The economic feature of the last 18 months or so has been the lower oil price and as time has gone by the much lower oil price. Overall this is beneficial to the world economy but producers such as many states in the Middle East, Russia and parts of the United States and Canada are seeing a deflationary impact. However there has also been a deflationary shock to the African countries which produce crude oil and one of them in particular has responded in an unusual manner in monetary terms so step forwards Nigeria.
An appreciating exchange rate?
The situation here is quite unusual as it is quite rare to see an appreciating exchange-rate for an oil producer in response to lower oil prices. Actually as the exchange rate is regularly reported as being fixed you may wonder how it has risen at all but we get the answer from last week’s report from the Central Bank of Nigeria.
The exchange rate at the interbank market opened at N197.00/US$ and closed at N197.00, with a daily average of N196.99/US$ between November 23 and January 11, 2015.
Okay so we have a fixed exchange-rate against the US Dollar which means that as it has risen it has taken the Nigerian Nairu with it. At a time like this that seems rather like one of the cunning plans issued by Baldrick in the television series Blackadder! Nonetheless this remains policy although of course Friday’s move by the Bank of Japan showed us that policy promises only a week old can be reversed.
It also reiterated its commitment to maintaining stability in the naira exchange rate.
This new period of what has turned out to be an exchange-rate appreciation of AROUND 6% followed two devaluations where the Naira was devalued by 8% in November 2014 and then by 17% in February of 2015. Talk about a confused situation or if you like something of a shambles! Even fixed exchange rates are not what they used to be in the credit crunch era or to be more precise in fact this is a currency pegged to the US Dollar and right now that is not a good place to be for an oil producer like Nigeria.
The next issue for a pegged currency is what is the size of your foreign exchange reserves? From the Financial Times.
The central bank’s foreign exchange reserves have nearly halved to $28.2bn from a peak of almost $50bn just a few years ago. A rainy-day fund that had $22bn in it at the time of the 2008-09 global financial crisis now has a balance of $2.3bn.
Let us remind ourselves that the rate of decline for official exchange reserves is as important as the total and in fact more so as they shrink. Also that the issue is more important for a pegged exchange rate than a floating one. Added to this are the problems highlighted this morning by The Premium Times.
the parallel market sells dollars to those who would buy at N305
So not 196.6 then? Oh and the exchange-rate numbers may not be all they are cracked up to be either.
First, the US$28bn balance on the foreign reserve account is almost nearly fictional.
The reason given for this is that the Central Bank has obligations such as letters of credit futures and swaps which are not acccounted for.
So as we sweep up we have a country which officially has an appreciating currency in reality has one which has depreciated.
The theme that in fact there has been a devaluation in practice gets some support from the numbers below.
The Committee noted the slight uptick in year-on-year headline inflation to 9.6 per cent in December, from 9.4 per cent in November and 9.2 per cent in October, 2015.
As is often the case the poorest are those that are hardest hit as I note this development.
food inflation inched up to 10.32 per cent from 10.13 and 10.2 per cent over the same period.
In a world of zero and in some cases negative inflation you only get the numbers above from a lower currency so let us mark that and move on.
At first the situation looks rather good especially if we compare it to the West.
Domestic output growth in 2015 remained moderate. According to the National Bureau of Statistics (NBS), real GDP grew by 2.84 per cent in the third quarter of 2015, almost half a percentage point higher than the 2.35 per cent recorded in the second quarter.
However for Nigeria this represents quite a slow down as the rate of economic growth reported was pre oil price drop more like 5-6%. This is a direct consequence of the fact that some 11% of Nigerian economic output was the production of crude oil. Not only is that now lower but of course there will be secondary job losses as the impact filters through other parts of the economy.
Price Waterhouse declared this over the weekend.
Our results show that corruption in Nigeria could cost up to 37% of GDP by 2030 if it’s not dealt with immediately. This cost is equated to around $1,000 per person in 2014 and nearly $2,000 per person by 2030.
So with a country of 174 million people the current cost is of the order of US $174 billion which is a large sum for what is still a poor country. Or to put it another way.
Nigeria’s GDP could have been 22% higher in 2014 if it had reduced corruption to Ghana’s levels.
Of course this is an issue for most of Africa. On a personal level my involvement in athletics leads me to chat to athletes who have been out to train in the Rift Valley area and each one reports the same sad experience. So there is food for thought in the fact that Nigeria underperforms what is a sad benchmark.
Added to this is the corruption surrounding the oil production where believe it or not gangs smash the pipelines to filter off oil and just leave it. So not only is there larceny and theft on a grand scale there is an environmental and ecological disaster too as the oil pours out. In addition to this individuals wheel drums of stolen oil around in the cities and try to sell it and from time to time they explode. From Bribe Nigeria.
The finance minister, Ngozi Okonjo-Iweala, a genuine reformer, has estimated that 400,000 barrels of oil a day were stolen in April.
A cry for help
This started in a by now familiar manner as The Nation reports.
Minister of Finance Mrs. Kemi Adeosun last night refuted a report published by Financial Times suggesting that Nigeria has applied for emergency loans from the World Bank and the African Development Bank.
Ah an official denial! We know what happens next don’t we? Anyway let us look at the Financial Times.
Nigeria has asked the World Bank and African Development Bank for $3.5bn in emergency loans to fill a growing gap in its budget in the latest sign of the economic damage being wrought on oil-rich nations by tumbling crude prices.
The problem is that around 70% of government revenues came from the oil sector and of course that was at a price of US $100+ and not the mid to low US $30s. They must have more than halved and Nigeria will either have to find another source of revenue or borrow more. The rationale behind borrowing from International organisations like the World Bank is that the interest-rate is likely to be a fair bit below market rates for Nigeria.
Something of note is happening in Nigeria today which is against even the policies of UK domestic ebergy companies who are belatedly cutting prices. From AllAfrica.
Under the new tariff, residential customer category (R2) in the Federal Capital Territory (FCT), Niger, Nasarawa and Kogi states, which fall under the Abuja Electricity Distribution Company (AEDC) franchise, who previously paid N14 per kilowatt/hour, will now pay N23.60 per kilowatt/ hour.
Maybe they will even bill customers properly.
The new tariff order, aside from eliminating fixed charge, has a robust mechanism to ensure that electricity distribution companies fully meter their consumers and eliminate ‘crazy’ billing within one year,” Akah said.
We see that Nigeria is in quite a mess. The fall in the oil price has exposed the ongoing problems of corruption there and it is corruption on a grand scale. We find ourselves wondering if this should be added to the definition of “Dutch Disease” as the present of oil and gas resources has in effect allowed the corruption to flourish in the background. Those who are corrupt have profited in large amounts as eyes turn again to the Swiss banks. Meanwhile the ordinary Nigerian has been cheated and now with higher food and energy prices is suffering again.
Economically we have a currency which is officially higher but in reality is lower a deflationary burst and an budget deficit. There was a time that this was be a job for the International Monetary Fund. But under its French Managing Directors Dominique Strauss-Khan and Christine Lagarde it has twisted itself towards the needs of the Euro and away from its original modus operandi. Nigeria could so with the help of an old-style IMF.