Here comes the big trouble, for with floating of naira comes massive devaluation, Hyperinflation and higher interest rate.
Nigerian government has finally bowed to recommendation by masterly International Monetary Fund (IMF) to devalue naira by allowing the embittered currency to float. Nigerian government cannot be accused of dithering; the government held his own but oddities and authoritative IMF finally have their way.
The governor of Central Bank of Nigeria (CBN), Godwin Emefiele has stipulated that naira value will be determined by the forces of the market grounded on the law of demand and supply. Therefore from June 20, naira will be allowed to float, subsequently bringing with it massive devaluation and further weakening of naira. CBN has earlier pegged naira at about 197 to a dollar, but the apparent value of naira determined at the parallel market stood at about 340-350 to a dollar.
When the pegged on naira is finally removed and floating commences, the outing prevailing naira rate at forex may climb up to 400 to dollar higher than the rate at parallel (black) market. The possibility and probability are imminent because there is not enough dollars to sell to ‘hungry’ buyers. The demand for dollars by the “selective dealers” will surge with inadequate supply, simultaneously deteriorating the intrinsic purchasing power of naira at the monetary base.
The weakening and devalued naira will depressed the currency purchasing power due to the emerging hyperinflation. Take note of the word ‘hyperinflation’ this is not your ordinary inflationary trend. Hyperinflation can be describe as super inflation attributed to declining naira value, economic recession and paucity of food products/essential materials in the market. With consecutive negative contractions of two quarters, recession will be apparent. Already the GDP has a negative growth of 0.4 percent in the first quarter of the year.
Inflation rate is 71.59% not 15.6%
According to National Bureau of Statistics, the country’s inflation rate is at six year high of 15.6 percent but many economists are not seeing eye-to-eye on the accuracy of the given number.
Prof. Stevie Hanke , the applied economist at Johns Hopkins University and director of the Troubled Currencies Project at Cato Institute disagreed with the given inflation rate. He professed that the discrepancy on the modus of the tabulation of Nigeria’s inflation rate does not reflect the true reality of the higher inflationary trends.
Therefore using the formula by Prof. Hanke to calculate Nigeria’s inflation rate:
(official data) × (lie coefficient) = real estimate: Then the real inflation rate will be 71.59 percent
With prices of rice, garri and yam going beyond the reach of average Nigerian family. How do Obi, Dele and Bello feed their families? The floating of naira and its ramifications are not making things better at the foreseeable future.
The astringent tightening tool of CBN’s monetary policy cannot tame hyperinflationary trend by the raising of interest rate. The reality is that the macroeconomics oddities and dislocations are beyond the application of the waned CBN’s monetary policy. The Nigeria’s interest rate at 13 percent is bound to be raised higher notch up by CBN to 14-15 percent to rein in the rising inflation. The move will spell more misery to Nigerian business community, for the subsequent mopping of liquidity will dry up credits and invariably makes borrowing more expensive in the illiquidity market.