By Clement Maram
The Energy Progress Report 2022 produced in conjunction with International Energy Agency, the International Renewable Energy Agency, United Nations Statistics Division, the World Bank and the World Health Organisation, says Nigeria has the lowest access to electricity globally, with about 92 million persons out of the country’s 200 million population. Poor electricity supply has been stifling the country’s industrial growth, limiting commercial ventures’ expansion and profitability. This means productivity in Nigeria is zero. This situation has been mtade worse by the country’s over dependence on oil as the sole source of revenue, a dollar revenue that is increasingly in short supply to purchase raw materials for industrial production and fix Nigeria’s power problem.
The shortfall in our revenue, from crude oil sales has led to an increase in government borrowings from local and international institutions to address the revenue deficits. Today about 83 percent of the country’s earned revenue goes to service debt. Foreign direct investments which Is Nigeria’s main source of foreign exchange has gone down from $2.2 billion in 2014 to $1 billion in 2020. This has increased the call for diversification of the country’s economy from oil to agriculture, commerce and technology.
But with the increasingly fall in value of naira, Nigerians have been seeking opportunities to invest in foreign currency –denominated assets as a means of diversifying their portfolios and minimising their exposure to naira devaluation . There is however the urge to always gravitate to the asset class that offers good returns with low moderate risk . But with fallen price of crude oil, Nigeria has been hit with price shock with weaker fiscal buffers . This has created a volatility in the exchange rate which has created problems for investors. They now face the risk of lower real returns from their investments in naira denominated assets as a weaker exchange rate would lead to higher inflation and their investment returns in dollar terms are potentially lower for those to whom the dollar value of their wealth is critical. This is why investors are diversifying into foreign – currency, denominated investments. Investing in dollar-denominated assets means purchasing assets as foreign stocks, dollar mutual funds, Eurobonds and dollar fixed deposits. Eurobonds are debts instrument that is denominated in a currency, such as the US dollar, and not the home currency of the country or market in which it is issued. The federal government and several business entities in Nigeria have issued Eurobonds that are currently traded on international financial markets. Individuals are now able to invest in Eurobonds directly or indirectly by investing in mutual funds created for this purpose. Financial experts say in addition to the returns one could potentially make from Eurobond investment, one could also benefit from the protection against possible depreciation of the naira relative to the dollar .
There is now a thriving Mutual Dollar and Euro finds space in Nigeria that is helping investors to shield their investments or assets from being rubbished by the fall of the Naira to the US dollar. But for how long would the US dollar hegemony continue in the world? The US-based investment company, JP Morgan, reportedly predicted that US dollar hegemony is ending due to the shift in economic and financial gravity from the West to the East. JP Morgan estimated that Asian economies account for over 65 percent of global economic growth and 50 percent of the world GDP. The World Bank (WB) and other global organisations indicated that China alone contributes 30 percent of the world’s economic growth and has replaced the US as the biggest trading nation with more than 120 countries .
The rising use of the Yuan and other currencies would in future naturally reduce the use of the US Dollar in world trade and financial systems. The over 120 countries that claim China as their biggest trade partner would likely convert their currencies into Yuan to reduce additional transactional costs and exchange rate volatility which conducting cross exchanges between their currencies, the US dollars and Chinese Yuan would impose on them. Under the dollar hegemony, developing nations and emerging markets’ economies might not easily absorb inflation shocks. Africa which makes up 3 per cent of the global GDP is predicted to grow six times by 2050. By then, many of these countries will likely reconsider trading in dollar and resort to barter trade and trading in their own currencies over the dollar.
This could promote economic growth in that international trade and investment will likely increase by not having to exchange local currencies for the green back. It would reduce exchange rate risks and transactional costs and expand and strengthen the multinational financial system.
Currently the majority of foreign loans are made by the US-controlled IMF and WB with harsh loan conditions on countries borrowing from the two financial institutions. The harshest condition is loan must be repaid before the borrowing nations can spend the funds on economic and social development. Yet this is the reason the borrowing nations took the loan in the first place. Since most developing countries do not have the means to boost economic growth and revenue, this condition keeps them underdeveloped and in debt trap.
This is why Nigeria’s electricity problem seems insurmountable. The federal government’s deal with Siemens AG of Germany in 2020 was expected to remove the bottlenecks hindering the inability of the country to provide constant electricity in our homes. But nothing has come out of it because the billions of dollars Nigeria has borrowed from IMF and WB over the years must be repaid before the funds can be spent on economic and social development even as the country sinks at the mercy of the Almighty Dollar.
Maram writes from Abuja