With the reforms embarked upon by the administration of President Bola Tinubu in the financial and petroleum sectors, the naira is set to return to its glory days. Before May 29, 2023, everyone knew that the nation’s financial sector needed immediate surgical reform in order for the country not to go bankrupt.
However, immediately Tinubu was sworn in, his administration started a surgical economic move such as ending the decades-long fuel subsidies that have favoured the rich (though, the decision has more than doubled the price of Premium Motor Spirit, causing a sharp spike in the prices of food and other essential commodities). The subsidy removal was supported by a majority of Nigerians.
Nigerians believe that fuel subsidy benefits only the rich while the poorest of the poor benefit nothing from the government bazaar and in the long run, the policy is killing the nation’s economy because fuel subsidy payment diverts part of the resource for developmental purposes towards consumption.
Hence, the resources that should have gone into infrastructure, education, health, and security with positive externalities are going into consumption.
The ever-growing fuel subsidy bills also continue to hit deep into government resources. With revenue shortage, fuel subsidy payment means the government will need to borrow to invest in other aspects of governance.
Another policy was the floating of the naira (unification of exchange rate). For many years, the financial sector has been calling for the reform of Nigeria’s Forex market that will engender liquidity and price discovery.
A liquid and transparent Forex market is a key requirement for capital formation and economic growth in every economy. Sadly, in the last couple of years, Nigeria faced a major Forex crisis which stifled economic growth and dented investor confidence.
On June 8, 2023, the Central Bank of Nigeria announced the collapse of all Forex windows into the Nigerian Autonomous Foreign Exchange Market with the removal of the hard peg on naira trading within the official market. The foreign exchange market became liberated, paving the way for willing buyers and willing sellers.
These two reforms- fuel subsidy removal and unification of exchange rate – though painful, have not only helped the nation stand on its feet economically, they have also saved the nation several billions of naira that were, hitherto, going into private pockets.
These few private individuals who were allegedly smiling to the banks, maintaining huge account balances while the masses were being pushed further down into the poverty line daily, lost the privileges they once enjoyed and sanity was restored to the petroleum and financial sectors.
For instance, after the reform of the forex market, the devaluation and unification brought an end to the multiple foreign exchange markets and rates, which have disincentivised business activities and deterred foreign investments.
Also, multiple exchange rates, hitherto, used have been a source of confusion for investors. When they bring in funds at the official exchange rate and can only repatriate their earnings at the black-market rate, they make conversion losses on their investments. Investors recognise that a unified exchange rate would help alleviate these problems and improve the ease of doing business in Nigeria.
Unifying the exchange rates would help prop up investors’ confidence in the Nigerian markets because Nigeria has been struggling to attract foreign direct investment in the last few years, with investment falling by as much as 90 per cent since 2008 but with the foreign exchange unification, an improvement would likely be noticeable within several months and steadily gain traction beyond that.
This is because FX challenges are top of mind for multinational companies bringing FDI into Nigeria.
“The exchange rate is expected to improve in no distant time because countries such as the United States, Australia, Canada, Japan, Chile, and Mexico, which have liberalised their foreign exchange market, have enjoyed better exchange rates and economy today”
Their inability to repatriate earnings in full has kept FDI below its potential, with inflows to smaller neighbours like Ghana outpacing Nigeria’s in recent years. Also, FX has been a key problem driving a handful of companies to divest in recent years.
However, the move of the CBN to clear backlogs is also yielding positive results because investors would like to see an improved level of forex liquidity and positive market signaling to fully accept Nigeria as the alluring investment destination it once was. This is because Nigeria remains a potential investment haven. The strong, youthful population and the diversified nature of its economy with various untapped natural resources make Nigeria an attractive economy cum investment opportunity. Many sectors within the country are in their infancy, suggesting that there is room for much growth. Nigeria’s per capita consumption of so many items underscores the huge investment potential there is.
However, it is a no-brainer that the two reforms have ended sleaze and analysts have applauded Tinubu’s reform, saying the economic policies introduced to cushion the effect on the citizens would reposition the economy and in the long run, make the value of the naira stronger as well as returned it to its glory days. The economic policies, as reeled out by the president, signal that the Federal Government is working closely with state and local governments to implement interventions that will cushion the pains.
Some of the interventions include the provision of N1bn ($1.16m) credit to each of 75 manufacturing companies over the next year and the provision of N125bn ($145m) in the form of grants and loans to small, medium-sized enterprises and other businesses in the informal sector.
The government also ordered the release of 200,000 metric tons of grains to households across the country to help stabilise the price of food while 225,000 metric tons of fertilisers, seedlings and other inputs are being provided to farmers. At least N200bn ($232m) would also be invested in agriculture to boost farming.
The Federal Government is also negotiating a new salary structure with civil servants. However, there is no gain saying to the fact that with these reforms, Nigeria’s foreign exchange market will perform better as global indices have shown that things will improve.
Also, the exchange rate is expected to improve in no distant time because countries such as the United States, Australia, Canada, Japan, Chile, and Mexico, which have liberalised their foreign exchange market, have enjoyed better exchange rates and economy today.
Lastly, though the steps taken by Tinubu and the CBN may be inconvenient in terms of the fluctuation, it is believed that it will stabilise and get better because countries that have chosen this route before now have done better on average in the long run.
Yusuf writes via abiolayusuf865@gmail.com
