Which way Naira? N500 OR N250 to US $1 before the year is over?
The unintended consequences of globalization is about to drain the wealth of many countries, and the monetary policies to help such countries are no longer available. The 2008 global recession created unprecedented wealth in numerous countries through the coordinated efforts of many Central Bank governors who injected so much money into the global economy to help end the global recession. Many countries ignorantly increased their balance sheets (printing more money) in an effort to stop the recessionary pains; however, after 8 years, the global economy has not yet fully recovered from the credit crunch led recession in 2008.
Mankind is now inching closer to a more devastating energy induced recession that is capable of wiping out abundant wealth from the world. Meanwhile, robots and advanced technology (Artificial Intelligent [AI]) are making it increasingly difficult for countries to create jobs for their citizens because it is more productive and cheaper to replace millions of human jobs with machines (robo-humans). However, since Nigeria is still part of the global economy, here are some major internal and external factors that would make the currency Naira to slide to N500 to US $1 before the year is over;
Nigeria’s High Recurrent Expenditures
Unless recurrent expenditures are drastically reduced by a minimum of 40% and the saved funds channel into capital expenditures, the country will continue to lack the resources to create jobs for the poor masses. Borrowing money to pay salaries and funding other nonproductive capital expenditures cannot save the country at this time as the global village is heading towards another recession. Nigeria really needs people that understand what financial engineering is all about because what the world is about to go through is not transitory in any scope.
Militant Groups and Crude Oil Production
The increasing demands of many militant groups and the blowing up of many of the country’s crude oil facilities will likely reduce Nigerian crude oil output close to 1,000,000 barrels per day, which will be a far cry from the budgeted 2,200,000 barrels per day. Do the math! It means less money will be going into the national treasury forcing the government to borrow more money than was initially budgeted. Increasing debt with decreasing revenue is a deadly mixture of catalysts that could result in civil uprising.
Nigerians Unwillingness to go Through the Painful Changes Initiated by President Buhari.
The proposed changes from President Buhari is the most needed process to move the country forward, but are Nigerians still willing to go through the required painful periods before entering the promised land? The president and his team has done a poor job communicating the pains to the poor masses; thereby, selling quick turn-around economic and financial restorations that are not possible to accomplish in a short period of time.
Crude Oil Price Heading Towards $25 per barrel
Crude oil price will continue to slide down till it gets to $25 per barrel, and at that point, it will not make any economic sense to produce crude oil again in many countries. Anytime the crude oil price gets closer to $55 per barrel, many independent crude oil producers will restart their oil rigs again and suffocate the world with crude oil. The surging negative effects of global warming and the quest for clean energy are the reasons the world will see crude oil at $25 per barrel in no distant time.
Global Currency Devaluation War
There is an unexpressed global currency war just to control the varnishing export market, and if such action continues, it might plunge global financial system into a deadly crisis. Many countries like Japan and some European members have zero to negative yields in many of their treasury bills. Global Central Bank governors have lowered the interest rates on their treasury bills and are now running out of ammunition to save their respective economies from the fast approaching global economic recession. Nigeria and other emerging economies will definitely feel more financial and economic pains, as some of these countries have been forced to start adjusting their economies structurally. Structural Adjustment Program (SAP) is not an ideal economic restoring program in a corruption ridden environment, unless corruption gets controlled first.
Chinese Economic Slowdown,
China was very instrumental in helping to pull mankind out from the last global recession that ended in March of 2009. For many years now, most economic indicators coming out from China have not been encouraging. The slowdown in China is actually getting worse because of the continuous sliding down of crude oil price that is eroding the wealth of many crude oil producing countries. Many of these countries are China’s trading partners that are cutting down on their importation bills. China being an export oriented economy is currently experiencing severe economic slowdown due to limited importations from most of the crude oil exporting countries.
Brexit (Britain’s vote to leave European Union)
Britain’s referendum vote to leave European Union has added another unprecedented and unpredictable degree of uncertainty that is capable of escalating the global financial and economic crisis. The biggest beneficiary of Brexit vote should be America, because King Dollar will remain very strong without the US Federal Reserve increasing the fed fund rate. Secondly, since investors cannot stand unprecedented uncertainty, many investors will focus their attentions on US market until Britain and Europe present a clear road map, watch out as Dow Jones Industrial average surges to 19,000 from the present 17,800 points. This historic Brexit vote is capable of igniting global revolution in many countries where the citizens that have been oppressed for decades see opportunity to equally exit. Funny enough, most of the major troubling areas in the world are former British colonies that were mindfully configured to fail. The Brexit vote has also fueled the political uncertainty in America where Donald Trump, the presumptive presidential candidate of the Republican Party, has been running on the same slogan of “take back our country”. The world watches impatiently to see the next country to start the exit process either from Europe, Asia, North America or Africa, since Britain just opened a can of worms. The only certainty in this crazy Brexit vote is that all investment roads in the global village lead to America which currently has minimal uncertainty. Another regrettable certainty from the Brexit project will be more confused global financial and economic players that would escalate the move to the global recession sooner than later.
Upcoming global rising interest rates
The prolonged global currency war has kept interest rates low for long, and once inflation shows sign of life, United States Federal Reserve will quickly increase the fed fund rate which would elevate king Dollar to a distant first position, and push global interest rates up. US Fed Reserve might seriously consider cutting down the Fed Fund rate in September 2016 as a result of the Brexit vote. The longer the global interest rates remain low, the more risky it will be for many countries to experience hyper-inflation or stag-inflation when the interest rates eventually start going up.
The world is heading into a more severe recession and the only way countries like Nigeria and other emerging economies can minimize the impending economic and financial tsunamis will be to;
- Quickly cut the overinflated recurrent expenditures in half and put the saved funds into capital expenditures. Such action would help to create jobs for the millions of unemployed citizens.
- Small and medium scale industries should have unobstructed access to funds for export productions which will help such countries generate needed foreign reserves.
- Monetization of all the hidden and nonperforming assets to help create millions of gainful employments in the country. This process must be done immediately because such countries will run out of time.
- Increase the fight on chronic corruption because it will take years to reduce the type of corruption in Nigeria to a manageable level. There is nothing like a corruption-free country, but when there are no checks and balances like in the case of Nigeria, the corruption will gravitate towards chronic and deadly corruption.
- Internal peace through negotiations with the agitating groups and other militancy groups are very vital so that the highly needed foreign institutional investors will feel secured to come and invest long term in the country.
The above steps are seriously needed to quickly reverse the downward trajectory of the once strong Naira back to N250.Nigeria can ignore such steps and see how the masses will react when Naira is being exchange at N500 to US $1. The challenges facing the global village are not transitory in any scope, and countries that tend to approach these challenges with short-term measures will pay handsomely. For more details, read “Nigerian Promising Era”, “Crude World of Oil” and other related books by the author.
Christopher Okoli (Nigerian-American based Investment Advisor)
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Crude World of Oil, Africa – Emerging or Tapering Continent, African Dilemma and Nigerian Promising Era.