People & Money

Nigeria: Flying into strong headwinds

Is there something which we should know?

The decision by Emirates Airline to reduce its flights from Dubai to Lagos to seven weekly with effect from mid-August, down by more than 50 per cent on the 15 that the airline currently flies underscores a lot that is currently wrong with the economy. For a variety of reasons, and in spite of successive governments’ pledge to clear the economy’s main pressure points, businesses continue to struggle to breakeven in the prevailing macroeconomic environment. The consequences for employment generation, government tax revenues, and domestic productivity are self-evident.

Sections of the market have long argued for numbers on the net external reserves to be published along with the traditional “gross” balance. That is, what remains of the gross external reserves after the central bank’s contingent liabilities (especially swap deals with local banks) have been accounted for. Alas, we are not a jurisdiction partisan to transparent plays. This is why it matters that the gross external reserves number is not an accounting one.

This environment, it must be noted, has nothing to do with Russia’s invasion of Ukraine, which has resulted in rising food and commodity prices across the world and in Nigeria. Nor for that matter, with the ravages of SARS-CoV-2, which in 2000 via lockdowns designed to throttle the pandemic inflicted chokeholds on economies worldwide. Excessive costs of doing business in the local economy, including the upshots from arbitrary policy making processes ― the Buhari administration has thrived on glad-handing bans and restrictions (the border closure up to December 2000 ranking as the most bizarre of these decisions) as solutions to supply and demand imbalances in the economy – have combined with rising prices to make Nigeria a difficult place to do business in.

Also Read: Nigeria and IMF’s roseate outlook

The effects of rising prices on the poor and vulnerable segments of society is the easier argument against elevated levels of inflation. But in an economy plagued by rapidly rising prices, businesses rarely can tell what stimuli the prices of their output are responding to. Heightened demand for a good or service, for example, rather than signal superior value proposition or efficient management of distribution channels could simply be from savvy consumers front-loading spending. Whatever the signal source, the resulting arbitrary allocation of resources amongst domestic economic entities simply makes planning of any sort impossible.

The central bank did assure that it was working to manage both the demand and supply sides of the foreign exchange issues confronting the economy. But isn’t that what the balance on the reserves are for? If the reserves are not fulfilling these roles, is there something of which we should know?

Depressing though this is, Emirates Airline’s claim, in a letter addressed to the Minister of Aviation, that as at last month, it had US$85 million awaiting repatriation out of the country, raises a far deeper worry. It would seem that a number of multinationals operating out of the country are similarly encumbered. They earn naira. Incur large chunks of their expenditure in dollars. And, thus, have a need to repatriate earnings (if simply to meet non-resident shareholders’ yield expectations) in dollars. While one may sympathise with businesses that are expected to continue operating even as increasingly substantial amounts of their revenues are sequestered away in illiquid instruments, the bigger worry is that these sums are a claim on the nation’s gross external reserves.

At current levels, the balance on the reserves cover more than six months of imports. This is useful, given that reserves are used to meet the country’s external financing needs. And being “enough” assures foreigners that their investment in the country are safe. Safe in the sense that the country has enough such reserves to backstop the local currency. And safe, again, in the sense that when these businesses do want to repatriate earnings, there is enough reserves to meet their needs. Over the two weeks to end-July, the fortunes of the naira have called into question these, and several other functions of the balance on the reserves. From US$1:N620, the naira depreciated in under seven working days to US$1:N710 in the parallel market.

Also Read: Who has the economy’s back?

The central bank of Nigeria did assure that it was working to manage both the demand and supply sides of the foreign exchange issues confronting the economy. But isn’t that what the balance on the reserves are for? If the reserves are not fulfilling these roles, is there something of which we should know?

Without knowing what the distance from the centre point of this average number is, it would be difficult to shake off the sense of foreboding about the economy that currently has the local currency in a tizzy.

Besides, the sense was always that much of the demand pressure at the parallel market was from unpatriotic retail-types (i.e. George Soros, circa 1992 and the European Exchange Rate Mechanism wannabes) trying to short the naira. Within which context the ban on abokifx.com almost made sense. The letter from Emirates Airline pulled the carpet from under that assumption. The official market is seemingly unable to meet demand, too. And this build up of large unmet dollar needs is without doubt a major source of the downward pressure on the naira.

Also Read: Inflation is not about to go away all by itself

The obvious follow-up question is, “Why is this the case?”

Sections of the market have long argued for numbers on the net external reserves to be published along with the traditional “gross” balance. That is, what remains of the gross external reserves after the central bank of Nigeria contingent liabilities (especially swap deals with local banks) have been accounted for. Alas, we are not a jurisdiction partisan to transparent plays. This is why it matters that the gross external reserves number is not an accounting one. It is instead a statistical expedient: a 30-month moving average from November 2011.

Without knowing what the distance from the centre point of this average number is, it would be difficult to shake off the sense of foreboding about the economy that currently has the local currency in a tizzy.

Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.

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