The naira, last week, ambled past the US$1:N500 mark. Not much to worry over if you share the opinion (quite popular in our official circles) that the black market is an artificial construct where hoarders, economic saboteurs, and associated ne’er-do-wells wage war on the economy. This reading on current conditions in the economy benchmarks its prices on the exchange rate at the interbank foreign exchange market, where the naira will fetch you far more dollars. In this sense, it is a less gloomy take on the economy. But only a select number of domestic economic actors may buy dollars from that market.
The rest of us are, thus, less sanguine about the naira’s black market trajectory. In the 20 months since the Buhari administration came to office, headline inflation has doubled from 9.17% (year-on-year) to 18.72%. We may indulge in endless disputation over the extent to which the incompetence of the Jonathan administration doomed the incumbent one. Or whether by acts of omission and commission the incumbent administration may have compounded its poor inheritance. We cannot, however, deny that over the Buhari administration’s stay in office, life has become more miserable for all of us. The “poor and vulnerable” (a category the living conditions of which, candidate-Buhari made the most about on the hustings) more so.
True, the things that the poor spend more on (food, rent, transport, etc.) have risen by far more than their income has, but the more useful data series (because of the responses it induces) is by how far those things the rich spend their money on has risen. For, while the poor will adjust to their straitened circumstance by further contraction, including through reduced calorific intake, the rich, beyond bare necessities already, look to maximise the yield on their savings instead. Investment vehicles are non-existent in the country. Equities have struggled since the 2008/2009 financial and economic crisis, and have hardly been helped by the Buhari administration’s dread of market solutions.
Resource-rich segments of the economy thus currently have only money market instruments to look to as a destination for their savings. Commercial banks are very miserly on how they reward savings deposits and only slightly so for term deposits. Investment banks, on the other hand, pay ever so more than their retail counterparts. However, back out the relentless upswing of domestic prices, and nearly all money market instruments return negative real rates to savers. Except of course savers are liquid enough and just as savvy to warehouse their savings in treasury bills — where 1-year tenored bills carry a coupon of about 18%, just about covering the (inflation) cost of money.
However, anyone who bought US$100 at the black market two weeks ago (when it exchanged for US$1:N497), would have earned a coupon of 3.8% (now that the naira exchanges for US$1:N516). And there is not much by way of the Buhari government’s understanding of its responsibilities for the economy to suggest a change to the naira’s continued depreciation. Consequently, the naira’s outlook matters for most of us. My favourite analyst works out the outlook for the naira this way. She estimates the federal budget last year at about US$30bn (and argues that this sum did not do much for the economy). She thinks it both sad and significant that this year’s budget comes in at about US$23bn — and doesn’t think it will do much to rouse the comatose economy, either. However, she firmly believes that the funding shortfall (about 23%) between both budgets will be part of the pressure this year on the black market. Accordingly, she factors in a 23% movement (down) on the naira’s current exchange rate, which should see the currency close the year at about US$1:N650. Add other risk premiums, including a large one for left-handed monetary policy management and the naira could end the year at circa US$1:N700.
Combined with the ravages of inflation on the naira, what this outlook does is to drive a strong retail interest in dollar purchases. Currently, there are several lets to effectively doing this. First are the risks associated with buying and keeping dollars at home (no matter how sturdy the safe is). Then there are the dangers associated with keeping domiciliary accounts: that the bank may not be able to meet withdrawal demands as at when needed; or more severe, that the regulatory authorities may (out of desperation, but quite in keeping with its nationalist character) nationalise such deposits.
The one viable option (buying dollars and remitting them into foreign bank accounts) may not be readily available to us all. But over this weekend, I was offered a custodian arrangement of sorts: buy the dollars, and pass it on to a third-party with a foreign account who will keep it in custody there for a fee.
The moral of this story? Those who make transactions on the free market impossible make more expensive ones on the shadow market inevitable.