Opinion Article compiled by Olukayode Akintumile & Oluwatobi Gbadamosi – March 2020
It is no longer news that the Coronavirus pandemic has led to a fall in global oil prices. It is also no longer news that Nigeria’s economy is majorly funded by proceeds from oil sale. What is news however, is the information that the Central Bank of Nigeria will not be attempting to devalue the naira amidst the price volatility currently being experienced in the Foreign Exchange (FX) Market, but will instead double down on maintaining the same rate as before. This stance though brazen, seems ill advised in the face of the current trend of oil prices and the fact that Nigeria’s external reserve only stands at approximately $36billion. But that is a topic for another day. The question for now however, is that amidst a volatile FX market and record low oil prices, where does the average Nigerian stand?
But first, the Volatility
Volatility according to Merriam Webster’s dictionary, is a tendency to change quickly and unpredictably. While it is not unusual for humans to associate this trait with the behavioral patterns of their fellow humans, the Foreign Exchange market has in the past week also shown itself to possess this usually undesired trait. Beginning the week hovering like a peaceful hummingbird around the N365/dollar mark, the news of a global oil price war quickly turned it into something more like a raging eagle, as investors rushed to hedge their funds in dollars driving up demand and thus the dollar price in the process. In the parallel market, the dollar rose to as much as N410 before returning to stabilize around the N380 mark. These factors all led to the decision by the CBN to keep the exchange rate stable against all odds. However, the effects of this on the Nigerian economy is far from positive. The Nigerian Economy Bleeds With an oil powered economy, rocket science is not required to predict that the current state of the global market would hit Nigeria’s economy hard. Already, the implementation of the nation’s budget for 2020 is at great risk of falling apart. As a matter of fact, the current price of oil simply means that the budget (based on an oil benchmark of $57/barrel) cannot be met. Add to that the current state of volatility of the foreign exchange market, and the result is a looming threat of recession.
First, if the naira continues to show signs of falling against the dollar, fear would ensure that investors continue to hedge their funds on the stronger currency. This in no small way would affect the movement of the FX market, and may lead to the following factors occurring.
• A devaluation may eventually be inevitable, as the naira may already be de-facto devalued in the parallel markets. It will simply be a case of making it official.
• In the face of policy adamance against devaluation, the country may end up using up its external reserves in its fight to withstand the demand on the currency.
• When the budget is faced with difficulties in implementation due to lack of funds, the government may have to start cutting down on capital projects. Short of this, an alternate option is to cut expenditure by laying off civil servants.
• Difficulties in disbursing funds by the government may also affect private companies which are dependent on government contracts.
• Inflation may also become only a matter of formality, as the high cost of importing raw materials would ensure that selling prices of finished goods would soar. Ironically, this may also lead to more exports and a favorable balance of trade, as prices of Nigerian made goods would become cheaper to the international market.
• Recession may eventually occur.
How About You?
In the face of all of the above, one question must surely stand out; a question which demands of us not just the general effect, but the particular effect of the above posited on the common man. For if Nigeria is faced with an economic meltdown, how does this directly affect the daily lives and activities of you and I? Below are a few possible, but certainly not exhaustive effects of an economic meltdown on the ordinary Nigerian.
• Inflation in the economy would lead to a higher cost of living, and this would affect the ability of the common man to meet his needs.
• An economic meltdown may lead to loss of jobs, and this may in turn lead to a crisis in security of lives and property.
• Devaluation, having reduced the value of the naira, would mean that workers are no longer getting the same value for the time they put in at work. This may also lead to a demand for wage increase, and a threat of strike action.
All in all, the current price volatility evidenced in both the global oil market, and the foreign exchange market holds no pretty promises for Nigeria and Nigerians. And as the government continues to employ all bold policies it deems fit; You and I can only hope that they get it right at the end of the day.
Still, there is Light Within this Tunnel
Amidst the volatile FX market, and the fall in global oil prices, investors are developing itchy feet, as Commercial Banks have slashed their interest rates, and even Treasury Bills are no longer as profitable. As a result, investors are worried about the security and profitability of their investments. However, at FundQuest Financial Services Limited, we pride ourselves at providing good value for our investors. Investors get a healthy interest rate in our secure investment products. So while we await the stability of the FX market, and a return to normalcy of global oil prices, be sure to secure your funds in solid and profitable investments. Talk to us today.
FundQuest Financial Services Limited
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