The economy and Pandora’s Box By Henry Boyo

In popular Greek mythology, “Pandora’s Box was actually a large jar given to Pandora by the gods, the box contained all the evils of the World, and when Pandora opened the box, all the evils flew out, leaving only hope inside when she closed it again” (paraphrased from Wikipedia). •Pandora’s Box “Poverty will clearly deepen nationwide and severe level of unemployment will persist with serious social consequences, if the preferred strategy for rescuing our economy implies further Naira devaluation and outright deregulation of fuel price, as recommended by the IMF and other likeminded experts. (see “Devalue Naira, Remove Subsidy and Kill Nigerians” Rational perspectives: 02/11/2015 www.lesleba.com).

Incidentally, the dreaded twin evils of Naira devaluation and deregulated fuel price are presently widely celebrated as right steps towards economic restoration and diversification; thus, with the evolving policy thrusts, Nigeria moved closer to IMF’s recommendations. However, international financial media and Banking moguls, and their Nigerian associates and partners, still insist on a steeper slide in the Naira exchange rate and a further hike also in fuel price to reflect market forces of demand and supply. The advocates of these harsh policy thrusts, often boisterously warn of dire social and economic consequences, if we do not fast track bastardization of the Naira and further pump up fuel price.

Unfortunately, the unfolding trends instigated by government’s concessions on Naira and fuel prices, do not auger well, as rising prices for food, transport and other basic needs have begun to stoke inflation beyond the already, very disenabling rate of about 13%, to deplete purchasing power of all income earners. Nonetheless, despite the inevitably, reduced consumer demand and industrial contraction, employers of Labour are persistently confronted with demands for higher wages to cushion the harsh economic realities. It would, however, be clearly unconscionable, to defend N18,000 ($65) as an appropriate minimum wage, if Naira exchange rate hovers between N280-300/$, as currently speculated, under CBN’s proposed flexible exchange rate model. Conversely, there is an orchestrated call for patience, with ceaseless assurances from advocates of a weaker Naira and fuel price deregulation, that progressive change will come. Nigerians, recall that similar soothing calls and assurances preceded the suicidal IMF inspired SAP devaluations, which devastated our industrial landscape; we also bear witness to devaluation’s instigation of higher fuel prices which decimated our lifestyles and values and ultimately induced the horrendous brain drain.

Understandably, industrial production and the Nigerian economy, as a whole, have never recovered from the devastation SAP caused. Unfortunately, the relationship between Naira Exchange rate and fuel price seem to have surprisingly eluded Nigeria’s policy makers. However, ‘perverse’ critics may suggest that the mute official denial of this relationship is deliberate and actually sets the stage for state condoned corruption and liberal rent seeking opportunities. However, it cannot be denied that vast fortunes have been made by bankers and their associates in the public and private sectors, from a price mechanism and forex market that discourages inclusive growth, but aggressively, conversely promotes the interest of a small rentier class.

The result is clearly evident in our country, as liberal forex supply and inappropriately contrived regular CBN dollar auctions actively promote currency racketeering, round tripping, money laundering and also fund most of the smuggled imports, which cause considerable damage to the growth of Nigeria’s industrial base and significant revenue loss also to government from duty and tax evasion. The fuel subsidy policy, evidently led to serious malpractices and huge leakages from the Treasury for several years, but this programme was sustained without remedial modification until subsidy values rose astronomically beyond 20% of federal budgets between 2011-2012! Clearly, government cannot still be in denial that lower Naira exchange rates will invariably instigate higher fuel prices and provoke public demand for some relief.

Historically, government would first devalue the Naira, and then belatedly recognize the adverse impact on fuel price! For example, the most recent increase in pump price to N145/litre was certainly not caused by prevailing depressed crude oil prices below $50/barrel! Indeed, it is rather surreal that while Nigerians currently groan under the burden of higher fuel prices, motorists abroad happily enjoy up to 50% drop in the pump price of fuel, because of low crude oil prices! It is similarly inexplicable, that higher crude prices and the related increasing dollar revenue should challenge the Naira exchange rate, and also pump up fuel prices; sadly, this is an unusual case of heads they win and tails we lose!

The question, is whether or not the economy is gradually been primed to take off as we are encouraged to believe by financial experts and bankers by the hike in petrol prices to N145/litre and the concurrent notice of a flexible exchange rate model which would further devalue the Naira. Nonetheless, the N145/litre fuel price may have been designed to take advantage of low crude prices and wipe out fuel subsidy, with Naira exchange rate of N197/$. However, the NNPC GMD’s recent suggestion that, henceforth, funds for fuel import would be sourced at N280/$1, may imply that fuel price will invariably rapidly approach N200/litre, and trigger serious inflationary consequences.

Furthermore, with the present collateral spike from about N125/litre to about N180/litre for diesel (AGO), the heavy cost burden of internal power generation borne by industrialists, may exceed 20% of total production cost, and invariably subdue competitiveness of Nigerian products. It is not yet clear what concessions will accrue to manufacturers with the proposed flexible exchange system, but it is possible that any such gain would be consumed by the higher cost of diesel for powering our factories and commercial establishments. Thus, if N280/$ is designated for very critical imports like fuel, it is unlikely that industrial raw material imports will be supported with cheaper dollar rates.

Consequently, the early impact of a weaker Naira and deregulated fuel price do not suggest that there is any opportunity for the Nigerian economy to turn the corner soon, despite passionate calls for more patience from advocates of the twin evils of devaluation and subsidy removal. Surely, so long as CBN continues its auctions of dollar rations in a market which is undeniably awash with Naira liquidity, the parallel market exchange rate will not collapse nearer the official rate as expected, anytime soon. In this event, parallel market exchange rates will remain as the tail wagging the official rate, as perennially surplus Naira will further dispel confidence in holding Naira, and reduce its market patronage as a safe store of value. Ultimately, the odious, regressive impulsive cycle of further devaluation and higher fuel prices will persist to finally lay the economy and its people prostrate, while we wait endlessly on hope.