Sobowale On Business

October 23, 2023

Expected exchange rate after N1000/$

Naira falls to N1250/$ in parallel market

Naira falls to N1220/$ in parallel market

By Dele Sobowale

“To know that which before us lies in daily life is the prime wisdom; what is more is fume” – John Milton, 1608-1674

When in late November last year, I was invited as a facilitator for a sales training workshop, the participants were startled when my lecture started with a graph. The graph traced the trend of exchange rate since 2020; it ended with a projection for 2023. I correctly predicted that exchange rate for 2023 would reach N1000/US$1. None of the participants believed me. I repeated it in VANGUARD early this year when currency change precipitated economic lockdown nationwide. So, just remember this; irrespective of how you feel about N1000/US$1: VANGUARD told you first.  

For several weeks now, the exchange rate on the street had been around N1000/US$1. Then, the Central Bank made a few important policy decisions; and most people expected the rates to come tumbling down. They remain stubbornly at about N1000/US$1.

The most obvious question right now is: what should we expect from now on with the unification of exchange rates? There are several inevitable repercussions on account of this policy change for all stakeholders. There are also unpredictable consequences of the changes which are contingent on the fiscal and monetary policies adopted by the Federal Government.

Already, there are signs that apart from the changes at CBN, it would appear that RENEWED HOPE is bearing a frightening resemblance to Buharinomics. Unless a sudden change occurs, the exchange rate may trend towards N1200/US$1 by the first quarter of next year.

Begging bowl out again: $1.2bn loan application

“At a time of higher debt levels, the rapid transition from prolonged period of low interest rates to much higher rates… inevitably generates stresses and vulnerabilities” – Kristalina Georgieva, MD, International Monetary Fund, IMF.

Poverty, whether personal or national, brings disdain. Nigeria’s Minister of Finance and Governor of Central Bank of Nigeria, CBN flanked the IMF MD in a photograph in Morocco recently. There was no doubt who was the “boss”. Nigeria is again playing its familiar role of beggar.

The FG is seeking two loans from the World Bank at once. Invariably, such loans are not granted unless the borrower satisfies certain conditions imposed by the IMF. Because this loan request follows the same pattern as most of Buhari’s loans – borrow-and-spend on paying salaries and give-aways to the poor – the IMF has stepped in to dictate to us a set of policy decisions which Nigeria should take. Some of them are akin to poison right now.

“IMF proposes more taxes, higher interest rates after subsidy removal.”

That report summarises the dangers ahead for the FG and the organised private sector, prospective investors and consumers. The IMF Africa Department Director, Abebe Selasie, called the introduction of more burdens on Nigerians “a holistic approach.” Typical of advisers who don’t have the problems of implementation and management of consequences, Selasie had left the FG with the task and the likely political upheavals that will certainly occur.

At a time that the private sector is clamouring for the reduction in taxes, the IMF is recommending more taxes without specifying which sectors need to be taxed. Knowledgeable Nigerians, however, have been aware for years that, more than any other causes, two factors erode the nation’s revenue base – the cost of governance and corruption. Where Presidents and Governors can appoint any number of Ministers, Commissioners, Special Advisers and Assistants, and the legislators can also appoint unlimited number of aides, no amount of taxes imposed and collected will ever be sufficient.

The USA is number one nation in Gross Domestic Product, GDP; Russia has the largest land mass and India now has the largest population. None of them has up to 25 Ministers. So, what is Nigeria doing with 48?

A former Accountant General of the Federation, AGF, is in court for embezzling N97 billion. Given a country in which the top one per cent own as much wealth and earn as much income annually as the bottom 70 per cent, you would expect the tax burden to be equitably shared. But, that is not the case in Nigeria. The rich actually pay a disproportionate less share of taxes – either personal or corporate. It is the rapidly shrinking Middle Class, whose taxes are deducted through Pay As You Earn, PAYE, who shoulder the burden of taxes. More than 10 million low level taxpayers would be needed to contribute the N97 billion allegedly stolen by a wealthy individual. The burden of increased tax proposed by the IMF will fall more heavily on the Middle Class than the rich. The repercussions are dire.

 In no country in Europe and the Americas are interest rates near 10 per cent. It is already close to 30 per cent in Nigeria. Furthermore, Mr Selasie certainly knows that increasing interest rates results in reduced aggregate investment and employment. Why then is higher interest rate recommended for a nation whose rates are already among the highest in the world? This is akin to a surgeon recommending decapitation in order to cure a nasty head ache.

Granted, Nigeria’s inflation rate is now trending towards 30 per cent. But, this is not inflation caused by too much money chasing too few goods. Three elements primarily account for Nigerian inflation: scarcity of foreign exchange resulting in high exchange rates; acute food shortage on account of pervasive insecurity in all farming communities and persistent failure of the FG to earn sufficient dollar revenue in order to fund its budgetary obligations. Certainly, none of these can be alleviated by increasing interest rates and taxes.

Furthermore, raising interest rates might be effective in bringing down inflation in countries where 90% of purchases are credit-based and interest rates are imposed. By contrast, virtually all Nigerian purchases are cash-based. Even houses are built gradually as the prospective home-owner has the money to buy the materials needed. Meanwhile, interest rate increase by the CBN results in higher lending rates by banks; but seldom leads to increased savings rate. Thus, in Nigeria, increased interest rate discourages borrowing as it should but does not encourage propensity to save because there is no incentive for saving. Finally, most account holders in Nigeria spend virtually 100 per cent of the deposits made during the month. Even higher interest rates on savings will not increase savings significantly. To every rule there is an exception. I think that the largely cash-based Nigerian economy does not respond to interest rate hikes as credit-based economies. Higher interest rates will be counter-productive. 

FG/CBN chasing shadows

“Cash transfer: FG seeks fresh $400m loan to fund 15m households.”

“Despite lifting FX ban, dollar supply declines to $53.02m”

“FG may spend N3.27trn on palliatives, loans”.

The first two news reports were published on October 15, 2023; the third on the following day. Taken together, they point to a government which is steadily getting the nation into worse trouble than it was in before. Certainly, nobody in that government had thought of where the N3.27 trillion will come from.

Exchange rate in 2024 will most likely go up considerably.