Why Tinubu’s economic policies will help the naira - Watchtower media

Why Tinubu’s economic policies will help the naira

With the reforms embarked upon by the administration of President Bola Tinubu in the financial and the petroleum sectors, the naira is set to return to its glory days. Before May 29, 2023, everyone knew that the nation’s financial and petroleum sectors needed immediate surgical reforms in order for the country not to go bankrupt or pariah.

However, immediately President Bola Tinubu was sworn in, his administration started surgical economic moves such as ending the decades-long fuel subsidies that favoured the rich although the decision more than doubled the price of Premium Motor Spirit (PMS), causing a sharp spike in prices of food and other essential commodities; but it is an action supported by all Nigerians, home and abroad.

Nigerians believed that fuel subsidy benefits only the rich while poorest of the poor benefits nothing from the bazaar. In fact, the policy was killing the nation’s economy because fuel subsidy payment diverted part of the resource for developmental purposes towards consumption. In other words, the resources that should have gone into infrastructure, education, health, and security with positive externalities were going into consumption.

The ever-growing fuel subsidy bills hit deep into government resources. With revenue shortage, fuel subsidy payment meant the government needed to borrow to invest in other aspects of governance.

Another policy was the floating of the naira (unification of exchange rate). For many years, the financial sector had been calling for the reform of Nigeria’s forex market to engender liquidity and price discovery. 

A liquid and transparent forex market is a key requirement for capital formation and economic growth. Sadly, in the last couple of years, Nigeria faced a major forex crisis which stifled economic growth and dented investor confidence. 

But, on June 8, 2023, the CBN announced the merging of all forex windows into NAFEM (previously NAFEX) with a removal of the hard peg on Naira trading within the official market; hence the foreign exchange market became liberalised and it became one of a willing buyer and willing seller.

These two reforms- fuel subsidy removal and unification of exchange rate – though painful, have not only helped the nation stand on its feet economically, it has also saved the nation several billions of naira that were, hitherto, going to private pockets.

These few private individuals who were smiling to the banks, maintaining huge account balances while the masses were being pushed further down into poverty line daily, lost the privileges they once enjoyed and sanity was restored to the petroleum and financial services sectors.

For instance, after the reform of the forex market, the devaluation and unification brought an end to the multiple foreign exchange markets and rates, which have dis-incentivised business activities and deterred foreign investments.

Also, multiple exchange rates, hitherto used by businesses, have been a source of confusion for investors. When they bring in funds at the official exchange rate and can only repatriate their earnings at the black-market rate, they make conversion losses on their investments. Investors recognised that a unified exchange rate would help alleviate these problems and improve the ease of doing business in Nigeria.

The unification of the exchange rates would in the end prop up investors’ confidence in the Nigerian markets because the country has been struggling to attract foreign direct investment (FDI) in the last few years, with investment falling by as much as 90% since 2008 but with the foreign exchange unification, an improvement would likely be noticeable in the coming months and steadily gain traction beyond that. 

This is because FX challenges are top on mind for multinational companies bringing FDI into Nigeria. Their inability to repatriate earnings in full has kept FDI below its potential, with inflows to smaller neighbours like Ghana outpacing Nigeria’s in recent years. Also, FX has been a key problem driving a handful of companies to divest in recent years.

As it is, the move of the CBN to clear backlogs are also yielding positive result because investors would like to see an improved level of forex liquidity and positive market signalling to fully accept Nigeria as the alluring investment destination it once was. After all, Nigeria remains a potential investment haven. The strong, youthful population and the diversified nature of its economy with various untapped natural resources make Nigeria an attractive economy cum investment opportunity. 

Many sectors within the country are still in their infancy, hence there is room for much growth. Nigeria’s per capita consumption of so many items underscores the huge investment potential there is. 

It is a no brainer that the two reforms have ended sleaze and analysts have applauded President Tinubu, saying the economic policies introduced to cushion the effect of the two policies on the citizens would reposition the economy and in the long run, make the value of the naira stronger as well as return it to its glory days.

Also noteworthy is that the federal government is working closely with states and local governments to implement interventions that will cushion the pains. Some of the interventions include the provision of one billion naira ($1.16 million) credit to each of 75 manufacturing companies over the next year and the provision of 125 billion naira ($145 million) in the form of grants and loans to small, medium-sized enterprises and other businesses in the informal sector.

The government also ordered the release of 200,000 metric tons of grains to households across the country to help stabilize the price of food while 225,000 metric tons of fertilizer, seedlings and other inputs are being provided to farmers. At least N200 billion ($232 million) would also be invested in agriculture to boost farming.

The federal government is also negotiating a new salary structure with civil servants.

There is therefore, no gainsaying that Nigeria’s foreign exchange market will perform better as global indices have shown that things would improve. The steps taken by President Tinubu and the CBN may be inconvenient in terms of the fluctuation, it is believed that it will stabilise and get better because countries that have chosen this route before now have done better on average in the long-run.

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