As Nigeria heads towards a decisive election in 2023, much of the attention is on the candidates and political parties and the intrigue between the two. Nigerians know little of the imminent danger facing their economy.
The Nigerian currency is facing the worst devaluation in its history as Nigerians shun their local currencies. There are now competing dollar queues in Nigerian banking halls. Nigerians are rushing to open dollar accounts and convert their savings into dollars.
People prefer to store their money in dollars than in naira because keeping the dollar alone is now a lucrative investment due to the continued devaluation of the naira. The growing demand for dollar increases the supply of Naira and therefore its devaluation continues.
Most of the demand for dollars is not for trading but for speculative purposes. Hoarding the dollar and waiting for it to increase in value to sell it is disastrous and betrayal economically.
Dollar hoarding and speculation increase the supply of Naira in circulation and further fuel inflation. Already, headline inflation hits 16% in the first quarter of 2022. More naira in circulation will raise inflation to over 20%. As the 2023 election season has begun, politicians’ election and campaign spending will fuel inflation even further.
The naira is losing value in the eyes of Nigerians, and that is why it will continue to deteriorate. Some hotels, owners and schools in Nigeria charge in dollars instead of Naira.
Exchanging local goods and services for dollars is the surefire way to total economic collapse. Even government transactions and expenditures are also in dollars. These created huge demand and scarcity in dollars and drove up its value, which in April 2022 stood at 590 naira in the parallel market.
Foreign investors are now finding it difficult to repatriate their income from Nigeria in foreign currency. Some international airlines have complained of their inability to repatriate dollar revenues, which has forced them to now sell tickets only in dollars. This development will further increase the demand for dollars and the oversupply of naira and further devalue the naira.
The continued devaluation of the naira is putting enormous pressure on Nigeria’s foreign exchange reserve, which was estimated to be around $40 billion in February 2022. The fixed peg exchange rate policy accentuates the depletion of the foreign exchange reserve.
Sometimes authorities may not be open about depleting reserves to protect the integrity of the economy. However, if the effect explodes, it will be catastrophic.
The rising cost of the dollar peg will soon become unbearable. However, the liberalization of the exchange rate market will increase the dollar value to around 1,000 naira or more. This will lead to hyperinflation, increased unemployment and capital flight. This is the trap in which Nigeria has found itself.
Investors are already avoiding Nigeria due to fluctuating and unreliable exchange rate policies. Existing investors are already considering divesting. Foreign direct investment inflows are at their lowest in a decade. The main source of foreign exchange in Nigeria is the sale of crude oil and this is also decreasing due to the crude oil trading system.
Investment analysts have pointed to the serious social, market and political risks associated with investing in Nigeria. These range from insecurity, poor infrastructure and government interventions to political unrest and instability.
These risks nearly caused a collapse in the country’s non-oil exports, leaving the economy highly susceptible to oil market volatilities. It also makes imports sensitive to exchange rate fluctuations and foreign inflation.
Local manufacturers struggle to acquire expensive dollars to import capital and inputs. These are the conditions for hyperinflation, a severe economic crisis that could destroy the Naira. Once the value of the Naira collapses, the Nigerian economy also collapses.
With the increase in capital flight, imports, borrowing and the budget deficit, one can only wait for the inevitable explosion.
Very soon, the Nigerian government may become unable to fix the value of the dollar, and once that happens, the worst disaster will befall the Naira. The collapse of the naira will demolish the purchasing power of people’s incomes and usher in more hunger and poverty. Once that happens, total anarchy will set in.
However, the impending agony above can be averted by taking some decisive action. First, the Central Bank of Nigeria (CBN) needs to be tamed to catch excesses and effectively manage exchange rate policy through transparency and fairness.
The CBN must meet the demand of foreign investors and airlines to enable them to easily repatriate their foreign currency earnings. This will build investor confidence by having guaranteed liquidity of their returns in the desired currency.
The wasteful dumping and selling of dollars must stop. There should be further reforms to discourage the trading of physical dollars in the country. The government should set a maximum target for the use of dollars for official activities and transactions.
The government should minimize the need for dollars in its transactions. We need to add value to our locally made products and services to increase the supply of foreign exchange through exports. Citizens must be made aware of the importance of valuing the local currency and the danger of saving or carrying out local transactions in dollars.
In order for us to manage our economy, we need to manage inflation and restore confidence in the naira and this can only be done through economic reforms such as import substitutions, foreign exchange reforms and investment in infrastructure .
We need to develop our major mineral resources and build the agricultural value chain for exports and attract foreign exchange. Foreign investors can only come if we can strategically address the social, economic and political risks in the country.
The next administration has the herculean task of first saving the ailing economy before rebuilding it. This is why the focus should be on the candidate who understands economics and solutions. Otherwise, we will all be doomed and fall into serious economic crises like what happened in Asia in 1997, in Zimbabwe in 2008 and recently in Sri Lanka.
The 2023 election is not just a joint election between parties, it is a decision on the fate of our economy and by extension our survival. Therefore, it is not about one region, one party or one ethnicity, it is about the vision that could reverse the current chaos.
Adamu is an oil economist and can be contacted ([email protected] (@AhmedAdamu)