Nigerian Naira: The misfortune of its people and the glee of foreign investors

Dear Africa interested individuals:

                                                  The Nigerian government has just completed the introduction of policies that have culminated in a trifecta of pain on its citizens and residents that will have a massive and immediate impact on the standard of living of its people.  Never before in the history of Nigeria has there been a combination of the below official events all within a six-month period.

1. 

  Electricity prices were increased on average by 80% per kilowatt hour more to residential customers effective February 1, 2016.  Commercial customers were also not left out.  The abolishment of fixed monthly charges may reduce the overall charge to a 40% increase which is what the media is reporting.  Electric power distribution (supply and quality) actually got worse after the increase took effect and majority of customers nationwide are still getting estimated billing and not actual usage bills.  The regulator/government will shirk their responsibilities and expect the end user to meet their responsibilities.  More evidence of this will come to the fore as you journey along with me.       

2.  

   Fuel (gasoline) subsidy was removed (downstream industry deregulated) and the price per liter of fuel reduced to N85.00 per liter from N87.00 effective January 1, 2016.  Nigerians did not see this pronouncement as a removal because the fuel price was reduced and the government still dictated the actual official price per liter.  Oil prices were in the twenty dollar range in January 2016 and the government saw this as the best time to remove subsidy as the eventual price hike would not be immediate.  The 71% price hike came on May 11, 2016 when the price per liter was increased to N145 per liter.  Nigerians did not even enjoy the reduction as fuel scarcity plagued the country from January through May to varying degrees.  I will like to remind you that power supply is still poor and a lot worse than August 2015 when supply was widely acknowledged as improved.    

3.  

  Nigeria's currency was depreciated effective June 20, 2016 and will be fully market driven by Nigerian banks.  I guess the government thinks it is being considerate by depreciating the currency instead of devaluing it?  When have Nigerians ever been considerate of each other?  This is clearly a political calculation.  Watch the banks milk the system like milk is going out of fashion.  They have ten days left till the end of their half-year reporting period.  I expect the naira to depreciate by 60% and settle at N320 (+or-5%) as an average over the next nine trading days of June and into the foreseeable future.  The people hoarding dollars and the government will want to cash in and make the policy change worthwhile.  President Buhari has already said that the Nigerian economy can only be revived through spending.  The clarion call for the Buhari led government is show me the money.     

The trifecta of pain in full bloom: February 1, 2016 higher electricity prices (80% residential increase in most regions) came into effect. May 11, 2016 fuel prices were increased by 71%.  June 20, 2016 (today), the Naira was allowed to reflect market forces which will likely culminate in a 60% loss in value relative to the Dollar (N200 presently) when all is said and done.  Nigerians have never experienced these trifecta of consumer price spikes at the same time.  The situation is exacerbated by the following negative tag on events.  

(A).  Power supply reduced drastically relative to prior insufficient levels.  Nigerians spend more on fuel for their generators (source their own power) than on fuel for their cars.  The fuel of course is now more expensive officially.  More money out of consumer pockets on what should not be necessary.  Sourcing your own power should be not the responsibility of the citizens of any country.  Their responsibility should be to pay for the actual amount of electricity supplied by distribution (utility) companies.  

(B).  Despite repeated regulatory warnings, Nigerian electricity distribution companies have still not provided meters for majority of their customers.  This means more estimated bills (skewed to the high end) at the higher, recently approved tariff rate.                

(C).  The Nigerian currency usually experiences a measured movement whenever the currency is shifted out of its approved band.  In other words, the currency is devalued and not depreciated.  The Central Bank of Nigeria has this time around decided to fully float the exchange rate and leave the rate fully dependent on the forces of demand and supply in an import dependent economy. Uncertainty in the market place usually demands a premium.  Common knowledge tells us that Nigeria is more often plagued by negative uncertainty.  If the Central Bank governor feels that the Naira will settle at N250.00, then, why doesn't he just devalue the currency to N250.00?  He has a confident expectation that N250.00 will bring equilibrium into the foreign exchange market place, but, declined to devalue the Naira to that level.  He has left his fellow bank CEOs to dictate the way forward for the Nigerian exchange rate at the most inopportune of times!  

Is the executive acting out a script or reacting 'on the fly' to events as they happen?   I am leaning more towards the former than the latter.  Kindly follow me on a quick journey. 

Nigeria is currently experiencing cost-push inflation.  Nigeria's inflationary environment has nothing to do with demand-pull inflation.  Cost-push is the worse of the two in my opinion.  

Despite the spike in Nigeria's debt levels due to frequent borrowing over a short period and the difficult economic environment, the Nigerian executive created and finally assented to an expansionary budget (29% higher than 2015) on May 5, 2016.  Government expected revenues will only cover two-thirds of the planned budgetary spending; borrowing is expected to cover the other third.  The government intends to borrow internationally to cover the deficit as yields are lower than in the domestic market.  Yields on American junk bonds are presently yielding less than 8%. Nigeria's 2023 Eurobond is yielding 7.155% as at June 16, 2016.    

On May 11, 2016, six days after the budget was assented to, fuel price was increased by 71% and downstream deregulation came into real existence.  Government asked downstream operators to import fuel using foreign exchange obtained from secondary sources.  Which secondary sources actually exist to adequately meet demand for fuel importation?   The main reason given by the government for the scarcity is the inability of downstream operators to source foreign exchange at the official rate due to the massive decline of foreign exchange earnings of the federal government. The government is the judge and jury in its own case.  The government caused the problem while pronouncing itself free from blame.  The government is not providing foreign exchange to the downstream operators and instead of doing that decides to further impoverish Nigerian people through the most aggressive single inflationary measure in Nigeria: a hike in fuel price.  

On May 25, 2016, two weeks later and five days after Q1 2016 GDP went negative, the Central Bank announces a flexible exchange rate policy for the naira.  I hope you are keeping track of events?  What President Buhari had vehemently refused to do before he even got elected, he all of a sudden agrees to do, three weeks after assenting to the expansionary budget for 2016.  Let me digress briefly.

Nigerians are very hardworking and IMPATIENT people.  This impatience goes to the heart of why Nigeria is an import-dependent economy and why decision makers favor short-term gain and long-term pain over short-term pain and long-term gain.  These calculated government decisions reek of the same prescription.  Get what we can today and deal with tomorrow and its probable problems tomorrow or tarry a bit and let someone else have the honor.  The expansionary budget for 2016 is not cautious budgetary policy.  The market-driven naira depreciation is not cautious monetary policy. It is cautious monetary and budgetary policies that helped DRC Congo decrease its inflation rate from 50% in 2009 to 1% since 2013 till date.  

The Nigerian government in its quest to increase revenue for its ambitious expenditures (that may not reach the larger population), is inflicting further misfortune on its people under the guise of a better tomorrow.  Purchasing power is declining faster for consumer staples while huge sums of money continue to accumulate and circulate around a select few.  

It is time to talk about foreign investors who are excited about this development and are seeing $ signs while preparing their exuberant reports and memos to clients that Nigeria is now where the money is and it is time to flock to Nigeria with the inflows in droves post devaluation.  Meanwhile, local pension funds have allocated less than 10% of their available funds in Nigerian equities despite a regulator approved 25% allocation maximum limit.  Domestic institutional investors that have no foreign currency exposure risk are shying away from the equities market waiting for their guests (foreign investors) to visit once again and lead the way for them.  What are they running away from?  I concur that the stock market is going to have a boost and GDP growth will probably improve on a quarterly basis from its Q1 2016 negative level.  My professional policy has always been to stand with sober analysis over irrational exuberance.  This is not a valued trait in the world of research though, sober analysis withstands the test of time.  Somewhere in Africa this scenario has already happened multiple times. 

Egypt has had four devaluations since the start of 2015 that reduced the value of the Egyptian pound by about 24% officially over the period relative the dollar.  The last one was an 11.8% devaluation on March 14, 2016.  The gap between the official and parallel market rates widened to 29% from 24% after the latest devaluation.  Nigeria had one devaluation in February 2015 which depreciated the currency from N168 - N198, a loss in value of 18%.  The Nigerian index declined 17% in 2015 while the Egyptian index declined 22%.  The Nigerian index is up 2.1% year-to-date while the EGX-30 index is up 4.7% year-to-date.  This is despite the Egyptian index rising 10.3% the first three trading days inclusive of devaluation announcement day.  The Nigerian index rose 8.2% last Wednesday through Friday. 

Devaluation or depreciation is a transient source of positive market performance and for a short time papers over the deep-seated cracks within any financial system.   It comes quickly and ferociously and then tapers off before you even book a day to celebrate your unrealized gains.  Reminds me of Mike Tyson in his hey days; most of his knockouts came in the first three rounds.  Let me remind you that Egypt is an emerging market while Nigeria is a frontier market and typically attracts greater inflows than Nigeria by nature of its index provider classification as an emerging market.      

Unlike Egypt that devalued its currency, Nigeria opted for depreciation rather than the politically handicapped path of devaluation.  Nigeria will, based on guidance allow market forces to  fully reign supreme in determining its exchange rate.  The market forces being Nigeria's banks that have taken more from the system than they have given back in return over the past eleven years.  The Nigerian government (executive and legislature) is using its people aggressively as a quick-fix to achieve its goals while baiting them that these policy changes are in their best interest.  Most Nigerians are below the poverty line and this will hurt them the most.  The added effect of the inflationary impact of rapid depreciation, especially for an import-dependent economy will send Nigerians' standard of living into a nosedive while the government strives to revive the economy.  

Is GDP per capita going to improve anytime soon with this market-driven naira depreciation?  No. How valuable is economic recovery (that all the corporate-sponsored analysts are bandying around) that does not tangibly impact on the life of the larger population?  Majority of the impending inflows will still be outflows after taxes are removed.  GDP growth that does not allow the wealth from resources to reach the larger population is not even news worthy.  This is the hard commodity challenge that impacts Nigeria, DRC, Ghana, Angola, Zambia etcetera.   

Abraham Lincoln (who lost four elections before being elected President of USA) said "government of the people, by the people, for the people, shall not perish from the earth."  These policies in quick succession by the Buhari administration are not reflective of a government for the people.            

An almost simultaneous combination of 80% increase in rate per kilowatt hour, 71% increase in gasoline prices and a likely 60% depreciation of the naira will drastically reduce the standard of living of more than 90% of Nigerians.  Poverty rates are getting higher and the middle class is losing class fast.  This is not macro or micro economics; this is draconian economics.  I share their pain, the truth I see is the truth I will tell.  No citizen of a country should celebrate when its currency continually loses value against major currencies.  Price reductions rarely happen in Nigeria; what goes up, stays up.  

In August 2007, the official naira-dollar exchange rate was N125.00.  The Central Bank governor expects a market-driven exchange rate of N250.00.  If Mr. Emefiele is right, Nigeria's official USD exchange rate will have lost 100% of its value in nine years. The Nigeria ASI index has declined by 43% from June 30, 2007 till June 17, 2016.  We know that the increase in fuel prices (if memory serves me right, President Obasanjo had nine fuel price changes over his eight-year tenure) and currency devaluations and depreciation have increased the prices of goods and services over the years.  The stock market has apparently also not benefited beyond transient rallies.  A stock market rally is not sustained by continuous currency devaluations.  I have shown you Nigeria over the years and Egypt of recent.  The banks' profit will rise or be supported in the short-term post depreciation from foreign exchange dealing.  The economy and the businesses the banks lend to will stutter from increasing price levels (never seen before) and the banks' financial performances will reflect this.              

The corporate-sponsored analysts (looking out for the interests of their capitalist employers, not the Nigerian people on the receiving end of these combo effect living standard destroying policies) sending you exuberant memos about Nigeria's imminent economic recovery are speaking purely based on business profiting sentiment.  The sober realities of a consuming nation of 180 million people depending on imports for consumption of basic necessities like rice and wheat is not who they truly speak for.  Their $5 million inflow will likely generate 1.5B naira going forward instead of 1B naira.  The Nigerian government will receive 50% - 60% more for every barrel of oil sold and for every Eurobond and dollars borrowed from multilateral institutions.  The banks that have a net inflow of dollars (like GT Bank) will have an immediate boost to their balance sheet and net income without batting an eyelid.  If memory serves me right, as at a year ago, a 10% devaluation of the naira would generate in excess of a billion naira (five million dollars) extra pre-tax profit for GT Bank in one fiscal year.  What do you think a 60% devaluation will do?  

The leadership of Nigeria has made multiple policy reversals within its first year of power especially as it relates to this massive policy shift on currency devaluation.  The key to a successful anti-inflation policy is CREDIBILITY.  If market participants lack confidence in the long-term anti-inflationary commitment of policy makers, they will reduce their expectations for the future of inflation even if current policy is restrictive.  When policymakers have a past history of  policy reversals, and of saying one thing while doing another, it will be difficult for them to establish credibility.  Thus, restrictive policies that lack credibility often lead to recession and abnormally high rates of unemployment.  Sounds familiar Nigeria?  The British say 'God Save the Queen.'  I say God Save the Nigerian People.             

There is a local saying in Nigeria and neighboring countries: "One man's meat is another man's poison."  The misfortune of the Nigerian people is apparently the glee of foreign investors.    

Tell others to tell others about this Africa Research Blog; the financial/economic truth is here.

                             

                                 The TRUTH will set us free; I will keep TELLING it.

                                            Dialecticafricaanalyst@gmail.com