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The Flashing Signs Of Economic Disaster By Niyi Omidire

November 9, 2014

There is backwardation (where long term prices are lower than short term prices) creeping into international Crude Oil market which confirms that crude Oil prices will continue to head lower in the short to medium term.

I am not a seer or a prophet of doom however recent happenings in the global macroeconomic environment warrants that policy makers are warned of the impending economic disaster that awaits Nigeria.

Last week there were reports on Bloomberg of Nigeria’s Central bank buying naira and selling dollar to stem the depreciation of the Naira.  While I commend their efforts to stabilise the value of the Naira, I want to stress that they have embarked on an exercise that will lead to the ruin of Nigeria.

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I am sure our policy makers and majority of Nigerians know that crude oil prices have fallen drastically on the international market.  I am also sure our policy makers know that growth is hard to come by in various parts of the world.  The interest rate yield curve at the short and long end of most industrialised countries are at the lowest in over a 100 years.  As a result,  crude oil on the demand side is been buffeted by lack of economic growth while at the supply side there is an increase in production as new oil finds its way to the market place from America and Canada.

There is backwardation (where long term prices are lower than short term prices) creeping into international Crude Oil market which confirms that crude Oil prices will continue to head lower in the short to medium term.

Unfortunately, we have squandered the huge amount of dollar earnings that have come our way in the last 10 years or so.  This is evident in us having just 38b USD in reserves while our fellow Oil producers have amassed huge amount of reserves.

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We have also failed to follow the example of other crude oil producing countries who have adopted risk management policies to hedge their exposure to volatile crude oil prices.  Mexico for example bought a simple put option at a strike price of around 90 USD to hedge against a fall in crude oil prices.  They for sure would not have budgetary problems that is about to engulf Nigeria.

One other thing our policy makers failed to do during the last 10 years or so is to stem the flow of hot money into Nigeria.  Policies should have directed such flows into foreign direct investments.  FDI flows will be very difficult to reverse in the short term at the sight of any macroeconomic instability.

To all Nigerians, we have played to the gallery, both leaders and followers are culpable.  The government has squandered very much all the revenue that has accrued to it.    We the followers are not left behind as we have have been wanton consumers in the last 10 years.  The chicken has now come home to roost.  We are all about to witness a serious bout of austerity unleashed on Nigeria as it has never happened before.  This will be more severe in comparison to the Babangida SAP days and the Shagari’s rationing days.

We will begin to see naira depreciate to a level we can but only watch as we will be helpless in defending it.  Just ask the Russians or the Japanese or the Asian tigers and they will tell us a thing or two on how not to defend a currency.  Once we have spent the little we have trying to defend the indefensible, the central bank will have no choice than to increase interest rate to stem the outflows out of Nigeria.

The depreciation of the naira and the increase in interest rate will spell doom for a country that is import dependent.  The cost of goods will soar and there will be rationing in the society.  The government will have no choice than go a begging to the IMF just like our neighbours Ghana have recently done.  I am sure we all know IMF loan will come with conditions.  Conditions we don’t like but we will have to swallow the medicine anyway.

I however take solace in the fact that this great economic upheaval that is about to engulf Nigeria will serve as a catalyst for change.  The powers that be will be surprised at the political unrest the austerity measures will bring and its power to galvanise the masses for a change they’ve waited for for so long.

 

Niyi Omidire

 

 

 

 

 

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