In this column in March this year, we warned the nation of the tough times ahead in the foreign exchange market and the economy at large. In view of what is happening in the economy, we republish the article as a reminder.
As it stands, the nation is on a financial cliff that can fall off any time except a miracle happens. The one commodity that provides life support for the economy has seen its price at the international market fall to as low as $58 per barrel (now below $50).The 2015 election will certainly come and go but the after effect may linger for a long time. Whether it is PDP or APC that eventually wins the presidential election, the party that will come to power post-election, had better get prepared for the handling of the economy.
The International Energy Agency has predicted that crude oil prices may fall to as low as $20 per barrel. Oil prices might have stabilised only temporarily because the global oil glut is worsening and US production shows no sign of slowing. The US may soon run out of spare capacity to store crude, which would put additional downward pressure on prices. That process would last at least until the second half of 2015, when growth in US oil production is expected to start abating.
Behind the façade of stability, the rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly. As a result of the above oil market scenario, the incoming government will have a herculean task running the country effectively. Many states will not be able to pay their bills, same with the Federal Government.
As it is now, money that would have been judiciously used is being frittered away in foreign currency in the name of election. Right now, politicians have invaded the foreign exchange market to buy up the available dollar to pay electorate for votes. Instead of saving the windfall from oil when prices were high, state governors clamoured for the sharing of money in the excess crude account.
Now, the account has nothing to be shared. Indications are that the pressure on the naira now is as a result of political activities in the country. Post- election, the naira may see some level of stability at N197 to the dollar. The unusual use of dollar in political campaign has led to further depletion of the nation’s foreign reserves as money is carried around in sacks to people whom the politicians believe have some influence over a certain section of the populace and their presidential voting choice.
As a result of the mopping up of the dollar from the system for non-productive use, a less than three per cent differential between the bank naira – dollar rate and the black market rate after the November 2014 devaluation, is now about 13 per cent in less than five months.
This is not in the best interest of the economy and after the election, if prices of crude continue the southward journey; things will become worse as fewer dollars will be available at the foreign exchange market for importation of essential consumer goods. This, of course, will give rise to hyper-inflation which is already rising and will continue to rise.
The National Bureau of Statistics (NBS) last week released the Consumer Price Index (CPI) report for February 2015, saying that prices of goods and services rose slightly by 20 basis points, which is about 0.2 per cent. It said that rise in prices, headline inflation – measured Year-on-Year (Y-o-Y), was estimated at 8.4 per cent, 20bps higher than 8.2 per cent reported in January 2015.
This is largely the expectation as inflationary pressure intensified in February due to the weakness of the domestic currency over the past six months. This had a knock-on impact on prices of both imported food and non-food items. After the election, which ever party comes into power, Nigerians should expect a rough time going forward.
There is no doubt that with dwindling oil prices, Jonathan or Buhari will have no option than to remove completely, fuel subsidy. It will not be a matter of choice; it will be a matter of survival for the government to continue to meet its internal financial obligation.
The first shot at raising revenue will be subsidy removal. Nigerians should not be deceived. This will certainly come into play early in the life of the new administration. None of the political parties has made it an electoral issue and Nigerians have not asked either Jonathan or Buhari what they intend to do with subsidy on petrol.
The Nigerian banking sector will feel the heat as they are likely to lay off employees after the election is successfully concluded. Many companies may not be able to service their facilities and non-performing loans may mount. Banks may be tempted to stop giving out loans due to high cost of funds.
In a bid to tighten monetary policy after the election, the CBN may demand to sterilise public funds in the banking system or demand that all public sector funds be placed directly with it. The private sector deposit in banks may see some increase in the amount the CBN will withdraw from banks. The banks will then be under extreme pressure to perform post-election 2015.
The Federal Government under pressure to raise money, may after the election, allow the naira to further depreciate to raise more money for government as crude oil prices probably falls below $53 which is the 2015 budget benchmark.
More manufacturing companies will close or reduce operations due to stifling business environment wreaking havoc on their businesses. Nigerians should expect higher electricity tariff, naira devaluation, less power from the national grid, which means more expenses incurred to run generators. For now, there is no light at the end of the tunnel.