Nigeria’s economy is something of an enigma. It has presented a case study to the monetary and fiscal policy advisors in the International Monetary Fund (IMF) and the World Bank.
Africa’s largest economy is deep in recession, but inflation is surging. It is a strange phenomenon. Inflation is fueled by excess liquidity and high demand for goods and services. Recession follows cash crunch
and low demand. Nigeria is broke, yet inflation is surging.
The Central Bank of Nigeria (CBN) and the federal government disagree on which of the two monsters to take out first. The CBN fights inflation with excruciating liquidity squeeze. Government fights recession with expansionary fiscal policy.
The CBN liquidity squeeze mops up the funds from the expansionary fiscal policy and deepens recession.
The federal government believes that one can only spend out of recession as it is impossible to save out of it. The CBN on the other hand believes that liquidity squeeze would halt the naira’s tumbling value, tame inflation and start the economy on the path of growth. That explains why monetary policy rate (MPR) stands at 14 per cent at a time when spending should be stimulated.
The CBN policy is a deadly friendly fire against government’s tactics of fighting recession with conventional economic strategy. Nigeria’s inflation is not pushed by demand. Demand for everything has tumbled drastically with prevailing cash crunch. That explains why the economy is in recession. Inflation is pushed by cost. The naira’s tumbling value against the dollar drives inflation. Few Nigerians have access to the green back. However, even peasant farmers processing palm oil in Nigeria’s impoverished rural communities know the movement of the naira against the dollar. They hike prices accordingly as the naira tumbles against the dollar.
Twenty litres of palm oil now sells for N15, 000 in rural Nigeria even with the season’s bumper harvest of palm fruits. That quantity of palm oil sold for N7, 000 before the CBN introduced its flexible exchange rate that saw the official exchange rate of the naira plummeting from N197 to N312 to the dollar.
The dollar, not demand, is the invisible hand on the price mechanism of goods and services in Nigeria. The rural dweller would rather watch his banana rot away than sell it at affordable price. The simple reason for the profiteering price tag is that the dollar has firmed up against the naira.
Ironically Nigerians have developed home-grown solutions to the dollar crunch.
There are about six exchange rates in the economy at the moment. There is an official rate which hovers around N305 to the dollar. That is the rate the federal government used to calculate the match bonuses and allowances of the victorious Super Falcons. The ladies are protesting that they have been short-changed. They expected N7.1 million but were paid N4.3 million due to exchange rate variation. There is also the inter-bank rate. Western Union and other channels for sending hard currency to Nigeria have their own rate. The parallel market and bureau de change operate two different rates. The federal government has a rate it sells dollars to fuel marketers for the importation of petrol.
The most ingenious exchange rate is operated by Nigerians in Diaspora. It is derisively tagged “one-on-one”. Unlike Venezuelans who are waiting for their government to fix their collapsing currency, Nigerians are battling their way out of the forex crisis.
Goods are imported into Nigeria under the “one-on-one” exchange rate without any currency leaving the shores of the exporting or importing country.
Nigerian business men travel abroad and link up with other Nigerians in the country they want to import goods from. They negotiate the exchange rate for funding the proposed imports. The Nigerian in Diaspora gives the one at home the rate at which he would sell forex for the import and pays for the goods. The Nigerian importer gets home and pays the naira equivalent of the import into the bank account of the Nigerian in Diaspora at the agreed exchange rate. The dollar does not leave the shores of the exporting country. The naira does not leave the shores of Nigeria. Only goods change destinations. Exchange rate in the “one-on-one” window gyrates with the bargaining power of the seller and buyer. Due to bargaining power variation, no two “one-on-one” transactions are carried out at the same exchange rate.
Monetary economist might have to go back to the drawing board to re-invigorate the rules governing foreign exchange transactions when Nigeria’s economy labours its way out of recession. They would have learnt a few lessons from the ingenious survival instinct of Nigerians.
There are strong indications that the economy is inching its way out of recession. Trade figures are rising despite the forex crunch. Inflation rate is slowing down. Even the Federal Bureau of Statistics (FBS) is convinced that recession is petering out. The IMF projection is that Nigeria’s economy would grow by 0.4 per cent in 2017. If that happens, part of the credit for the quick journey out of recession would go to “one-on-one” exchange rate. It contributed in its own little way to ease the merciless grip of the dollar on Nigeria’s economy.
Government fights recession with expansionary fiscal policy. The CBN liquidity squeeze mops up the funds from the expansionary fiscal policy and deepens recession.
