LBS EXECUTIVE BREAKFAST SESSION – NOVEMBER 2023 (Re: Policy direction misaligned with economic destination)

Dear Subscriber,

Nigeria faces a forex grind as it makes tough choices

An old Scottish proverb says that “If wishes were horses, beggars would ride”. The Nigerian government definitely knows what it wants but may not know what it needs. The markets marveled at the desperate attempts by policymakers to navigate the naira towards its real effective exchange rate (fair value) in the forex markets, now trading at ₦1,150/$.

The naira had lost 18.78% of its value at the parallel market in the last 8 weeks. The plunge in its value was in spite of a rash of promises mistaken for policies to prop up its value. This is quite similar to the mind games between George Soros and the Prime Minister of Malaysia during the Southeast Asia market crisis in the 1990s. The more Malaysia tried to save its currency, the deeper it plunged until it finally capitulated.

The big question on the minds of investors is: what is the true value of a currency (naira) that has been bouncing around like a yoyo in the last few days? If you use the hamburger index, in which you divide the price of a Burger King BKXXL (₦6,600) by its New York price of $5.38, you arrive at an exchange rate of ₦1,286.8/$. But when you use a wider basket of commodities to compute the PPP value, you come up with surprise surprise… ₦795/$, a difference of 61.86%. In the official market, the naira has swung between ₦786/$-₦993/$ this week.

What next for a currency that is trading as irrationally as a man in an asylum?

The Nigerian government has settled some of the matured Non-Deliverable Forwards (NDF) held by some preferred banks of an approximate sum of $1bn. Whilst we scratch our heads about what is the best time to buy dollars, we must not forget that Nigeria is planning to achieve a GDP size of $1trn (three times its current level of $390bn) in 8 years. This implies a real GDP growth rate of 12% every year. The average growth rate in the last five years was 1.8%. For Nigeria to achieve this feat, it must become one of the African Tiger nations. We are still trying to figure out how this growth rate can be attained in the current economic circumstances. But who knows, miracles do happen once in a while. That is why the proverb that says “If wishes were horses, beggars would ride” may be an appropriate way of looking at the Nigerian economy and its current dilemma, where the economic destination is misaligned from its policy direction.

In this edition of the LBS breakfast session, Bismarck Rewane and the FDC Think Tank carry out an in-depth analysis on how the Nigerian government hopes to unshackle sectors of the economy that are constrained by policy inconsistencies of the past.

Do enjoy your read!!!