To avoid economic collapse next year, the government must take urgent steps to stem the recurring problem of excess liquidity of the naira, crash lending rates to a single digit, and liberalise its suffocating hold on the dollar.
This is the consensus view of financial analysts who bared their minds on the outlook of the economy in 2015. The analysts spoke against the backdrop of Fitch Ratings’ negative view of the banking sector in 2015.
In its 2015 outlook report released on Thursday, December 18, the London-based rating agency forecasts that bank profitability, asset quality and capital ratios will deteriorate in 2015 because of oil price shock and the decision of the Central Bank of Nigeria (CBN) to devalue the naira, raise interest rates, and increase reserve requirements (CRR).
At the end of the monetary policy committee (MPC) meeting on Tuesday, November 25, the CBN announced a 500 basis-points hike in the CRR on private sector deposits to 20 per cent from 15 per cent, devalued the naira by 8 per cent, and raised lending rates by 100 basis points to 13 per cent.
Consequently, the CBN drained N800 billion from the banking system to meet the new requirement on private sector deposits, which has triggered unprecedented hike in the interbank lending market.
Stemming excess liquidity as way out
An economist, Henry Boyo, explained that the hike in interest rates, inflationary pressure, and devaluation of the naira are a direct outcome of excess liquidity in the system. He insisted that the best way to address the problem is to liberalise the dollar.
He said companies and government agencies whose earnings are in dollar should be issued with dollar certificate with which to approach banks.
Boyo also wants their dollar earnings exchanged by banks at prevailing rate or at market determined rate, instead of the CBN hijacking the dollar earnings and printing naira equivalent, an approach he said constantly results in liquidity buildup.
“When this is done, the problem of excess liquidity would have been addressed to warrant decline in inflation rate. With inflation rate trending low, interest rate will fall sustainably.
“And external reserves could be conserved and built up sustainably. There will be no need for devaluation of the naira,” Boyo explained.
Austin Nweze, a lecturer at Pan Atlantic University, Lagos, supported Boyo’s argument, saying the CBN should liberalise the circulation of the dollar, as Zimbabwe did, instead of holding on to dollar monopoly, which is counterproductive.
“In Zimbabwe, there was a time inflation exceeded one million per cent. Then the government introduced the use of dollar side by side with the local currency. If you want to buy anything in dollar, you pay in dollar. Today, inflation in Zimbabwe is about 2 per cent,” Nweze recalled.
“Why should the CBN have monopoly of foreign exchange (forex). If you do business and you get paid in dollar, you should be allowed to spend your dollar.
“What the CBN does is to take the dollar and convert it by printing equivalent of the dollar value. Why not allow market forces to moderate all these.
“If a state government or an oil company has so much dollar, for instance, and it approaches a bank for naira, the bank can offer how much it is willing to pay. That way you allow market forces to determine the value. You don’t have to spend so much dollar to support the naira. It is as simple as that.”
Hard times ahead
Given the macro implications of the current low oil prices and devaluation of the naira, economic analysts have predicted that 2015 will be tough particularly for the average Nigerian whose income will be impacted by the policy moves.
“We are in for a tough challenging time. It is going to be a re-enactment of the collapse of industries between 1990 and 1993 after a series of devaluations of the naira which killed most industries, and the factories taken over by churches and mosques for religious worship,” Boyo said, who is also a manufacturer.
He painted a gloomy outlook of the economy in 2015 and urged the government to save the economy from total collapse.
Boyo argued that naira devaluation against the backdrop of high lending rate of 25 to 30 per cent to manufacturers, inflation rate above 8 per cent, and adoption of common external tariff with ECOWAS countries, combine to sound the death knell of industrial and economic growth.
Where will this leave the manufacturing sector? Industries will be devastated. Reason: “You can’t have an industrial growth in this kind of environment with a common external tariff that exposes local industries and products to unequal competition,” Boyo insisted.
According to him, in the early 1990s before the naira was devaluated, he could order a container load of petroleum jelly with N100,000. This increased to N3 million after a series of devaluations of the naira.
With the latest devaluation he will need more than N5 million to import a similar quantity of petroleum jelly, a major component in the manufacture of his product.
“With a credit facility obtained at less than 5 per cent interest, a foreign investor that manufactures a similar product is at great advantage. How can my products be competitive? It is quite challenging.”
Tough times for banks
According to Fitch, six Nigerian banks, including FBN Holdings, UBA, Diamond Bank, Union Bank, Fidelity Bank, and First City Monument Bank, have issuer default ratings (IDRs) driven by the probability of state support.
Though it said the ability of the authorities to support domestic banks is limited by Nigeria’s sovereign rating (‘BB-‘/Stable), banks’ default ratings will worsen in the event of multi-notch down grade of current stable outlook rating of the government.
Given sustained decline in oil prices that leads to further build-up of external and fiscal financing constraints, further deterioration in external accounts and reserves will weaken willingness to service debts by both government and banks exposed to huge debts in bonds issuance.
However, Zenith Bank, Guaranty Trust Bank, and Access Bank have IDRs driven by creditworthiness, as defined by the Viability Ratings (VR). As for other banks rated by Fitch, their low VRs (generally in the ‘B’ range) already factors in the tough operating environment in the country.
Given the macro implications of the current low oil prices and policy moves, Fitch said profitability will be affected by slower business growth and higher loan impairment charges.
It stressed that all banks’ viability ratings remain sensitive to fast erosion in capital ratios and asset quality.
“Other profitability constraints remain, such as the revised rules on banking charges and higher regulatory levies enforced in 2013.
“We are forecasting sector non-performing loans (NPLs) to rise above the CBN’s informal cap of 5 per cent, but below 10 per cent by end-2015,” the report said.
N4.3 trillion budget of faith
Faith is the word that underscores a N4.3 trillion budget proposal for 2015 that Finance Minister, Ngozi Okonjo-Iweala, presented to the National Assembly on Wednesday, December 17.
Though the budget is the lowest in four years, in view of plunging oil revenues, benchmark price for oil was surprisingly pegged at $65 with a production figure of 2.27 million barrels per day (mbpd).
What can be more fatally optimistic than fixing the price of crude at such an ambitious level even as it dropped lower than $59 at the time the budget was being presented.
The price of Organisation of Petroleum Exporting Countries (OPEC) basket of 12 crudes was $55.64 per barrel (pb) on December 17, compared with $55.91 the previous day.
Yet, Okonjo-Iweala anticipated Gross Domestic Product (GDP) growth at 5.5 per cent for next year (from 6.35 per cent), one of the highest in the world.
“The key of the budget is focused on the diversification of the economy and it’s been working because food prices have not risen, in spite of the depreciation of the naira,” she said.
She disclosed that the government has provided for the $13 pb decline from $78 to $65 by raising more non-oil revenue through taxes and policies.
Confused economists
Prior to his assumption of office on June 2, CBN Governor, Godwin Emefiele, had assured Nigerians that the naira would never be devalued under his watch.
Coming from Zenith Bank, Emefiele, who had been in the financial system long enough to know the workings of the economy past and present, raised the hopes of Nigerians in his inaugural speech when he said he was going to commence gradual reduction in interest rate to a single digit.
He reiterated that naira devaluation is not the best option for the economy. Less than five months after, he reversed himself, precipitate and confusing.
While Nigerians were grappling with the development, CBN Deputy Director, Joseph Nana, rose to the defence of devaluation.
On October 20, Finance Minister and Economy Coordinating Minister, Ngozi Okonjo-Iweala, confirmed that Nigeria was not broke even as incontrovertible evidence showed that the government cannot pay bills in the short run and is therefore insolvent.
A few days later, she was quoted as saying that the country needed about $5 billion for economic stability, from all indications, an admission of crippling economic crisis.
All this drama once again goes to show that the custodians of the economy do not have a good grip on it.
Okonjo-Iweala struggled to provide answers to allegations by former CBN Governor, Lamido Sanusi, that the Nigerian National Petroleum Corporation (NNPC) did not remit about $49.8 billion to the treasury.
All government officials at the centre of the drama late last year, including Okonjo-Iweala; Petroleum Minister, Diezani Alison-Madueke; and Sanusi could not explain how much was not repatriated to the Federation Account.
It took the government substantial money and resources to set up a reconciliation committee and engaging a foreign consultancy firm before it was discovered that $10.8 billion was actually not remitted.
“It is sad that those who can barely provide answers to the simple economic problems plaguing the country are imposed on the economy as expert managers of it.
“In a saner society, Emefiele will voluntarily resign his appointment for saying one thing and doing a radically different thing,” said a financial analyst who did not want his name on print.
