In addition to the analysis of the state of the Nigerian
economy in our Monday special Independence edition, this article attempts to
look at the same topic with particular emphasis on the value of the naira, rate
of inflation, foreign reserve and growth of the non-oil sector.

Value of the Naira

As is often the case with any country that operates a
mono-product economy, the state of the Nigerian economy has been dictated
largely by the prevailing international market price of crude oil (its chief
export commodity) and the people’s huge appetite for imported goods.

Frequent fluctuations in the price of petroleum has often
left the Central Bank of Nigeria (CBN) with very limited amounts of major
international currencies to offer for bidding at its biweekly Wholesale Dutch
Auction System (WDAS) foreign exchange market. And with the ever rising demand
pressure from companies and individuals wishing to repatriate earnings or pay
for foreign imports, there is usually recourse to unofficial sourcing of such
foreign currencies at a higher naira value.

In fact, there were times when the total dollar demand at
the official WDAS market averaged $450 million whereas the CBN could only offer
a little above $300 million per bidding session.

Faced with this untamed demand for forex and its negative
impact on the naira, the apex bank, at a time, began wondering what people did
with their currency purchases. Its governor, Lamido Sanusi, and his principal
officers were said to have requested strict compliance to the regulations
guiding forex utilization while also warning of appropriate sanctions against
any breaches. Banks were even required to avail the regulatory institution with
records of their forex transactions.

The CBN also tried to curb round tripping activities by
increasing the weekly forex sales by international oil firms to such other
approved windows like banks and bureaux de change. But all this seems to have
made little, if any difference, as the value of the local currency continues to
take a plunge.

Only a little margin exists between the naira’s depreciation
pattern and the path reportedly predicted some years ago by the International
Monetary Fund (IMF).

The IMF was said to have drawn up a projection of the
naira’s exchange rate after conducting an evaluation of Nigeria’s
macro-economic indices. According to the report, the international agency had
predicted an official exchange rate of N148.70 to the dollar for 2009, N149.90
for 2010, N155.10 for 2011, N166.10 for 2012, N177.70 for 2013, N189.90 for
2014 and N202.70 for 2015.

So far, it can be argued that the IMF’s predictions have not
manifested at the WDAS market. This is probably due to the CBN’s recent
increase of its forex rate target band from between N140.00 and N155.00 per
dollar to between N150.00 and N160.00.
Rather, the projections have been largely reflective of the situation in
the open market where the naira exchanged for an average of N153.48 to the
dollar in 2009, N156.30 in 2011 and fell to as low as N163.68 a few months ago.

The current official rate is N157.20 per dollar while it
sells for N168.35 at the parallel market.

Rate of Inflation

Related to the constant depreciation of the nation’s
currency is the rising rate of inflation.

Payment for imported commodities with foreign currencies
that were procured at high costs means that such items would need to be sold at
even higher naira prices in order for their merchants to make any profits.

In other words, since the CBN is always unable to meet the
foreign exchange demands of international businessmen, such merchants often
resort to sourcing their shortfalls from the costly unofficial market and
eventually spread these costs on the prices of their merchandise.

Again, the cost of raising business capital from banks in
Nigeria has remained high especially in the wake of the recent crisis that
rocked the banking sector.

To check this, the CBN alters its monetary policy rate (MPR)
and had, for the main part of last year, left it at 12 percent with a view to
achieving a single digit inflation rate. But the year still ended with a 10.3
per cent rate.

The partial removal of petrol subsidy which came into effect
early this year has also contributed in worsening the inflationary situation in
the country. President Goodluck Jonathan had, in his New Year address to the
nation, announced a complete withdrawal of the remaining N65.00 subsidy on the
litre price of petrol; saying that his government had rather approved a new
price of N141.00.

After nearly a week of nationwide mass protests that began
on January 9, organized by labour and civil society groups, the government was
forced to negotiate a 50 per cent withdrawal which established the current
price of N97.00 per litre.

The general increase in consumer prices which attended this
subsidy withdrawal was later to be exacerbated by the new electricity tariffs
recently introduced by the federal government.

The consumer price index (CPI) which is often used by the
National Bureau of Statistics (NBS) as the basis for computing the rate of
inflation has also indicated a 20 basis points increase from the 12.7 per cent
inflation rate recorded in May to a 12.9 figure in June.

The bureau attributed this partly to the new electricity
tariffs announced by the government.

“The CPI which measures inflation rose to 12.9 per cent
year-on-year in June 2012. The year-on-year change could be partly attributable
to persistent increase in the prices of some farm produce such as yam tubers as
well as the increase in the electricity tariff…”

The CBN which uses monetary policy instruments to control
inflation is apparently not panicked by the rising rate as it expects that such
sharp increases have been known to wear off with time.

According to the apex bank’s governor, Lamido Sanusi, while
speaking after a Monetary Policy Committee (MPC) meeting about three months
ago, “staff estimates indicate that inflation in the first two quarters of 2012
would range between 11.0 per cent and 14.5 per cent, and then moderate steadily
towards the single digit zone by late 2013. Real interest rates are therefore
likely to remain positive on a trend basis, even if the rate of inflation were
to rise briefly above the MPR in the second quarter.”

Analysts are, however, sceptical about Sanusi’s hope of
achieving a single-digit inflation rate. They see such happening only where the
government is able to maintain a fiscal restraint, ensure steady supply of
refined petroleum products, intensify its power sector reform efforts,
rehabilitate collapsed infrastructure and support local industries by reducing
the nation’s dependence on foreign goods import.

State of Foreign Reserve

Crude oil export is Nigeria’s main source of foreign
revenue. And like the value of the naira and the rate of inflation already
discussed above, the state Nigeria’s external reserve depends on a number of
variables, chief of which is the international price of petroleum.

Even with a favourable market price, internal and
international crises can also affect revenue accruing from a country’s export
earnings. In the case of Nigeria, especially during the period between 2007 and
2009 when youth militia groups ran roughshod over the creeks of the Niger
Delta, the country’s oil export was significantly reduced, leading to a drop in
its foreign currency earnings and, by extension, the external reserve which
fell below $28 billion.

In fact, the Niger Delta crisis had contributed to a global
shortage in crude oil supply, thereby forcing up the $65.00 market price to as
much as $100.00. But since Nigeria’s production fell below its OPEC approved
limit of two billion barrels per day (no thanks to militant youth), there was
hardly any way of officially exporting enough to take advantage of the global
price increase.

Nigeria’s foreign reserve did rise again in the aftermath of
the federal government’s amnesty programme for repentant militants. According
to available records, the account showed a reserve of $38.59 billion in August
2010 before the figure began to hover around a month-on-month average of $36.62
billion.

As at date, the country’s external reserve stands at $38.64
billion.

State of non-oil sector growth

The non-oil sector of the Nigerian economy has been
described as comprising those groups of economic activities which are not
directly linked to the petroleum and gas sector.

Examples of such activities would naturally include
agriculture, solid minerals, manufacturing, telecommunications, construction,
real estate, hotels and restaurants, transportation, tourism, entertainment and
business services.

According to NBS sources, agriculture makes the largest
contribution of 40 per cent to the nation’s gross domestic product (GDP). This
is against the 15 per cent contribution from petroleum even though its export
generates 95 per cent of the country’s foreign exchange earnings.

Telecommunications is another subsector that has contributed
immensely to the growth of the GDP.

“This sector continued to perform impressively and has
remained one of the major drivers of growth in the Nigerian economy, with its
contribution to the total GDP increasing continuously,” the bureau reported.

The statistics office had in another report early this year,
said that the Nigerian economy grew at a faster rate in the fourth quarter of
2011 because of a stronger performance in the non-oil sector, particularly
telecoms. Whereas the GDP grew by 7.68 per cent during the period, the non-oil
sector recorded a 9.07 per cent growth rate within the same period, largely
driven by improved activities in telecoms, building and construction, hotel and
restaurant and business services.

The telecoms subsector alone was reported to have recorded a
real GDP growth of 36.31 per cent in this period. And analysts believe that
even though this leap has not been witnessed in the other non-oil sector
activities, investors still have reason to remain optimistic about the consumer
potential in Nigeria.

Ibelema Jumbo