Jide Akintunde, Managing Editor/CEO, Financial Nigeria International Limited
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Subjects of Interest
- Financial Market
- Fiscal Policy
Can the naira become strong again? 29 Nov 2023
An illustrative chart of the naira
From 29 May 2023 when President Bola Tinubu assumed office, to the end of October this year, the naira had depreciated in the official market by 97.10 percent. Last month alone, the currency depreciated against the US dollar by more than 20 percent at the parallel market before closing at around N1,180/$1.
To the nation and its economic policy-makers, this precipitous weakening of the naira has become the major worry for the economy. But the strength of the economy was not affirmed when in recent years the naira was more than six times stronger than its current value. This means the underlining weakness of the economy lies elsewhere. The depreciation of the naira is not only a symptom of what would be the country’s fundamental economic weakness, but the anxiety it is causing policymakers also indicates they are confusing the issues.
A maze of economic indicators
There are a multitude of indicators of economic performance and no one country leads on all of them. The best-performing economies on one indicator may not be highly ranked on some other indicators. For instance, the gross domestic product (GDP) measures the financial value of a country’s total economic output in a year. In nominal GDP terms (i.e., total output value without accounting for inflation), the United States is by far the biggest world’s economy. With a GDP of $25.5 trillion in 2022, the US accounted for 25.3 percent of global output, according to Worldometers.info.
This data suggests the US has an outsized proportion of the world’s economic output and it is true. But when we consider GDP per capita, which is derived by dividing total output value by the total population, the US is not among the top five countries on the global ranking for the indicator. Countries with much higher GDP per capita than the US ($75,269) include Luxemburg (127,046), Norway (106,594), Ireland (105,362), Switzerland (92,410), and Qatar (88,046). GDP per capital provides a clearer indication of the welfare of citizens of countries than GDP.
In recent years, happiness economics has broadened the considerations for people’s overall wellbeing. Community vitality, time use, standard of living, ecological resilience, cultural diversity, health, good governance, and psychological well-being are factors surveyed for the Gross National Happiness index. According to the 2023 World Happiness Report, the top 10 happiest countries are Finland, Denmark, Iceland, Israel, Netherlands, Sweden, Norway, Switzerland, Luxembourg, and New Zealand.
Achieving high economic performance requires a strategic intent. Countries that have national strategies for economic performance and execute them consistently tend to have higher level of achievements. For instance, Japan, China, Germany, and South Korea have pursued export-led economic growth strategies for more than five decades. Such countries tend to accumulate current account surpluses, which means they have more exports and incoming payments than imports and outgoing payments, to future-proof their economies. According to IMF data, countries with the highest current account surpluses in 2023 include China ($271 billion), Germany ($266 billion), Norway ($143 billion), Japan ($141 billion), Netherlands ($83 billion), Switzerland ($73 billion), Saudi Arabia ($64 billion), and Russia ($63 billion).
Despite its technological advancement in the production of economic goods, the US has the world’s largest current account deficit, at $795 billion in 2023, and followed by the United Kingdom ($122 billion), India ($67 billion), and Brazil ($41 billion). The countries’ exports and incoming payments are less than their imports and outgoing payments.
The relative strength of an economy is also indicated by its currency. Nevertheless, the exchange rate of a currency may diverge from the overall global competitiveness of the issuing economy. The currencies that have been historically stronger than the US dollar – the world’s dominant reserve currency – include the pound sterling, euro, and Swiss franc. In 2023, the world’s strongest currencies are those of some tiny economies, led by Kuwaiti dinar, Bahrain dinar, and Omani rial. In a competitive global economic arena, if a country’s currency is very strong, its exports will be quite expensive, except it deploys one or more anticompetition tactics including dumping and production subsidies. Generally, countries that rely on the exportation of value-added products would rather the value of their currencies are at best relatively strong.
The list of the quantitative and qualitative economic indicators is inexhaustive. But still in the context of the current economic anxieties in Nigeria, it is pertinent to discuss public debt. It is agreed that public debt can be good, if it contributes to raising the economic output and welfare of the people. The US is the world’s largest debtor country. Countries with very high debt-to-GDP ratios are also not necessarily in financial or economic distress. Japan, Singapore, and the United States have debt-to-GDP ratios of 261 percent, 134 percent, and 121 percent, respectively. But the metric could be a tell-tail sign of a present or recent economic woes. Greece, which in recent years needed a financial bailout from multilateral creditors, has a debt-to-GDP ratio of 177%. An economy that has been crisis-ridden for decades, Venezuela has a debt-to-GDP ratio of 158%.
Public debt can indeed become distressful if it is growing too fast, especially above the real GDP growth rate, and if debt service costs absorb a greater proportion of government revenue, therefore stifling investment in public goods. These conditions are present in the Nigerian situation and make the country’s debt a valid concern. Whereas the public debt grew at a yearly average rate of 52.4 percent between 2016 and 2022, the GDP grew at below 2 percent in this period. In 2022, debt service cost exceeded government revenue.
However, there is an important differentiation to be made between the debt situation and the ongoing slide in the value of the naira. The government can directly manage the debt level, but the exchange rate is largely determined by the forces of demand and supply.
Given that the value of a currency is mostly determined by market forces, what should policymakers do about the downward spiral in the value of the naira? For effectiveness, their interventions should be stronger either on the supply or demand side, depending on which one the government can better control. For years, the government has prioritised the supply side by including oil production and oil price benchmarks as anchor items in the annual budget. They have done this despite the limited contributions that revenue from crude oil export can make to the overall economic performance of the country and the welfare of its teeming population. The effect is that oil revenue has continued to account for over 90 percent of government’s external earnings and disproportionately high percentages of the overall public revenue.
In line with the focus on managing the supply side of the foreign exchange market, the government decided to float the naira this past June. As the naira started to depreciate quite sharply, a $3 billion facility from Afreximbank was procured to improve dollar liquidity in the market. The President Tinubu administration is now planning to source foreign loans of around $15 billion in total, apart from trying to increase the country’s crude oil export, to stabilise the value of the naira and fund recurrent and capital public expenditures.
However, the point should also be made that the current and past administrations have also deployed demand management strategies to support the value of the naira and the economy. But the strategies tend to be subsidiary – or secondary – to the supply strategy and are largely ineffective and inconsistent. One of such demand management strategies restricted importers from accessing the official foreign exchange market for the importation of some 43 intermediate and finished goods. After eight years of implementing the ban, access to official forex market was restored for the importation of the items last month in the hope that it would shift demand from the parallel market to the official market. The impact of the decision has been negative. In the short-term, it is probably contributing to the sharp depreciation in the naira’s official exchange rate.
There is no strategic measure that the current administration has taken or is considering taking that is new, from wanting to boost oil production, taking foreign loans, taking dollar loans against future oil export proceeds, and micro-managing access to foreign exchange by domestic producers and consumers. It leaves one wondering how long policymakers would remain on this beaten path to economic despair.
The fitting goals of a well-reasoned economic reform agenda in Nigeria should be to increase domestic production very quickly and foster productivity growth over the long-term. At the early stage of implementing such a strategy, domestic food production to end hunger should be prioritised. Hunger dehumanises and deprives people of their dignity. It also inhibits productive engagement of manpower and makes people to behave in ways that cause social and environmental harms to a country.
Many countries prioritise food security because it is important for maintaining internal security and stability. Since the 17th century, the world has witnessed many food riots, including the 1918 rice riot in Japan, which brought about the collapse of the administration of Prime Minister Terauchi Masatake. There have been signs of a likely outbreak of a food riot in Nigeria as the problem of hunger continues to escalate. For decades, and during the now-dreaded EndSARS riot in 2020, political riots have quickly morphed into looting of food stores and shopping malls. EndSARS provided a bitter foretaste of the difficulty in containing such riots without resorting to using lethal military force against civilian citizens.
Nigeria has the vital resources for pursuing internal food security, including arable land and manpower. According to Statista, 148 million people are employed in India’s agriculture this year. About this absolute number of people are employed in the sector in Nigeria, despite India having more than six times the size of the Nigerian population. While this indicates that productivity in Nigeria’s agriculture is low, it nevertheless shows that the human resource input to lift output in the sector is present in the country. Similarly, Nigeria ranks amongst the top 10 countries in the world on available arable land. With a total of 344,577 km2, Nigeria has 2.19% of the world's total arable land.
Inherent in a productive strategy for the country should be productivity growth. Productivity growth refers to an increase in the value of outputs produced for a given level of inputs over a given period of time. It entails deliberate efforts to increase output value for a given input. Achieving productivity growth is vital to increasing standard of life. According to US Bureau of Labour Statistics, productivity growth reduces inflationary pressure on prices. If this is pursued and achieved in Nigeria’s agriculture, it would be the end of high inflation in the country, as food inflation is more elevated that the overall consumer price index.
According to researchers at the Brookings Institution, there are four ways to speed up productivity growth: more competition, better skills, smarter R&D funding, and focus on low-hanging fruit. To access export markets for products and services – as opposed to raw commodities – a country must be able to favourably compete against the local producers and other imported brands in export markets. It is for the purpose of achieving external competitiveness that the government has set up export processing zones and supported the establishment of private ones. There is a need to strengthen the operations of the free trade zones and boost export credit granting amongst other mechanisms to increase export production in the country.
Shortage of skills is a major impediment to productivity growth in the country and needs to be addressed. At one level, the problem reflects the poor quality of education and training in the country. At another level, it indicates the embrace of mediocrity, whereby we don’t push ourselves beyond the basics of job performance. It would require a culture change to address this challenge, from the top to the bottom hierarchies of public and private enterprise.
With regard to investment in R&D, the country has arguably neglected it. Our journey to smarter R&D funding should restart by dramatically increasing funding for science and technology education and prioritising R&D investment. A commitment to this will over time make us smarter in making such investments.
With regard to focusing on low-hanging fruits, our agriculture constitutes such, in addition to solid minerals, ICT, and entertainments. Even if without the strategic construct that is proposed here, it is gratifying that the Tinubu administration has prioritised solid mineral development and the ICT/innovation economy.
Increasing production is more of a short- to medium-term strategy. Achieving productivity growth is long-term in outlook. The first would address hunger and mitigate internal insecurity threats. The second would not only make locally-produced products and services more attractive in the country but also ensure the country would be able to compete in export markets. None of the two requires a fixation on the exchange rate for now. Indeed, by the time the country is ready to become a major player in export markets, a relative weakness of the naira would be a supportive factor while improved external incomes generated would moderate such weakness.
Leading the economy
There is no chance of achieving a high level of economic performance without a political vision. In Nigeria’s presidential system, the president is in the best place to provide the national economic vision. But on this, President Tinubu has yet to convince many citizens beyond his partisan observers. During the campaign season for the February 2023 election, Tinubu made it clear that his administration would implement market-leaning policies. But the market policies that his administration has introduced (floatation of the naira and removal of petrol subsidy) in an unproductive economy are on course to further undermine its productivity.
The sheer economic disorder the naira policy and subsidy removal has created is now making the President somewhat ideologically insecure. To counter the untold hardship his policies have imposed on the people, he has announced various programmes that would amount to the highest spending on social security within a year in the history of the country. And ironically, like his predecessor President Muhammadu Buhari did because of his socialist orientation, public investment is set to play a dominant role in the Nigerian economy under President Tinubu. He is having to opt for an assortment of domestic and foreign loans to drive investment in the economy.
But in fairness to him, the President has hardly been able to settle down since his inauguration. Apart from being spooked by the unforeseen impacts of his policies, his political opponents have been out to cause him maximum damage by challenging his eligibility in the presidential election and emergence as the winner all the way to the Supreme Court. If he is confirmed as the valid winner of the election by the apex court, he is expected to be able to focus more on his economic agenda for the country and get broader local and international support.
But there are other factors that would enhance the credibility of his leadership and support of his policies. First, he should disavow the attempts to project his administration over the next eight years. If he and his supporters continue to prematurely insinuate a second term for him, he would inadvertently be denying himself any respite from political attacks and avoidable distractions. This is not to deny him his constitutional right to seek a second term in office in 2027, but he would be undercutting himself by inadvertently shortening the electoral cycle.
Second, President Tinubu needs to make concerted efforts to connect with Nigerians and offer an olive branch to his civic opposition. To do this, he needs to humanise himself and acknowledge that the election that brought him into office was, indeed, controversial. In doing this, he would be following the good example of President Umaru Yar’Adua, who went on to set up a committee to recommend reforms to address the flaws in the election that brought him to power.
Third, the President should reappraise his cabinet, in terms of size, gender representation, and technocratic competence. The cabinet of 48 ministers is heavy in number but light in the vital areas that can help the government to gain popular support and succeed. The impending review of the performance of his ministers after their first six months in office offers an early opportunity to correct the wrongs in the headship of government ministries, departments, and agencies.
Fourth, with a more competent cabinet, the government should take a more holistic look at its reform agenda with the view of finetuning it – or improving its implementation. Such efforts should benefit from wider consultations with independent economic and governance experts. While the pivot towards market policy should be maintained because Nigerians are entrepreneurial, the idea of inevitable short-term hardship in the reform process should be jettisoned. It reflects the discredited mindset of the IMF in offering its programmes in developing countries.
Finally, the government needs to set well-informed priorities. This includes boosting domestic production in order to raise the welfare of the people and fostering productivity growth to make the economy externally competitive.
A strong or weak naira should be the fixation. But if the economy is not productive, the naira would continue to weaken, despite episodic liquidity boosts through foreign borrowing. The test of debt sustainability in Nigeria is the proportion of debt service cost to the overall government revenue. Some of the economic indicators the government should target for drastic improvement are the factors of the World Happiness index, which include community vitality, standard of living, health, good governance, and psychological well-being of Nigerians.
Jide Akintunde is the Managing Editor of Financial Nigeria publications. He is also Director, Nigeria Development and Finance Forum.