Going by the recent value attrition of the naira against the United States’ dollar due to the floatation of the currency, Nigeria could be upstaged by South Africa as the largest economy on the continent.
Nigeria’s 2015 Gross Domestic Product (GDP) at $521.8 billion prior to Wednesday’s trading at the inter-bank foreign exchange market may have lost about $157 billion or 30 percent of its value due to the drastic drop of the naira rate against the dollar from N197 to N282. This has threatened Nigeria’s position as the leading and biggest economy in Africa.
Specifically, at Monday’s dealing, the first in the wake of the new forex policy, the naira crashed 30 percent to N280 to the dollar, with dealers and market watchers admitting there is yet room for the currency to weaken further. And this played out on Tuesday when the value further dipped to N284.
With a 30 percent loss in value of the naira, the country’s GDP would have shaved off about $157 billion to a new level of $365.3 billion, just $14.7 billion ahead of South Africa’s national output of $350.6 billion.
Nigeria’s economy surpassed South Africa’s as the largest on the continent in 2014 after a rebasing exercise of its GDP for the first time in two decades.
Should the naira depreciate further, Nigeria may fail to lay claim to the position of it being the continent’s biggest economy midway into the next rebasing as it would have been overtaken by South Africa with a more stable currency where a US dollar is purchased with 14.8 rand.
“Though the GDP is really not tangible as it is only an index of the growth of the economy, the $510 billion GDP is at the risk of been eroded and we stand to be upstaged by South Africa, which is currently the second largest economy”, says Henry Boyo, an economist and industrialist.
But Ikechukwu Kelikume, Head of Department of Accounting, Banking and Finance of the Lagos Business School (LBS), disagrees.
According to him, even South Africa is experiencing some contraction and thus poses no threat to Nigeria’s claim as Africa’s biggest economy.
“The changes in the economy notwithstanding, the second largest economy in Africa (South Africa) is currently experiencing contraction in GDP hence they will not overtake Nigeria in anyway”, he says.
After expressing support for the new forex regime, which he says will technically address the lapses in the old dispensation (the dirty float exchange rate management system) that gave room for rent seekers, arbitragers and speculators to control the foreign exchange rate market, Kelekume gave a comparison of the two economies.
“Currently, Nigeria’s GDP contracted to $490 billion while South Africa is currently $313 billion. In terms of GDP growth, annual GDP growth for Nigeria fell from 6.5% in 2014 to 2.7% in 2015 while for South Africa GDP growth rate declined from 1.5% in 2014 to 1.3% in 2015 (IMF World Bank Outlook 2016).
“For Nigeria Q1:2016, GDP growth saw the country posting a negative GDP growth rate of -0.36% with the possibility of the country posting a negative GDP in Q2:2016 thereby officially entering a recession.”
He expressed optimism that the “new liberal exchange rate regime will strengthen the Nigerian economy and usher in the much needed FDI to drive the economy”, while reminding us that “what triggered the Nigerian economic crisis was low and unstable oil price” and that “oil price has since risen to $49 per barrel and I believe this will impact positively on the Nigerian economy if the current Niger Delta crisis is addressed”.
Even if Boyo agreed that devaluation can lead to an influx of foreign capital, he says the value of inflow may not be worth the devaluation, saying that an index foreign investors use to gauge an economy is the stock market index, which he noted has lost 50 percent of its value with naira depreciation.
“By Friday, the value of stocks on the Nigeria Stock Exchange was N9 to N10 trillion. At $200, it was about $50 billion but by Monday, the value had plummeted to $25 billion.
“The argument has always been that by devaluing we are going to attract foreign investment. But foreign investment expected is no more than $15 billion. The loss as a result of devaluation is more than what is expected as investment and the value of your exchange is a determinant of the capital you attract”.
Boyo noted that there are several other immediate problems arising from floating the naira including the erosion in the value of the budget, pension fund and minimum wage.
According to him, with a 50 percent devaluation “the budget is hit, particularly the capital part of the budget because of the imported components. It is now practically half of that. So any hope that physical infrastructure will improve is gone”.
In a similar vein, he said that recurrent expenditure is now also 50 percent less and this can lead to more wage increase agitation.
Commenting on the pool of pension funds, he said, “The N5 trillion pension funds was $25 billion but is now $12.5 billion. Meanwhile you are creating expectations that pensioners will get their benefits down the line, which is unrealistic”.
Boyo who is the founder of Cocosheen, a beauty product, said that as a result of devaluation, “all foreign loans will need 50 percent more naira value to liquidate them. That is 50 percent more naira to payback. And that minimum wage at N18, 000 is 50 percent less and because of this, people who will fall below the poverty line will increase”.
“N1000 is now equivalent to just $3; we may be needing higher denominations like N5000 or redenominated. Devaluation will trigger higher petrol and diesel prices and affect business of industrialists; industrialists will pay 50 percent higher. Even electricity tariffs will have to go up as a result”, he noted.
Boyo surmised that any hope that the system will improve or get better is unrealistic because the market is looking at demand and supply of dollar but ignoring demand and supply of the naira.
“If we continue to have surplus of naira and ration of the dollar, the value of the naira will continue to slide. Because the agency that supplies the naira continues to auction dollar to the people, meaning that even the CBN is betting against the naira”.
Earning more dollars will not help, Boyo, who has written extensively on the matter, said.
“In a market where the naira is already superfluous, it is false to hope that by earning more dollars, the naira will appreciate.”
He, however, recommended that the dollars that the CBN keeps be allocated to government beneficiaries and let them convert to naira within the system. “In that way, you have liberalised, changed the dynamics; banks now increase cash reserve ratio and reduce their ability to use the funds”.
A big winner of the new floating exchange regime is South Africa’s telecommunication company MTN, recently fined N330 billion by the Nigerian Communication Commission (NCC).
A 30 percent depreciation in value against the dollar means a gain by that margin as the company would pay only 70 percent of that value or N231 billion, thereby effectively saving a whopping N99 billion.
