This economic mess we are in

The nation’s GDP grew by 5.4 percent last year, and is projected to expand by at least 7 percent in 2014, a trend that has understandably generated tremendous interest among investors globally. But all is not well and we may be heading for a fiscal crisis and currency devaluation sooner than Okonjo-Iweala can spell b-u-d-g-e-t. […]

The nation’s GDP grew by 5.4 percent last year, and is projected to expand by at least 7 percent in 2014, a trend that has understandably generated tremendous interest among investors globally. But all is not well and we may be heading for a fiscal crisis and currency devaluation sooner than Okonjo-Iweala can spell b-u-d-g-e-t. This alarm is being raised because following the recent sharp drop in global oil prices we are likely to face both a fall in the value of the Naira, and serious budget shortfalls, just as we are gearing up for what would likely be a closely fought and expensive presidential election in February 2015.
The problem lies in the way our economy is being managed, or mismanaged. To grasp the cause of this threat we need to remember two simple facts; our main foreign exchange earnings, over 96 percent of it, come from oil and natural gas, and secondly, these two account for 80 percent of government revenue. If properly managed, even these disturbing dependencies may not be terribly bad. But good management is precisely what this government seems to lack.
It is not difficult to understand the existing arrangements. In a nutshell, this is what happens: All the foreign exchange we earn gets paid to the Central Bank. It exchanges these to naira and pays into the Federation Account from where all tiers of government subsequently get allocation, after deducting what is over and above the budget benchmark which goes into an Excess Crude Account. After giving us all our shares in naira, the dollars go into our foreign reserves, to be used to pay debts, finance the imports of goods and services for both public works and private (mostly business) needs.
This explains why the CBN is the main source of foreign exchange (to those who need it, and have the naira to pay it). But, at what rate should they sell, and how? For the last couple of years the rate is officially around N155 to the dollar, give or take 3 percent. Reports have it that last September alone $3.1 billion was spent by the CBN to prop up the naira, and the pressure is still on. At some point last week, the US dollar was selling at N172, well above this band, because there were far too many naira seeking conversion to dollars (and other foreign currencies) for many reasons, not the least of which was massive transfers related to preparations for 2015 elections. A more pressing concern is the tumbling oil prices which would likely hit us hard, making it difficult for the CBN to continue supporting the Naira at its’ preferred rate.
Hardly any analyst anticipates Brent recovering to over $100 per barrel, with most expecting it to be in the low $90s for most of 2015. An OPEC production cut also seems unlikely. We may have to adjust to the new climate. This should not have been a serious problem for us because, in theory at least, we have been saving money over the benchmark price in our Excess Crude Account (ECA), to build up a buffer that we can be run down during price shocks. Yet while the ECA had about $11.5 billion some two years ago, it had been drained to as low as $2.5 billion by last January, before it rose to $4 billion last September, even while oil prices were well above the budget benchmark. Our foreign reserves also fell significantly from a peak of $48.9 billion in May 2013 to just $36 billion in June, though they have since rebounded slightly. But while Russia’s foreign currency reserve stood at $454 billion as of the end of September, for example, Nigeria’s ability to intervene is much more problematic in comparison for we have refused to save for such eventualities. This 28 percent oil price drop, from its peak in June, has hit Nigeria more than any other country. If these low prices continue we could soon gobble up all our reserves. We may have nothing to buoy up the naira, or finance our budget spending
So, do we allow market demands to push the naira down to its “true” value? What should be its value right now, and how low can it really fall if the CBN stops propping it up? Allowing it to collapse due to market pressure has many risks especially for a government that is facing re-election in three months time. However, what would happen after March 2015?
Whoever wins the coming elections would have to address this issue; we must find ways to increase foreign exchange earnings, or reduce demand for foreign currency. Or try to do both.
Since oil account for only 14 percent of our gross domestic product, we clearly still have many other things to export if we can improve their quality and presentation, and many more we are yet to develop. We must also reduce our dependence on imported food, apparel, and second-hand products of all sorts. Another area is reducing demand for machine spares and raw materials. Our schools and hospitals should be revamped and modernised to save the billions we spent abroad on these every year. We must look inwards as a deliberate state policy.
A more direct approach to increasing foreign exchange earnings would be to engage the Navy in a war against oil theft, said to be about 100,000 to 150,000 barrels per day since the first quarter of 2013, beside the oil output deferred during shutdowns to fix sabotaged pipelines. These outages, coupled with lower oil prices, reportedly caused government revenues to fall 16.5 percent in September. Some have estimated that we are losing an estimated $35 million a day to oil thieves. These oil thieves are known and the Navy cannot claim to be too busy fighting Boko Haram. It should go after them. But then they may be too close to the ruling party to be brought to book any time soon.
As for the fiscal mess, that may be more difficult to fix. Up to this moment, with just weeks to the end of the year, neither the Government nor the National Assembly is bothering with any Budget for 2015. They never respect whatever a budget contains anyway, nor read any law regarding fiscal prudence, accountability or due process. So we can expect more GDP growth and little or no real impact on the citizens, with only those close to the Government smiling all the way to their banks abroad. For those who still don’t know, transformation is spelt in Dollars, not Naira. So cheap Naira means your Dollar can buy more. Simple.