpourri of mere paper and metal. The main threat to the naira today is that it is no longer a store of value. The CBN has both the means and enough incentives to alter this dynamic. It simply must find the will to do right by the country.
