It’s becoming difficult to define how the Central Bank of Nigeria (CBN) is steering the economy. While the government’s efforts to close all the drainpipes of corruption seem to be generating positive results, the CBN is lagging behind in its fiscal and monetary policies.
The idea to channel government’s cash resources into a single account – the Treasury Single Account (TSA) – has an immediate and long term impact in curtailing waste and misappropriation, but it is becoming harder to actually see economic stimulation.
In the past three months, the nation’s economy looked gloomy and unpredictable. Although this administration cannot be blamed for the colossal waste of Jonathan’s administration, there must be an immediate reprieve for the public. A gradual or systematic approach to changes in government policies is always easier to assimilate with compliance.
The withdrawal of government funds from commercial banks, in any rational country, would force down interest rates that would enhance economic stimulation, but the reverse seems to be the case. If the CBN is ready, as it claims, with intervention scheme funds of N2.02trillion for the various sectors of the economy, how does an entrepreneur access such funds? Does a businessman need to apply for a loan directly to the CBN or through a commercial bank? The process is fussy, cumbersome and merely rhetorical.
Despite pegging it against major foreign currencies, the Naira is losing its value on a weekly basis. One does not have to be a rocket scientist to understand the dynamics of the forex market. The Naira’s true value can only be determined by market forces, not by legislation or an arbitrary policy.
For most of this year, oil prices will stay below $60 per barrel and there is nothing our government or anyone can do to push prices higher. These facts must be entrenched in our budget to avoid pitfalls. Over-dependence on oil is the most critical problem Nigeria has and the diversification from oil to other sectors should come with ease through positive ideas and encouragement, not stiff coercion. This wave of change must come with a united voice of understanding and tolerance.
The liquidity crunch in commercial banks is absolutely unhealthy for our economy. The inter-bank lending rate jumped to nearly 30% as at the close of business on Friday. This cannot in any way support economic growth, if the cost of funds to banks is high. Naturally, borrowers will pay higher premium on borrowed funds, which will have a direct effect on the prices of goods.
While the CBN governor seems happy with Nigeria’s downgraded credit rating, our economic position is so precarious that further downgrading from B to C is highly possible. And, if we hang on to C, the likelihood of plummeting to D position, the worst rating, could further damage our reputation as an unworthy country in terms of international business.
To be self-sufficient we must swiftly depart from depending on oil and concentrate on agriculture and manufacturing (thanks to improvement in electricity supply).
We are at a crossroads of economic revival, but there must be support for Buhari’s government to implement the necessary, critical adjustments in our social behaviour and ultimately, curtail wastage of public funds. These policies must run concurrently with improved cash liquidity in the system to grease the survival rate.
Nigeria is not the only country suffering from the effects of low oil prices. Countries like Venezuela, Algeria, Kuwait and even Saudi Arabia are feeling similar pains. It is estimated that Saudi Arabia burns approximately $2billion a week from its $740billion foreign reserves. With a much smaller population, Saudi stands a better chance of weathering this storm than Nigeria.
Jonathan’s regime was less prudent than the current government and for obvious reasons, the road to economic recovery will be hard to travel. But we must cautiously handle the process to avoid social and economic hardship.
According to the Economist magazine of September 5-11 2015, “For too long, the news from the Middle East has been of nothing but war, terror and revolution. Yet for some countries recent times have quietly been, until very lately, pretty comfortable. A decade of high oil prices has left the region’s oil exporters with more than $2.5 trillion in accumulated sovereign assets along with scads of fancy toys; whole new cities, new highways, railways, factories, ports and airports, not to mention heaving arsenals of the latest weaponry.
“That pile has cushioned them so far against serious fallout from last year’s collapse in global oil prices. Overall, the finances of Middle Eastern oil producers are in far better shape than those of shakier oil rivals such as Venezuela and Nigeria. But with no signs of an end to the world’s current oil glut, fears are mounting of a sustained trough. Behind closed doors and in social media, the talk in the region is of a repeat of the 1980s, a grim era for oil producers when revenues not only crashed, but stayed depressed for nearly 20 years.
“It is impossible to predict that far ahead, and the effects of even a far shorter slump are likely to differ from country to country. Qatar, for example, has so few citizens and so much money that it could, at a pinch, survive for years on income from overseas investments, such as the estimated $10 billion worth of London property. By contrast Algeria, with 40m people, faces a far more immediate squeeze. It ran a trade deficit of $8 billion in the seven months to August (roughly 7% of GDP when annualized) compared with a $4 billion surplus in the same period last year; its currency has lost a quarter of its value against the dollar.
“Algeria also harbours dark memories of that earlier slump. The oil price collapse of the 1980s put an end to the social contract whereby the government provided jobs and generous welfare in exchange for neutered politics. As wages dropped and inflation and unemployment surged, riots erupted, followed by political turmoil and then, during the 1990s, civil war.
“The big Arab Gulf producers, led by Saudi Arabia, ignored the call. They not only have a far larger buffer of savings. They are, in effect, driving the price plunge in pursuit of a long-term strategy. This, too, is based on experience from the 1970s and 1980s. As noted before, oil producers learned then that when the cartel pushed prices too high, consumers rushed to find other sources of energy. As a result, it took OPEC nearly 20 years to regain the market share it eventually lost.
“Yet Saudi Arabia, along with the far richer per-head satellites of Kuwait, the UAE and Qatar, can keep this up for some time. With the world’s lowest debt-to-GDP ratio last year (an enviable 1.6%), it has enormous room to borrow. It also have room to save. Simple measures such as imposing sales and property taxes, or raising absurdly low local energy prices, could quickly help fund budget shortfalls.
“Even so, the wealthiest oil exporters should be worried. They may have learned many lessons from the past, but there is one that remains largely undigested. Despite innumerable warnings and innumerable failed attempts to diversify their economies away from oil, nearly all of them still rely on oil to get by. With relentlessly growing populations and public expectations, it is still only a matter of time before the crunch comes.”
This is a big lesson for Nigeria and it is left for the CBN to encourage investment in other sectors of the economy. Hoarding N2.2trillion in its vault is mere lip-service if businesses cannot access it.
Source quoted: The Economist, September 5-11 2015
The post Nigeria’s Economy: The Perils Of Relying On Oil appeared first on Nigerian News from Leadership News.