Business
FX volatility, job losses signpost imminent economic recession
By EMEKA EJERE and FELIX OLOYEDE
Economic analysts are jittery that the continuous fall in the value of naira, with no end in sight, may be taking the nation’s economy to an unpleasant destination if serious measures are not taken.
It is even more so as a leading global investment banking firm, Goldman Sachs Group, this week, predicted that a significant devaluation of the naira is expected within the next 12 to 18 months. The investment firm believes this will help bring about “the desired balance” required to stabilize the currency.
This was contained in an exclusive Bloomberg Terminal report published on Bloomberg. However, Bloomberg cited the link in an article reviewing the state of Nigeria’s equities market.
“Goldman Sachs Group Inc. this week said a significant devaluation of the naira is likely in 12 to 18 months to stabilize Nigeria’s external accounts. An exchange rate of N500-550 per dollar should bring about the desired balance…. compared with a current rate of about N407”, Bloomberg stated.
Coming on the heels of continues weakening of the local currency, the Naira is the startling unemployment data released by the National Bureau of Statistics (NBS) last week, which showed that joblessness in the country worsened in the first six months of 2020, the highest the country has had in recent years.
The unemployment data, which was christened Unemployment and Underemployment Report: Abridged Labour Force Survey Under COVID-19 (Q2 2020), indicated that 27.1 per cent of the country’s labour force are without a job in the first half of the year, up from the 23.1 per cent in Q3 2018, while underemployment rate rose from 20.1 per cent in Q3, 2018 to 28.6 per cent, despite President Muhammedu Buhari’s promise last year to create millions of new jobs.
The Bureau of Statistics did not release unemployment data for almost two years before the latest data.
The data showed that young people (15-34years) had the highest rate of joblessness, which increased to 34.9 per cent from 29.7 per cent Q3, 2018, while their underemployment rate worsened to 28.2 per cent from 25.7 per cent in Q3, 2018 as more companies laid off their workers due to the impact of the coronavirus, which forced the government to shut the economy for five week between March 27 and May 4.
The Central Bank of Nigeria (CBN), had on Saturday, July 8, devalued the official exchange rate to N380/$1 from N360/$1, in a move seen as a step towards the unification of the exchange rate,
The adjustment of the official exchange rate was in line with CBN’s earlier commitment to the International Monetary Fund (IMF), with the apex bank promising to unify the exchange rate as part of the conditions for accessing $3.4 billion IMF loan in May.
The loan, which came under the Rapid Financing Instrument (RFI), was meant to assist Nigeria’s fight against COVID-19 and resolve urgent balance of payment needs.
In a letter to the IMF, the federal government had assured that it would work towards “full exchange rate unification and greater exchange rate flexibility” to help preserve foreign exchange reserves and avoid economic dislocation.
This is the second devaluation of the official rate since the crash of oil prices and the outbreak of Coronavirus pandemic. The first occurred in March when the official rate was adjusted from N307/$1 to N361/$1.
Before the CBN’s move on July 8, exchange rate at the Investors and Exporters (I&E) window also known as Nigerian Autonomous Foreign Exchange Market (NAFEX) window had depreciated to N386 during intraday trading on Friday, August 7, 2020.
In another development, the exchange rate at the parallel market dropped marginally on Friday (July 7). as it closed at N475/$1 after exchanging as high as N486/$1.
This represents a N1 drop when compared to the N474 to a dollar that it exchanged on Thursday, August 6. However, Business Hallmark learnt that a deeper drop was noticed by some forex tracker who obtained a price as high as N486/$1 from some traders, validating claims that market volatility still persists.
Foreign investors, IMF and World Bank had long called for Nigeria to merge its multiple exchange rates, saying the absence of a single rate creates confusion and deters foreign investment.
The multilateral institutions insisted that with drop in foreign exchange reserves and decline in Nigeria’s dollar earnings over fall in crude oil prices, Nigeria had no option but to devalue its currency.
Market observers believe the naira will continue to lose value if the economic managers do not evolve creative and far-reaching measures to grow the Nigerian economy.
Data obtained from en.wikipedia.org,show that the Nigerian currency maintained a strong position at the official forex window until 1986 when it was devalued to N2.02/$1 from N0.89/$1 the previous year.
Within a decade it had weakened to N21.89/$ in 1996 and by 2006 the naira was exchanging a dollar for N128.50–N131.80. In the decade that followed, a dollar was sold for as high as N489 at the parallel market.
Analysts react
Speaking on the situation, development economist, Barrister Fred Nzeako, noted that while unifying the exchange rates will make a difference, it will not end the problem of falling naira value until Nigeria reduces her consumption of foreign exchange most of which, he regretted, goes into importation of petroleum products.
“The only way to save the naira and solve Nigeria’s problem is to reduce the consumption of foreign exchange”, Nzeako said.
“And the way to reduce consumption of foreign exchange is to reduce importation. Sadly, Nigeria spends the highest amount of foreign exchange on petroleum products.
“If you see the amount of money leaving Nigeria for the importation of petrol, you will weep for this country.”
On his part, Dr Bongo Adi, associate professor at the Lagos Business School, told Business Hallmark that the efforts being made by the CBN to strengthen the naira will continue to be hampered by corruption if not tackled headlong. He advised that corruption in government and the private sector must be addressed to stimulate economic growth and in turn give birth to a strong naira.
Adi said, “If we fix our economic problems by firstly producing what we eat, the naira will appreciate. When we can manage our economy such that when oil price goes down, we can produce what we consume that will make the naira stable.”
He also reasoned that should the government address the issue of political uncertainty in the country, it would also go a long way in firming up the local currency.
He stressed the need to cut down the country’s spiraling debt, which currently stands at $79.5 billion as of March 31, 2020. “The amount of the country’s loan shows that it may not be able to pay its loan in the future and that may affect the naira negatively,” he added.
Also, the chairman, SME Trade Group, Lagos Chamber of Commerce and Industry (LCCI), Mr. Abiodun Oladapo, noted that the value of any country’s currency is dependent on its level of productivity, regretting that Nigeria is not taking adequate advantage of the area where it has a competitive edge, which is agricultural production.
“For instance, a tonne of maize is about N100,000, but unfortunately the government is not encouraging its production by not supporting the production of fertilizer. If the naira must improve, the government must encourage real production,” he said.
“The continued depreciation of the naira is also traceable to the protracted stay of the military in government, ruling the country for almost four decades. They managed the economy abysmally and opened Nigerian borders to imported goods.
“Nigerians’ appetite for foreign goods and the hostile operating environment led to the death of companies like Dunlop Nigeria; Leyland in Ibadan; Volkswagen Nigeria in Lagos; Anambra Motor Manufacturing Company (ANAMMCO) in Enugu; Arewa Textile Mill in Kaduna, among others.”
Imminent recession
It therefore did not come as a surprise when the minister of state for Finance, Budget and National Planning, Clement Agba, said on Thursday that unless Nigeria achieves a strong third quarter economic performance in 2020, the country stands the risk of going into a second recession with significant adverse consequences.
Agba, who disclosed this while speaking at an interactive session with the House of Representatives joint committees on Finance, Appropriation, Budget and Economic Development as well as Loans and Debt Management, also warned that Nigeria faces significant medium-term fiscal challenges, especially with respect to its revenues, which if not immediately addressed could snowball into a debt sustainability crisis.
Representing the minister for Finance, Budget and National Planning, Zainab Ahmed at the event, Agba said Nigeria is currently exposed to spikes in risk aversion in the global capital markets, which will put further pressure on the foreign exchange market as foreign portfolio investors exit the Nigerian market.
Agba said, “Weaker-than-expected economic performance threatens our ambitious revenue growth targets, as seen in the 2020 revised budget and the updated medium-term projections.
“Achieving fiscal sustainability and macro-fiscal objectives of government will require bold, decisive and urgent action. Government is determined to act as may be required.”
