Nigeria effectively floated the naira on 20 June. From its pegged rate of N197/ N199 to the US$, the naira after the float is now trading at an average of N284 to the US$, a depreciation of 42%. What are the risks posed to the Nigerian economy by CBN’s decision to float the naira? In as much as the decision to float the naira was the best decision that the CBN could have made, the decision, like any other economic decision comes with its risks. Here are some the things that could go wrong with the decision to float the naira;
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Sharp drop in the value of the naira
Well this has already happened with the significant 42% drop in the official value of the naira from N199 to N284 to the US$. But this could also get worse if there is a spike in demand in the official market and the expected foreign exchange inflow does not happen fast enough. It is early days yet to say that the value of the naira will stay at N284. Forecast shows it could get worse rather than better especially if the expected foreign exchange inflows do not come in fast enough.
Inflation
Nigeria is a highly import dependent economy. So the sharp drop in the naira will most likely lead to sharp rise in the prices of goods and services that has a high level of foreign input. So we are likely to see sharp rise in the prices of electronics like phones, computers, and television sets among others. Even your cable television bill will likely go up soon. However, many of these items have already seen some significant increase in their prices since the beginning of the year. So, the additional rise in prices may not be that significant on some items.
Risk of closure of some companies
Some companies may see a sharp rise in their cost of raw material inputs that will force them to seek alternative sources of their raw materials locally or face closure of their operations. Companies that will be most affected are those with a high proportion of foreign inputs in their production process. For such companies, if they are not able to get local alternatives and if they have low profit margins, then they are likely to be forced to shut down or reduce their production due to the significant rise in costs of importing their raw materials
Rising non-performing loans in banks
Some banks have given out dollar denominated loans to companies that earn in naira. For these companies that have revenues in naira but have borrowed in dollars, they will suddenly see their cost of servicing these loans rise significantly which could force them to default on their obligations. Many banks are likely to see their bad debts portfolio rise because of this type of situations. Bad debts are also going to come from companies that fold up because of the sharp rise in production costs which they cannot pass on to their customers.
Exports fail to pick up
One of the biggest arguments that critics made against a weaker naira was the fact that Nigeria exports nothing but crude oil. Those who canvassed for the float argued that a weaker naira could encourage non-oil exports. However, exports may not result from a weaker naira if power supply remains highly epileptic and if road infrastructure remains poor. Also, a poor business environment, poor understanding of the export processes, lack of structure to encourage exports and lack of a definite government action plan to push exports could all ensure that the non-oil exports that could result from a weaker naira does not pick up.
Unpleasant life changes
Going in summer holidays to London, New York and Paris has just become a luxury for many Nigerians. So also is the cost of schooling abroad. You are likely to see many parents looking to send their children to local schools and reducing that once a year summer holiday trips to once in a “blue moon.” The lure of traveling abroad to work has also become attractive again. This means, there is a risk that there will be a rise in Nigerians seeking economic refugee status in Europe and America.
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