In the last few years, several thriving online retail stores has surfaced in the Nigerian space with Konga.com easily recognised as the largest. It was therefore a shock to many when news broke that Konga had sacked 80 of its staff. This number which made up about 10% of its workforce was disengaged in a move the company termed a restructuring exercise due to “local economic realities on ground.”
The value of the Naira has plummeted against most major international currencies in the past several months. As at January 20, 295 units of the currency was exchanging for one United States dollar at the parallel market, which incidentally has become the realistic market. Prior to the breaking of this news, a rival e-commerce company Jumia had also terminated the appointment of some staff in late 2015 while also reducing the salary of some by almost 20%.
The United States of America, Nigeria’s erstwhile largest oil customers have drilled their way to establishing oil reserves that they believe can sustain them for a long time to come, thanks to the shale revolution. Domestic production in the US went on the increase as a result of new technologies such as horizontal drilling and hydraulic fracturing. This is one of the reasons the Naira has been devalued. In fact, America became the largest oil producer in the world with over nine million barrels per day. Now, US Congress has removed the ban on crude exportation imposed over 40 years ago.
The shale revolution led to a glut in the international crude market, thus leading to a plunging of prices especially since the Organisation of Petroleum Exporting Countries (OPEC) decided to also keep pumping into the market in a decided effort to maintain market share. The result was that since mid-2014, there has been a drastic drop in the price of crude oil from around US$110 to around US$28.
The fall in the price of crude oil has affected Nigeria’s revenue since proceeds from crude oil sales are the major sources of income as foreign exchange for the nation.
Incidentally, Nigeria’s economy is import dependent, which makes the Naira quite vulnerable. The country is a major importer of manufactured products because her manufacturing sector cannot cater adequately to the demand of the citizens; even the manufacturing sector is dependent on imported machineries and intermediate products and this has put the nation on the shorter end of the stick.
The reduction in revenue from crude oil means less supply in foreign exchange, while the importers’ demand for forex has not dropped. This has continued to drag the value of the Naira down as there are less foreign currencies to meet up with demand. The country, and by extension the citizens have continued to face the brunt of the lack of diversification of the country’s export base. Though the Central Bank of Nigeria has made efforts to put policies in place to stem the tide of the fall of the Naira, it is yet to have any substantial effect.
Already, import-reliant businesses are beginning to feel the brunt of this high exchange rate as the cost of procuring their raw materials, machines or consumables have increased. This will certainly increase cost of production that will ultimately be passed on to consumers whose purchasing capacity is much degraded. As already seen by Konga, Jumia and some big banks, many more businesses are likely to sack staff or cut salaries.
Already, Imo state government has laid off about 3000 civil servants as a result of the inability to pay salaries consequent upon reduction in the amount accruable from the Federation account.
Plunging value of the Naira has also led to an increase in flight fares, with flight from Nigeria to South Africa shooting up from N120,000 to N155,000. If the Naira continues its downward spiral and the prices of imported goods continue to be on the rise, the repercussion will fall on the businesses and there may be more job losses as the prices of their items may go beyond the reach of their buyers.
A major advantage that may however, accrue from Naira devaluation is that there will be more incentives to export and that goods leaving the country may become more attractive to buyers. Nigeria may thus see an increase in the level of exportation of its products, most especially agricultural products.
The most important step for the Federal Government is to diversify the economy, which has never been an easy venture in any economy. Increasing output from agriculture and improving on power supply may go a long way in achieving this objective. A sustainable power system will reduce cost of doing business and thus provide local alternatives to imports.
