Nigerian economy may implode in no distant future due to conflagration of forces working against African biggest economy. Failure by successive Nigerian government to diversify the economy and wean the population from petroleum and gas dependence was an unmitigated disaster. The chicken has come home to roost. The oil price is now below $30 a barrel from the high of over $100. Nigerian economy cannot with stand further drop of oil prices considering the fact that 2016 budget was pegged at $38 per barrel. Nigerian government was also preparing to borrow billions of dollars to supplement the $38 per barrel budget.
The worst part is that diversification of the economy takes couple of decades to yield result. On the bright side is that manufacturing activities has commenced in Nigeria within the past couple of years but the progress that started few years ago largely by private companies is now under mortal threat by lack of foreign currency they need to import raw materials from abroad. Nigerian government does not have enough foreign reserve or foreign currency to satisfy local demand. Nigerian government cut off foreign currency sales to local Bureau de Exchange few months ago due to their corrupt business activities and insufficient foreign currency on the part of the federal government.
The end result is that the nascent manufacturing base is about to crumble due to limited supply of foreign currency by the federal government to select industries and explosive cost of foreign currency in the parallel market (black market). A dollar is now trading at 385 to $400 Naira, Euro at 390 Naira and British pounds at 498 Naira at the Lagos black market. It all means that if the business owners in Nigeria are able to secure foreign currency at such exorbitant rates, the outrageous cost will be added to the cost of goods and services so they can recoup their investment and make some profit. The added cost to goods and services will be passed on to the population with limited cash since some state governments are owing months of salaries which will result in low demand that may force private business owners to make obvious economic decision to shut down their operation if they cannot make profit.
To compound the grim outlook for Nigerian economy, the federal government embarked on a misguided but well intentioned effort to peg the value of Naira to dollar at the rate of 197 Naira which further restricts dollar supply by Nigerians in diaspora. Remittances by Nigerians in diaspora is second provider of foreign currency to Nigeria after petroleum export. Nigerians in diaspora sent home about $21 billion in 2015. Federal government at first ordered banks not to accept foreign currencies and relented when the unintended consequences of such action manifested itself. Nigerians in diaspora sent most of their money home in small amounts of between $100 to $300 through Western Union and other remittance companies to family members for various expenses and occasionally send substantial amount for capital projects through wire transfers.
The smaller remittances which accounts for most of the remittances are usually sent through Western Unions since they are too small for wire transfers due to the fees associated with wire transfer. The central bank also forbids commercial banks from disbursing remitted currencies via Western Union and similar organizations in dollars or other foreign currencies. If the central banks allowed the beneficiaries of the money to collect it in dollars or other foreign currencies like it was before the ban, that money could be exchanged to Naira in parallel market which will end up providing much needed foreign currencies for private businesses and could stop astronomical cost of foreign currency. Central bank’s insistence on having Western Union and similar companies give the beneficiaries government sanctioned pegged amount of 197 naira to a dollar disincentives Nigerians in diaspora from sending money to Nigeria which further limits dollar and other foreign currency supply which in turn increases Naira depreciation against foreign currencies.
Part of the reason why the federal government implemented some of these policies is to combat corruption, but the government has to weigh the potential consequences of various policies and make timely adjustments. Nigeria economy faces imminent collapse within the next few months or years if something doesn’t change. Nigeria is still largely dependent on imported goods and services and that cannot be changed overnight. Businesses are not charities, so business owners will not hesitate to shut down their operations if the cost of goods and services they provide is so expensive that they cannot make profit. Time tested theory of demand and supply applies to all forms of commercial transaction and will not change because the present administration wants it. Naira devaluation and foreign exchange relaxation is inevitable if President Buhari administration is serious about reversing the imminent collapse of the economy.
New obsession in Nigeria today is constant talk of solid mineral deposits in Nigeria and the money that could be realized from it. Nigeria has some mineral deposit but it is not close to the dollar estimate of the purported minerals. The cost of extracting some of the minerals may even be prohibitive that it may not be worth extracting. Besides, the last thing Nigeria wants is to move from one dependence (petroleum and gas) to another (solid mineral).