Grim predictions of naira value in the days ahead despite measures taken by the Central Bank of Nigeria (CBN) to pep it up make the economy and investors panic, and foreign reserves feverish. Correspondent SAM NWOKORO reports.
This is the first time the naira has received this much bashing since its introduction on January 1, 1973. The last time the currency had anything near this was during the Structural Adjustment Programme (SAP) in the 1980s.
The Second Republic government (1979 to 1983) had depleted foreign reserves by running a consumption binge. Debt incurred in imports accumulated to the extent that foreign reserves could no longer service both internal and external commitments.
Worse, Nigeria’s economy then was 100 per cent crude oil driven, not even oil and gas. Nigerians, and even the government itself, were directly involved in an import spree.
The government had warehouses and depots where only imported food items shipped in through the Nigerian National Supply Company (NNSC) were stored.
When the economy failed upon oil price plunge from $40 per barrel (pb) to $20 and downward, the then General Muhammadu Buhari took over the government in a military putsch and sacked the Second Republic.
By the time he struck, the value of the naira to the dollar was inching away from the initial rate of $1 to 80 kobo, then $1 to N1, pushing towards $1 to N1.10 to $1 to N1.20.
Nigeria went borrowing, but lacking the creditworthiness, the IMF and World Bank asked it to devalue its currency and liberalise the economy.
Since that time, the naira exchange rate to the dollar has become something of the only aggregate upon which every other performance indicator of the economy is measured.
Now as then
Today, Nigeria is contending with the same kind of structural problems and nowhere is it registering than in the value of the naira. Because of the shortfall in crude oil sales, foreign reserves have depleted.
Non-oil sectors are not contributing much to foreign reserves. And there is much demand for the dollar by an import-dependent economy.
The liberalisation of the economic space has led to the establishment of many startup enterprises, even though they are struggling to conquer the challenging business environment.
Many big enterprises like multinationals are diversifying portfolios, having bought stakes in government sale of its equities, whole and in part, in the waves of privatisation since 2004.
The rate at which those who bought stakes are developing them have not been encouraging: perhaps due to capital inadequacy and inability to forge transnational alliances to attract investors with good money.
Most investments so far have been at the initiative of public sector operators, chiefly the federal government and its development partners.
Banks, long dependent on government deposits to build their vaults, cannot be said to have a good hedge over naira value. Other private operators complain about a lack of primary needs, such as power and transport, to operate conveniently.
In the absence of these hedges, the pressure on foreign exchange (forex) has, especially since mid-2013, been biting at naira value which by this time two years ago was N152 to $1. Penultimate week, the naira exchanged at N225 to the dollar.
There is need to avert further plunge to save the economy. But the CBN may have come to its wits end, except in its latest policy which delisted 41 import items funded with forex sourced from the interbank market.
The CBN did not ban them, it only restricted their funding to unofficial channels.
Ban strategy
Because of the mammoth need for forex by both government and private concerns, the CBN finds itself in a tight corner.
Many government projects need to be funded. Since foreign development partners are involved in most of them, there is demand for the dollar.
And the rate at which such demands are guzzling foreign reserves and naira value needs to be mitigated.
CBN Governor, Godwin Emefiele, told the National Assembly (NASS) on June 23 that economic forces had made it less feasible to continue to devalue the naira. He also explained the ban on the 41 import items from the official funding window.
“The items are not banned, but the importers can no longer access forex from banks and institutions the CBN regulates”, and the reason is to “encourage local production of these items,” the CBN said in a circular.
John Okafor, a dealer in local furniture, commended the CBN for the new import policy, saying: “We agree with Emefiele on this. Why should Nigeria import toothpicks and rice?
“With all our arable land, why should we continue to import rice, tomato, fruits and other consumables? If we look around us, we will see the remains of the companies that used to produce many of these things.
“We now import plywood. What happened to our wood industry? What did we do with our past paper mills at Oku Iboku and Iwopin? What have we done with Ajaokuta steel industry and the aluminum smelter plant at Ikot Abasi?”
This is not the first time the government would ban these items from using forex sourced from the first tier market. Their import was banned when the Ibrahim Babangida administration introduced the SAP three decades ago.
But when democracy returned in 1999 followed by increased demand for Nigeria’s crude oil, the country returned a second time to oil export boom and revenue. Rights agitators intensified the lifting of the ban claiming that it discriminated against other enterprises.
Even the Olusegun Obasanjo civilian administration tried to implement this exclusion strategy, but had to lift the ban for political reasons. Since then, the issue has remained a political campaign item.
Bandwagon
After the CBN made the announcement, the naira nosedived by over 50 per cent between June 24 and July 14. Last week, it sold at between N215 and N225 to the dollar at the bureau de change (BDC) and street corners.
A report said about $5.7 billion of quarterly demand has been diverted to the open market. Panic buying has not abated, and it is being intensified as Muslim pilgrims source for forex for this year’s hajj outside the first tier forex window.
Food prices have also marginally increased and projections are that farmers who import much of their inputs like pesticides, seedlings, and animal and poultry vaccines may find it difficult procuring for the next planting season, which begins in October 2015 in the North and early March 2016 in the South.
There is fear that the value of the naira may fall further when those products and services suppliers exhaust current stock and want to replenish.
Global rating agency, Standard and Poors (S&P), said last week that the latest CBN measures could only delay the inevitable further devaluation of the naira.
S&P chief economist, Bharti, told financial journalists in New York that “recent measures by the CBN including stopping the sale of forex to importers of 41 items at the official forex market could only delay the inevitable.
“They will have no option, but to devalue. Many investors eagerly await for a devaluation of around 15 per cent as reasonable even though more might be needed.”
He explained that other financial institutions such as hedge funds (method used to eliminate or hedge forex movement resulting from transactions in forex) reflect weaknesses, which is why the naira currently sells at between N223 and N225 to the dollar, 15 per cent weaker than the CBN’s pegged rate at N196.95.
In other words, Nigerians have realised that the oil bonanza is over, hence the major source of both foreign reserves component and local financing of unwieldy government operations and largely consumption budgets block alternative sources of oxygen for the naira.
This may be worsened by the rapprochement between Washington and Iran, which will enable Iran to sell more oil on the international market.
More noose around naira
Latest economic scenarios playing out from the foreign scene also show that the naira may be headed for further pummeling as S&P predicted.
The nuclear accord reached in Vienna between Iran and the International Atomic Energy Agency over Iran’s nuclear energy projects could reshape global oil markets. After almost two years of talks, the country with the world’s fourth biggest crude reserves will benefit from an easing of international sanctions on exports in return for curbs on its nuclear programmes.
Iranian Oil Minister, Bijan Zanganeh, said the country can increase exports by 500,000 barrels per day (bpd) as soon as sanctions are lifted (possibly by year’s end according to experts), then additional 500,000 bpd in the following six months.
Iran has produced an average 2.8 million bpd this year, and has a reserve of 15.8 billion barrels, enough to supply China, one of Nigeria’s major customers in Asia, for more than 60 years, as oil analysts posit.
International crude oil traders have shunned Nigeria’s sweet crude since early this year. Up to 15 cargoes for July deliveries are not discharged.
The fortunes of August and September are uncertain even as oil price continues on the lower band of $58.512 pb, according to the Organistation of Oil Exporting Countries (OPEC).
Endorsement of CBN policy
Africa’s richest man, Aliko Dangote, an indigenous entrepreneur, described the CBN policy on forex restriction as “excellent and one of the best decisions taken so far by [Emefiele]. We cannot be importing poverty and exporting jobs.”
Emefiele himself insisted that “the time is ripe for honest conversation. Central Banks in developing countries concentrate on price and monetary stability alone. What we are doing is to identify productive sectors and channel money there.
“We are spending huge money importing things we can produce locally. It is affecting our foreign reserves (now about $29 billion). Nigeria is spending N1.3 trillion on average annually to import consumables such as rice oil, which can be produced locally. It is not necessary.
“Even if it is $1 we spent in importing tooth pick, I am saying that it is shameful that we have to import tooth pick.”
Obidigbo, Manufacturing Association of Nigeria (MAN) Chairman in Ebonyi State where there used to be a high concentration of small scale industries said: “The ban merely scratched the problem of indigenous manufacturers rather than solving them.”
He urged the CBN to take a more decisive action to salvage the economy, saying the ban can help reduce the pressure on the current $29 billion foreign reserves.
The Lagos Chamber of Commerce and Industry (LCCI) argued that the items banned constitute essential raw materials.
But Jim Unnah of the University of Lagos commended the policy and tasked the LCCI to expatiate on its claim that the items cannot be produced in whole or in part in Nigeria.
What to do to shore up naira value
Naira devaluation is not new in Nigeria’s economic growth engineering. The problem is the inconsistency in management.
Most times, blueprints are not given time to consummate. Interest groups mount pressure until the government reverses well intentioned policies.
Some of the items blacklisted from first tier forex sourcing had also been banned and unbanned in the past.
When Buhari first took over in 1983, the need to conserve foreign reserves led to the first wave of banning most imported consumables like milk, rice; and most of the items contained in the CBN circular.
To mesmerise Nigerians and paint Buhari black, the succeeding Babangida regime unbanned most of those items in the name of implementing SAP.
Sani Abacha rebanned the items, only for Obasanjo to unban them when democracy came.
Around 2004, another wave of banning came under the guise of waivers for some categories considered important to accelerate productivity in the real sector.
Thus, at various times, empowering local production and consumption has gravitated between political witch-hunt and ill-advised economic policies that ignore the impact on naira value and revenue.
But now, it appears the bubble has burst as oil price slump and supply glut combine with long years of import binge take a toll on foreign reserves and naira value.
Fred Dike, a textile merchant, noted that “less than 20 per cent of those importers who buy forex from the banks use it for other purposes. They resell them on the streets. They may not be importers genuinely.
“Some just transfer the money abroad and ferry home thrown-away packages from European factories and import them as fish or meat or apple. That is why you see the Customs burning their consignment all the time.
“So many things contributed to the fallen value of the naira. Therefore the CBN policy is good, even though I deal in imported textile.”
Other tips to help naira
Nigeria’s economy is not so difficult to understand by the average literate man in the street. For a long time, it has been tied to oil receipts which service both internal and external exigencies.
Non-oil export accounts for about 18 per cent of federal revenue. Thus many have been making calls for the diversification of the economy from oil.
Pat Utomi of the Lagos Business School has called for a restructuring of the country into six economic zones for easier fiscal and political administration.
“I would want to see real diversification of the economy fast. The talks have been long, but I have not seen it practically,” he argued late last year.
Tied to this is the contentious issue of liberalisation of the oil sector, especially the supply of refined petroleum products for which the government spends an average N1 trillion yearly to subsidise.
With the Petroleum Industry Bill (PIB) yet to be fully accepted by all stakeholders, deregulation remains academic and a political tinderbox.
Subsidy claimers are paid in foreign currency, and are the highest consumers.
But scrapping fuel subsidy amid short supply by local refineries portends social crises for citizens reeling under looted treasury, poor wages, and a currency that has lost more than 200 per cent of its purchasing power in the past two years.
Yet, optimists like Patrick Ubah, Capital Oil and Gas Chairman, want outright deregulation of the industry, including scrapping of subsidy as the panacea for graft and capital flight which deplete foreign reserves and naira value.
Other remedies propounded to shore up the naira include
• Getting foreign investment into government projects, something Buhari said he will pursue vigorously.
• Widening the tax brackets, especially value added tax (VAT), to augment income from oil export.
• Completion of high scale infrastructural projects, especially those being executed under public private partnership (PPP) which can put more money in government coffers when commercialised.
• Due diligence monitoring of how government bailouts to various sectors are utilised.
• Approaching the capital market for development funds.
• Stopping the use of foreign currencies in local transactions, which big corporations are fond of doing.