The months ahead are going to be exceptionally stressful for
Nigerians. Things would be extremely difficult for the 110 million
people living below poverty line and others at the lower rung of the
social strata.
Nigeria’s economy is technically in recession. It has recorded negative growth for two consecutive quarters and no one is sure that it would wriggle out of it by the fourth quarter.
The projection of the International Monetary Fund (IMF) is that the economy might manage to grow by a paltry 1.2 per cent at the end of the year.
Nigeria’s economy is technically in recession. It has recorded negative growth for two consecutive quarters and no one is sure that it would wriggle out of it by the fourth quarter.
The projection of the International Monetary Fund (IMF) is that the economy might manage to grow by a paltry 1.2 per cent at the end of the year.
For a country with population growth of 2.5 per cent, an annual economic growth of 1.2 per cent is a journey down the precipice.
The IMF projection does not see the economy ending this year in recession. But the writing on the wall suggests excruciating times ahead for 80 per cent of the population. More than 70 per cent are already below poverty line and many more would join the inglorious club before the standard of living starts inching up.
The flexible exchange rate policy of the Central Bank of Nigeria (CBN), a necessary evil at the moment, would first take its toll on the economy.
The IMF projection does not see the economy ending this year in recession. But the writing on the wall suggests excruciating times ahead for 80 per cent of the population. More than 70 per cent are already below poverty line and many more would join the inglorious club before the standard of living starts inching up.
The flexible exchange rate policy of the Central Bank of Nigeria (CBN), a necessary evil at the moment, would first take its toll on the economy.
The naira plunged last week to a record N335 to the dollar at the official window.
That is an invitation to higher inflation rate. The CBN responded to the 0.9 per cent surge in inflation rate in June by hiking the monetary policy rate (MPR) by two percentage point from 12 to 14 per cent.
Banks reacted immediately by pushing up lending rates on existing loans. Prime lending rates are perilously close to 30 per cent. The cost of funds for high risk borrowers like small and medium enterprises (SME) is heading for 40 per cent.
Manufacturers and service providers would almost certainly respond to the calamitous cost of funds with fresh price hikes that would push inflation rate above the 20 per cent range in the next few months.
That is an invitation to higher inflation rate. The CBN responded to the 0.9 per cent surge in inflation rate in June by hiking the monetary policy rate (MPR) by two percentage point from 12 to 14 per cent.
Banks reacted immediately by pushing up lending rates on existing loans. Prime lending rates are perilously close to 30 per cent. The cost of funds for high risk borrowers like small and medium enterprises (SME) is heading for 40 per cent.
Manufacturers and service providers would almost certainly respond to the calamitous cost of funds with fresh price hikes that would push inflation rate above the 20 per cent range in the next few months.
The high lending rate on its part would certainly worsen the rising
loans default rate in the banking system. Loans recovery is easier when
lending rates are moderate. With lending rates hovering around 35 per
cent, fund users would need profit levels of more than 100 per cent to
service their loans. In an economy where operators generate electricity
at N50 per kilowatt hour with private generators and maintain delivery
trucks at very high cost due to the craters on the few existing roads,
managers from the planet Mars would be needed to avoid loans defaults.
Banks are already groaning under the weight of the apex bank’s
directive urging them to make provision for the huge defaults in foreign
currency denominated loans imposed on them by the flexible exchange
rate policy adopted in June to ease the excruciating forex supply crunch
in the foreign exchange market.
Oil firms that contracted loans at N160 to the dollar to expand their operations when oil price was above $100 per barrel, now have to pay back at N335 to the dollar with oil selling at $43 per barrel. Many have defaulted and the banks are being compelled to provide for them. Many more would default with the two percentage point hike in MPR which might hike banks’ lending rates by 10 per cent. A fresh banking distress could be brewing if the situation is not managed with maximum acumen.
Flexible exchange rate has thrown up fresh crisis in the partially deregulated downstream sector of the oil industry. Government is grudgingly managing the crisis with dignified silence.
The price structure that drove the pump price of petrol to N145 per litre was predicated on an exchange rate of N285 to the dollar for fuel imports.
Last week the naira leisurely crossed the threshold of the fuel import foreign exchange reference price by a whooping N50 per dollar. If marketers import fuel at N335 to the dollar, the pump price of petrol would sail perilously close to N200 per litre.
In the face of surging inflation, catastrophically high rate of youth unemployment and rising insecurity in the land, fresh fuel price hike could trigger mass protests that might snowball into anarchy. From all indications, fuel subsidy might have returned through the back door. It is obvious that fuel is still being imported at N285 to the dollar. That would boil down to subsidizing fuel imports by N50 per dollar.
Oil firms that contracted loans at N160 to the dollar to expand their operations when oil price was above $100 per barrel, now have to pay back at N335 to the dollar with oil selling at $43 per barrel. Many have defaulted and the banks are being compelled to provide for them. Many more would default with the two percentage point hike in MPR which might hike banks’ lending rates by 10 per cent. A fresh banking distress could be brewing if the situation is not managed with maximum acumen.
Flexible exchange rate has thrown up fresh crisis in the partially deregulated downstream sector of the oil industry. Government is grudgingly managing the crisis with dignified silence.
The price structure that drove the pump price of petrol to N145 per litre was predicated on an exchange rate of N285 to the dollar for fuel imports.
Last week the naira leisurely crossed the threshold of the fuel import foreign exchange reference price by a whooping N50 per dollar. If marketers import fuel at N335 to the dollar, the pump price of petrol would sail perilously close to N200 per litre.
In the face of surging inflation, catastrophically high rate of youth unemployment and rising insecurity in the land, fresh fuel price hike could trigger mass protests that might snowball into anarchy. From all indications, fuel subsidy might have returned through the back door. It is obvious that fuel is still being imported at N285 to the dollar. That would boil down to subsidizing fuel imports by N50 per dollar.
The option to that is politically inexpedient.
Fuel price hike at this moment would exert enormous upward pressure on transport fares. Transport fare hike would engender a surge in food prices and torch off a chain reaction in the entire economy with dire consequences.
Right now, fuel import is solely being handled by the Nigerian National Petroleum Corporation (NNPC). With NNPC as sole importer of fuel, no one is grumbling about the tumbling value of the naira in the foreign exchange market.
Beside, with fuel consumption dropping by 30 per cent, NNPC might be importing only 20 million litres per day.
At that rate of consumption, government can afford to import fuel at N285 to the dollar even if the naira drops to N350 at the official window.
Fuel price hike at this moment would exert enormous upward pressure on transport fares. Transport fare hike would engender a surge in food prices and torch off a chain reaction in the entire economy with dire consequences.
Right now, fuel import is solely being handled by the Nigerian National Petroleum Corporation (NNPC). With NNPC as sole importer of fuel, no one is grumbling about the tumbling value of the naira in the foreign exchange market.
Beside, with fuel consumption dropping by 30 per cent, NNPC might be importing only 20 million litres per day.
At that rate of consumption, government can afford to import fuel at N285 to the dollar even if the naira drops to N350 at the official window.
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