By Emeka Chiakwelu
Here comes the big trouble, for with floating of naira comes massive
devaluation, hyperinflation and higher interest rate.
Nigerian government has finally bowed to recommendation by masterly
International Monetary Fund (IMF) to devalue naira by allowing the
embittered currency to float. Nigerian government cannot be accused of
dithering; the government held his own but oddities and authoritative IMF
finally have their way.
The Governor of Central Bank of Nigeria (CBN), Godwin Emefiele has
stipulated that naira value will be determined by the forces of the market
grounded on the law of demand and supply.
Therefore from June 20, naira will be allowed to float, subsequently
bringing with it massive devaluation and further weakening of naira. CBN
has earlier pegged naira at about 197 to a dollar, but the apparent value
of naira determined at the parallel market stood at about 340-350 to a
dollar.
When the pegged on naira is finally removed and floating commences, the
outing prevailing naira rate at forex may climb up to 400 to dollar higher
than the rate at parallel (black) market. The possibility and probability
are imminent because there is not enough dollars to sell to ‘hungry’
buyers. The demand for dollars by the “selective dealers” will surge with
inadequate supply, simultaneously deteriorating the intrinsic purchasing
power of naira at the monetary base.
The weakening and devalued naira will depressed the currency purchasing
power due to the emerging hyperinflation. Take note of the word
‘hyperinflation’ this is not your ordinary inflationary trend.
Hyperinflation can be describe as super inflation attributed to declining
naira value, economic recession and paucity of food products/essential
materials in the market. With consecutive negative contractions of two
quarters, recession will be apparent. Already the GDP has a negative
growth of 0.4 percent in the first quarter of the year.
Inflation rate is 71.59% not 15.6%
According to National Bureau of Statistics, the country’s inflation rate
is at six year high of 15.6 percent but many economists are not seeing
eye-to-eye on the accuracy of the given number.
Prof. Stevie Hanke , the applied economist at Johns Hopkins University
and director of the Troubled Currencies Project at Cato Institute
disagreed with the given inflation rate. He professed that the discrepancy
on the modus of the tabulation of Nigeria’s inflation rate does not
reflect the true reality of the higher inflationary trends.
Therefore using the formula by Prof. Hanke to calculate Nigeria’s
inflation rate: (official data) × (lie coefficient) = real estimate: Then the real
inflation rate will be 71.59 percent with prices of rice, garri and yam going beyond the reach of average Nigerian family.
How do Obi, Dele and Bello feed their families? The floating of naira and its ramifications are not making things better at the foreseeable future.
The astringent tightening tool of CBN’s monetary policy cannot tame
hyperinflationary trend by the raising of interest rate. The reality is
that the macroeconomics oddities and dislocations are beyond the
application of the waned CBN’s monetary policy. The Nigeria’s interest
rate at 13 percent is bound to be raised higher notch up by CBN to 14-15
percent to rein in the rising inflation. The move will spell more misery
to Nigerian business community, for the subsequent mopping of liquidity
will dry up credits and invariably making borrowing more expensive in the
illiquidity market.
Emeka Chiakwelu, Principal Policy Strategist at AFRIPOL. His works have
appeared in Wall Street Journal, Huffington Post, Forbes and many other
important journals around the world.
His writings have also been cited in many economic books, publications and many institutions of higher learning, including tagteam Harvard Education. Africa Political & Economic Strategic Centre (AFRIPOL) is foremost a public policy center whose fundamental objective is to broaden the parameters of public policy debates in Africa.
To advocate, promote and encourage free enterprise, democracy, sustainable green environment, human rights, conflict resolutions, transparency and probity in Africa. [email protected] www.afripol.org
