Management of Nigerian Economy- Staying the Course But Pausing to Reflect

Hafiz Bakare

In an interview, Hafiz Bakare, a consultant and former bank chief executive, addressed the significant policy changes made by the Nigerian government over the past 18 months, particularly the removal of fuel subsidies and the floating of the exchange rate. These changes have led to severe consequences for the purchasing power and overall well-being of the population.

Bakare emphasized the challenges posed by Nigeria’s reliance on fuel imports due to long-standing deficiencies in local refining capabilities. He explained that the removal of fuel subsidies—whether complete or partial—has dramatically increased fuel prices, primarily due to currency devaluation rather than subsidy elimination itself. Despite the anticipated benefits from the inauguration of the Dangote Refinery, recent price hikes overshadow those expectations, largely because of the high exchange rate. He noted that even when selling crude oil to the refinery in Naira, the transactions are still benchmarked against the dollar value in the international market.

“The correlation between the exchange rate and domestic inflation is well established in Nigeria,” Bakare pointed out. “As long as the exchange rate remains elevated, inflation will stay high. The Central Bank of Nigeria (CBN) has been focused on maintaining price stability and managing inflation, which has resulted in significant interest rate hikes—850 basis points since the start of 2024.”

Reflecting on his recent conversations with colleagues, Bakare stressed the need for introspection regarding the country’s direction, particularly in light of the recent economic decisions. He highlighted a few key points:

1. The move to unify and float the exchange rate has somewhat achieved its goal of aligning official and parallel market rates, curbing arbitrage issues. However, with the exchange rate exceeding N1,600, the Naira remains undervalued compared to its African counterparts. Bakare expressed concern about the inadequate supply of foreign exchange, noting that Nigeria’s low oil output—due to oil theft, pipeline damage, insecurity, and poor infrastructure—compounds the issue. “We can’t provide what we don’t have,” he said.

2. On the subject of the recent Dollar-denominated bond issuance, which was oversubscribed by 180%, Bakare remarked that there hasn’t been a noticeable effect on the exchange rate. He highlighted the paradox of promoting the recovery of dollars from local accounts while simultaneously generating higher demand for foreign exchange. Bakare suggested restricting future bond offerings to Nigerians abroad to avoid creating market distortions.

3. He reiterated the clear link between the exchange rate and inflationary pressures. While the rate of inflation’s increase might be less dramatic now, it remains exceptionally high. Bakare urged the CBN to reconsider its stance on continuing interest rate hikes, as the current high rates impede access to credit for the real sector, thus suppressing economic growth. “If we don’t have a limit on interest rate hikes, we could undermine our inflation management goals,” he warned.

In conclusion, Bakare predicted that the outlook for the exchange rate over the next six months to a year will depend on decisive actions to bolster foreign exchange supply and a projected decrease in demand driven by local petroleum refining. He observed that without substantial improvements in these areas, the benefits of local refining remain questionable. Furthermore, he stressed the importance of ongoing governmental reflection on economic strategies to ensure they deliver genuine value to the Nigerian populace, who are currently bearing the brunt of these economic pressures.