Insecurity in Nigeria: One shot too many for the economy

Insecurity in Nigeria: One shot too many for the economy

• By FDC Analysts

Insecurity and insurgency have become the watch words of most Nigerians. The problems have become so daunting that they are now being used interchangeably. The correlation between inflation and insurgency is now a raging and controversial debate.

Many analysts believe the insurgency causes inflation. Whilst the counter factual suggests that inflation and unemployment breed desperate and dangerous citizens. Economic insecurity as they say is the mother of all hopelessness.

FX Market

Recent data points to the fact that the price of oil is at $70pb, which is 116% higher than a year ago and the gross external reserves are approximately the same at $35bn. But proponents of economic reform are concerned that the amount of forex sold at the official and I & E window ($62.52mn) is 57% lower compared to last year ($145.38mn).

This has led to a significant depreciation of the parallel market rate. In 2020, the naira traded at an average of N437.6/$ in the parallel market with the price of oil at $43.2pb and today it is trading at N485/$ when the price of oil is at $70pb. The restricted supply of forex (rationing) could be stoking price inflation which has become the Achilles heel of the Nigerian economy.

Many manufacturers are now blending their forex needs by sourcing 90% of their requirements from autonomous sources. A suggestion of effectively adopting a proper floating exchange rate and increasing supply by at least $3bn this month in the market will lead to a convergence of rates close to N460/$, which is N10 lower than the current blended rate of N470/$-N477/$.

Is a 3rd Wave of VOVID-19 in the offing?

Apart from naira weakness, some analysts fear that a 3rd covid wave could spell disaster for Nigeria especially judging by the Indian experience. Our view is that Nigeria is very unlikely to be as vulnerable as India.

In this edition of the LBS Breakfast Session, Bismarck Rewane and the FDC Think Tank discuss the implications of insecurity, rising inflation and forex rationing on your business operations and earnings potential.