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Nigeria: Job Losses Loom as Naira Crashes Further

Funmi Komolafe, Babajide Komolafe, Victor Ahiuma-Young and Franklin Alli

13 January 2009

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A thick cloud of uncertainty descended on the nation's foreign exchange market yesterday as the Naira fell further by N6 to N150 per dollar in the official market, with dire implications for the national economy.

Reacting to the development, the Nigerian Employers Consultative Association (NECA), the Nigeria Labour Congress (NLC), Manufacturers Association of Nigeria (MAN), and other members of the organised private sector warned that the continued fall of the Naira would lead to widespread increases in prices of goods and services, unemployment, and increases in costs of capital projects across the country.

Already, there are indications that the banking industry would soon experience massive job cuts as banks have concluded plans to lay off thousands of workers as part of strategies to cope with the impact of the global financial crisis.

At the inter-bank market, N153 exchanged for one dollar as against N147 on Friday, while the parallel market, Bureaux de Change (BDCs), said they do not have any specific exchange rate for the Naira owing to uncertainty on the official exchange rate and supply of foreign exchange by the Central Bank (CBN).

With the latest drop, the naira has depreciated by N18.73 or 14.3 per cent in the official market since the beginning of the year. Last week, from N131.27, the naira depreciated to N144 in the official market, losing N12.73 to the dollar.

Foreign exchange dealers of banks and BDC operators, who spoke to Vanguard, expressed concern over the silence of the CBN, saying this is fuelling uncertainty and speculation in the foreign exchange market. A senior bank dealer said the apex bank had been very secretive since it started depreciating the Naira last month.

"Hitherto, the CBN announces results of foreign exchange auction and the ruling official rate, but since the beginning of the year, the apex bank has not been doing this. Rather, it keeps the banks and BDCs in the dark on how much it is selling and what rate it sold," the dealer complained.

"As a result, nobody is sure of what is going to happen, whether the CBN will sell foreign exchange and the quantity it will sell, whether it will further depreciate the naira, and by what margin. The situation has got to a point that nobody knows what to do and there is increasing dependence on rumours and speculations."

Experts warn on inflation

Members of the Organised Private Sector and banking experts have warned that the depreciation of the naira would occasion widespread increase in prices and increased unemployment.

According to the Nigeria Employers Consultative Association (NECA) and the Nigeria Labour Congress, the crash of the naira will lead to job losses, drop in capacity utilisation, higher cost of production and a drop in the purchasing power.

Speaking to Vanguard, Director-General of NECA, Mr. Olusegun Oshinowo, said "the managers of this economy should address the state of our economy and our currency."

He saidthe implication is that "costs will go up, capacity utilisation will drop, there will be lay-offs and purchasing power will drop."

NLC's General-Secretary, Comrade John Odah, described the crash of the naira as tragic. He also called for transparency on the part of the government.

His words: "It is tragic and it shows that our economic managers have not been able to protect our currency and economy from the global financial meltdown. It shows the hollowness of claims that we are not going to be affected."

NECA Director-General said: "We need somebody to come up and tell us what is going on. We are in a crisis and we are not acknowledging this."

Speaking in the same vein, NLC General-Secretary, John Odah, said "something must be done urgently. Government and our economic managers must tell the people what is being done about the economy."

Both Oshinowo and Odah said governments of other developed countries have informed their people about the state of the economy and what is being done.

In the words of Comrade Odah, "in other countries, people know what their governments are doing. The Central Bank of Nigeria must tell Nigerians what it is doing with our national economy and currency."

Mr. Oshinowo said Government's statement on the state of the economy is urgent and necessary now. He recalled, "in December 2008, we had to dip our hands into our foreign reserves to the tune of $6 billion. In the light of dwindling oil production, government must come out to say something."

Speaking in the same vein, Manufacturers Association of Nigeria (MAN) President, Alhaji Bashir Borodo, said the depreciation would have an adverse effect on the cost of production in two ways.

First, he said cost of imported raw materials will rise which will further hike the cost of production and lead to increase in price levels across the country.

He further asserted that the falling value of the naira, if not arrested, could lead to increase in interest rates.

"As more naira is generated to buy dollar in the foreign exchange market, what would be left for lending to businesses would be less, which will in turn, push up the lending rates by banks," he noted.

"The Central Bank of Nigeria (CBN), should intervene effectively to save the value of the Naira and protect the macro-economic gains achieved in the last four years, otherwise, we will be repeating our experiences four years ago," said Borodo.

The year would be characterized by a number of macroeconomic shocks. There is the naira depreciation shock. The foreign exchange market fundamentals clearly reflect the inevitability of the naira exchange rate depreciation.

The continued funding of the foreign exchange market at pre-2009 levels had become unsustainable. Since ours is an import-dependent economy, the depreciation of our domestic currency presents potential significant shocks.

Corroborating Borodo's assertion, President of the Lagos Chamber of Commerce and Industry (LCCI), Chief Solomon Onafowokan, said the depreciation would fuel inflation through increase in procurement costs, higher absolute values of import duties, VAT and port charges all of which would increase proportionately to the degree of depreciation. These would be transmitted to the economy through higher prices.

LCCI, he stated, has noted that there is also a direct relationship between inflation and interest rate, warning that the cost of fund would come under pressure in 2009.

His words: "I have reviewed the economic outlook to put in context the policy choices in this potentially challenging year. The LCCI feels strongly that appropriate policy choices by government could go a long way to mitigate the challenges and shocks, and some of the policy choices we propose include the following:

•Governments at all levels should refrain from the imposition of new taxes or raising tax rates on the private sector in 2009.

The current investment climate is bad enough. An added tax burden would completely stifle and strangulate the private sector and stagnate the economy. We believe that Governments at all levels could achieve marked improvement in revenue through improved efficiency in the collection and administration of existing taxes.

•Fiscal prudence in the public sector is now more critical and imperative than ever before. Governments at all levels should demonstrate greater prudence in the management of their finances. The spending patterns of the last eight years are no longer sustainable.

Thus drastic cuts in public sector spending (especially recurrent spending) are imperative in the spirit of the prevailing economic conditions.

•The recent imposition of Excise duty on detergent, cosmetics, alcoholic beverages and fruit juice, spaghetti and noodles, toilet paper and facial tissues, cartons should be reviewed in 2009 in the light of the numerous challenges already facing the real sector. The proposal for an upward review of VAT should be put permanently on hold.

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