Nigerian Naira Crash and the Economic Implications

The future of the Nigerian economy looks precarious. Indeed, the country’s economy is under severe threat as crude petroleum, the mainstay of the economy since the early 1970s has consistently headed south from last November.

Just as most experts have noted, the forces that precipitated naira’s value erosion over this period are largely visible in the crash of the nation main foreign exchange earner which has fallen from an all time high of about $140 in July, 2008, to less than $40 per barrel early January 2009.

What perhaps is making the scenario very disturbing is the fact that President Umar Yar’Adua had already predicated his 2009 Appropriate Act on an exchange rate of N117-8 per dollar, on the understanding that crude oil earnings would not fall below the $45 benchmark.

But today, several things seem to have fallen apart and the biggest challenge for the Central Bank of Nigeria, which had earlier this year assured Nigerians that the global economic meltdown would not affect Nigeria and her economy, remains how to save the naira from nose-diving further.

Economy experts have since argued that government’s consent to the depreciation of the currency at this time may not be unconnected with its attempt to partly finance the budget with proceeds from the market, since expectations of doing so through oil revenue is fast fading away with the crash in the price of crude petroleum at the London spot market.

As banker to the Federal Government, the Central Bank of Nigeria, sources revealed, accommodated the depreciation after using part of the nation’s reserves to its revenue shortfall in the past two months leading to a substantial depletion of the reserves.

But the apex bank has already realized that should this strategy continue in the next six months, the nation’s entire reserves may be completely wiped off, thus setting the country on another dangerous part of economic disequilibrium.

But against all expectations, the Central Bank of Nigeria has continued to reassure an apprehensive Nigerian public that the nation’s foreign reserves were still in safe hands, even after an estimated $10-12billion has been spent by government in the last two months.

The current trend has already sent jitters down the spines of most captains of industry, who fear that the era of unpredictability in corporate planning is here again.

While giving insights into the likely effects of the weakening on the naira on the Manufacturers Association of Nigeria (MAN), Mr. John Aluya, said that the situation is going to have reverberating effects on the manufacturing sector more than any other sector of the economy.

According to him, manufacturers would have to factor in various cost elements incurred in the process of producing goods before they decide on the price. This, he said, would impact negatively on the prices of finished goods and as a result, would compound the economic woes of many Nigerians.

Aluya, who is also the Managing Director/CEO of Technologies Industries Limited, said that when the cost of obtaining loans increases, there is the tendency that it would affect the cost of production, forcing consumers to pay more.

The reality is that prices of goods have hit the rooftop, especially consumables which have doubled. Also, electrical equipment, furniture among other household materials, have increased with high margins.

Managing Director of Stellar Company Limited, Mr. Ikpong Okun Umoh, said that the real sector is in for a serious trouble, owing to the fact that the prices of goods would increase sharply.

He was of the opinion that many manufacturing companies would as a result of huge increase in the cost of production, prefer to relocate to neighbouring countries where prices of raw materials are relatively cheaper, coupled with easy access to loans.

He also said that the high cost of production this time around has made it difficult for manufacturing companies to record good profit, adding that the development has forced investors to shift emphasis from production to the buying and selling.

For Prof. Pat Utomi, Director of Lagos Business School, the impact of the crashing naira would culminate in inflation, such that has never been experienced in the country. He said that the situation would put pressure on the government to contain the disequilibrium in the economy with the capital market remaining prostate longer than expected.

Utomi explained that because most manufacturing companies depend on imports, they would necessarily increase prices of their products to reflect rising cost of inputs. “But that will have to be as long as they can cope, and after a short while some of them might close shop, embark on massive job cuts or send a percentage of the work force into redundancy,” he said.

President and Chief Executive of Value Fronteira Limited, Dr. Martin Oluba noted that the situation was going to exert unprecedented pressure on importation, giving rise to high cost of goods and services. But as short term measures to contain the situation, he advised government to cut heavily on public spending.

Only recently, the Minister of State for Finance, Remi Babalola hinted at a Federal Accounts Allocation Committee meeting in Abuja, that low crude oil revenue and benchmark adopted for the preparation of the 2009 budget have compelled the committee to slash monthly allocations to the three tiers of government from February 2009.

According to the minister “these are hard times calling for the best of us and not the period for sharing excess crude earnings”. This is a critical policy decision that would have a far reaching implication on all Nigerians, considering that the amount of resources distributed by the FAAC at any given time is often based on crude petroleum price and the volume of export sales during the period.

Babalola also pointed out that the current benchmark for crude oil and the volume of production were lower than what they were in the last financial year, stressing that there may be greater need for augmentation as the months go by.

One of the major negative fallouts of this development is that capital projects in various tiers of government may suffer severe set back for lack of adequate funding contrary to President Yar’ Adua promise that priority attention would be given to infrastructure financing in 2009.

Commenting on some of the developments, President of the Institute of Chartered Accountants of Nigeria, Richard U. Uche, expressed displeasure over the continued depletion of the nation’s foreign reverses by the Umar Yar Adua administration, over the last few months, warning it could have far reaching implications on the country’s international obligations.

He pointed out that a situation where over $15 billion of the reserves was spent within a period of about two months was very disturbing and needed to be checked to ensure the country would have sufficient stock of reserves to support between 6-9 months of imports at any given time.

The ICAN boss attributed government’s recourse to the reserves to the fact that it has failed over the years to diversify the economy to the extent that any adverse event in the international market would always affect her in a significant way.

He stated that what was happening to the naira was the direct consequence of the falling prices of crude oil which fell from an all time high of about $140 per barrel in July 2008 to less than $40 per barrel at the beginning of the year.

He explained that the latest turn of events was enough indication for the Yar Adua administration to urgently diversify the economy by exploring other critical areas including solid minerals in order to move it away from continued dependence on oil revenue.

He regretted that Nigeria’s foreign reserves which stood at about $65billion dollars as at the end of last year has fallen to about $53billion by early January, with chances of further slide looking more feasible against a fallen oil receipts.

As the debate on the depletion of the reserves raged, the CBN could not offer any plausible reason for such a development within the period, but Professor Soludo only told agitated Nigerians that the banks currently charged with the responsibility of managing the country’s reserves have not collapsed in the wake of the global financial crisis that have hit many institutions across the world.

He stated that, “the banks that have our reserves are not going under. That’s all part of the erroneous speculations about what is going on in the economy, because the banks are safe and we will keep watchful eyes over our foreign reserves in terms of where we keep them.”

He added that Nigerians need not lose sleep over the safety of the reserves now put at $53billion from about $63billion toward the end of last year, stressing that the amount standing in the country’s favour was adequate to meet her present and future international obligations irrespective of speculations and trends in the market place.

It would be recalled that the apex bank had in 2006, appointed 14 foreign financial institutions and asset managers to partner Nigerian local banks in managing the country’s reserves.

According to the bank, government’s decision to allow the adjustment of the naira in line with the trend in the market was aimed at averting a repeat of the nation’s experience in the early 1980s when several imported goods were branded essential commodities, due to scarcity of foreign currencies to back importation. The CBN however assured that the present depreciation was temporary; stressing the national currency will soon find its level at a point that would not hurt the system.

It could be recalled that before the depreciation, the apex bank had, through a combination of policies, maintained the naira exchange rate at a fair stable range throughout the erstwhile President Olusegun Obasanjo administration, in a way that gave significant respite to industrial sector.

However, despite the current melodrama in the foreign exchange market and the economy as a whole, there is a general consensus among Nigerians that the nation’s economy still stands on the throes of another major crisis that might include an unprecedented record of job losses in various sectors of the economy.

Already captains of industry, and key private sector operators have interpreted the naira’s free fall in the face of dwindling foreign capital inflows from Europe, Asia and America as portending grave dangers for the economy.

They are predicting that more Nigerian firms are likely to close shop across several industries, due to rising cost of doing business coupled with an anticipated drop in consumer purchasing power in 2009.

And as had been earlier envisaged, the ugly trend has already started taking its toll on various segments of the economy, even though the year is just beginning.

For instance, only a few weeks ago, the global economic crisis took a major casualty on the Nigerian economy, when Dunlop Nigeria Plc, a leading tyre manufacturing company closed down its production lines in Lagos, because of rising cost of production.

There are strong indications too that the tyre manufacturing company may not be the only casualty of the global financial crisis in Nigeria, as the ripples are reverberating even in the domestic financial market.

One plausible consequence of last year’s death of some big banks in America and Europe, some have argued include the likely drying up of foreign investment inflows into Nigeria and other developing countries.

Already, there are concerns that banking sector credit to the domestic economy may hit an- all -time low this year, as indications point to the fact that most banks may encounter liquidity challenges in 2009.

This also means that more local businesses are in for hard times, with rising fears too about more job losses across various sectors.

Latest survey of some of the banks revealed that a number of the institutions are no longer keen on loan disbursement to customers, but have instead embarked on massive recall of credit already given out. In addition the banks are intensifying deposit mobilization drive from the economy with various ingenious formula, including their regular save and win promotions.

A good number of the banks are also known to have tightened up their cost control measures and other like avenues of leakages within the system having realized there is no free funds to be picked anywhere in the economy. There are also indications that in reaction to the crisis banks are contemplating further cutting down some of the privileges of serving directors, management and staff.

It is however expected that effect of the tight credit policy of the nation’s financial sector may soon boomerang on both the public and private sectors of the economy.

For instance, where banking sector credit to the domestic economy last year, grew above budgeted target, there are fears that it would lag behind several sectors of the economy this year.

For the public sector, some of the capital projects listed for implementation in the 2009 appropriation bill may suffer heavy setbacks considering low receipts from crude exports.

Beyond rhetoric, observers of the foreign currency market are of the opinion that one of the key challenges facing the nation’s monetary authorities today is restoring the dignity of the market because of its implication for both the domestic economic operators and the foreign direct capital inflow into the economy.

After their disastrous outing in margin trading on the stock exchange, some operators in the financial system may be seeing another golden opportunity in round tripping in foreign currencies to boost their regular income.

Realizing the importance of that market to bank, the CBN governor warned last week that the bank would deal with any bank that flouts its foreign exchange rules under the impending dispensation.

Soludo also read the riot act to proprietors of the bureau de change who take delight in registering multiple bureau de changes and using same to queue for foreign exchange on the days assigned by the operators.

Having admitted that today, there is little incentive for BDC to move from a small operating unit to large organisations, the CBN boss said he was currently studying the market, promising he would sooner or later take steps to streamline the way bureau de changes operate with a view to implementing far reaching reforms therein.

But one clear message he said he would want to leave the operators with was that if somebody is incorporating a bureau de change for the sole reason of obtaining foreign currencies, from CBN to sell and make much gains, then he had look for a better business to do.

Soludo stated that the apex bank’s decision to sell foreign exchange to bureau de change and banks was not supposed to be a permanent feature, noting that those setting up such businesses must have a business plan that demonstrates their capacity to operate at the retail end of the market in term of your ability to source from retailers. “That is how it is operated even outside the country,” he pointed out.

According to Soludo, it is not the central banks of those countries that supply foreign exchange to BDCs, but they independently source same through other private sector and so increasingly the situation in Nigeria would be reviewed to bring it in line with a structure that encourages more people to operate multiple branches.

But his warning that speculators would be choked out of the system seem a far cry from what many think is practicable, considering they are already having a field day on account of the current depreciation of the naira, and nobody would want to heed his warning to stop speculating or regret it soon when the tempo of the market would change.

He said:”Very soon, the naira will stabilize and strengthen and speculators will be off the market, as the exchange rate would steadily move in a direction that will give the naira stability and strength”.

If the proposed policy initiative succeeds in streamlining the estimated 800 bureau de change firms in the country to make them more efficient, it means that Nigeria would have less shocks and losses from the market, regardless of the magnitude of disequilibrium in the international market place.

The conventional banks may not be left out of the whole process reform as the apex bank said it would not hesitate to sanction or sack any deposit taking bank that attempts to sabotage its policies for the market.

It therefore means that the proposed reform would mean that bank will now be made to bid for foreign exchange at the official window on behalf of their clients for eligible transactions, as no banks that flout the rules of the market would face would be spared by the CBN.

The planned reform of the market would involve a movement back to the Retail Dutch Auction System where banks bided on behalf of their customer, in place of the Wholesale Dutch Auction System where banks bided on their own accounts, and later sell to their customers stressing it was what was fueling inter-bank transaction.

According him, the reform would mean going back to banks biding on behalf of their customers, an indication that every application would need to be verified and appraised on its own merit.

Banks that give false information in the declaration to the market risk being thrown out of the market and I know that no bank can survive without the foreign exchange market”.

He explained that as part of the new measures to sanitize the market, the apex bank would no longer tolerate frivolous demands for foreign exchange from banks and bureau de change operators.

Although speculation in foreign currencies remains a global phenomenon, those who would want to use it to prolong the hemorrhage on the naira would definitely have a raw deal with the law. The governor warned, adding that those stockpiling foreign exchange in anticipation that the depreciation would worsen in the near future would have themselves to blame when the naira bounces back earlier than expected.

But allaying fears about the consequences of the naira depreciation, the CBN helmsman assured that the current development will not cause inflation or job losses in the country, stressing there was no cause for alarm over the price inflationary impact of the depreciation.

Though Soludo admitted that in theory, depreciation of any currency should lead to higher prices considering that higher import and production costs would be fed into the domestic economy, which are often borne by consumers, he pointed out that those developments have been more than compensated by the declining commodity prices across the globe following the financial meltdown.

Top on the list of sectors which he identified as recording a drastic reduction is freight cost as well as the prices of various goods and services believed to be capable of creating some balancing effect on the country’s economy.

The governor also said rather than situation leading to job losses in the domestic economy, the depreciation of the currency would sustain jobs as opposed to the situation in 1982, when Nigerians queued for essential commodities. According to him, the job losses and other economic crises recorded in 1982, resulted from government’s failure to allow the currency to adjust itself in line with declining global economy then. Although the apex bank said it remains committed to achieving a stable exchange rate regime, it nevertheless pointed out that the depreciating the naira against other convertible currencies was the only way it could adjust to the monumental changes that have taken place in the global financial system over the last few months, stressing that any other contrary measure would reverse the major gains recorded by the Nigerian economy over the past 12 years.

Meanwhile, as part of effort to douse any adverse effect on prices, Soludo said the bank would in the next few weeks introduce stringent measures to regulate banks and bureau de change operators in the nation’s foreign exchange market.

He has since met with proprietors of bureau de change in the country where he made his intensions known to them.

According to him, part of the strategy the bank intends to adopt in the effort to reform the foreign exchange market may include a return to Retail Dutch Auction System, where banks would only bid on behalf of their customers for eligible transactions.

The CBN hopes that the recent downturn in the fortunes of the naira at the foreign exchange market, would not take long before returning to a stronger and stable region, and this may involve fixing a band within which the naira would be allowed to float.

Indications that the bank was serious in its effort to curb excess arbitrage space in the foreign exchange market appeared recently, when the naira appreciated in the foreign exchange market, moving from N160 a fortnight ago, to between N144-N148 to $1.

Several commentators have since contended that Nigerians may need to brace up for another round of austerity measures with effect from this fiscal year, as the nation’s key economic indicators still pointed to the direction that most of President Umar Yar’Adua administration’s 2009 budget targets may eventually not be realized at the end of the year.

Speaking shortly after the Bankers Committee breakfast meeting in Lagos recently, Professor Chukwuma Soludo, stated unequivocally that foreign capital inflows into the Nigerian economy through the capital market, grants and foreign direct investments have dropped over the past months, warning that the situation may take a worst turn this year, if the global economic downturn fails to abate during the year.

The current trend has already sent jitters down the spine of most captains of industry, who fear that the era of unpredictability in the corporate planning is here again.

They are concerned that the naira’s free fall in the face of dwindling foreign capital inflows from Europe, Asia and America as portending grave dangers for the economy.

Falling oil prices could only mean two things for the naira; devaluation or depreciation of the foreign reserve to sustain the stability of the naira in the light of a N2.87 trillion budget presented by the government.

Faced with the dilemma of falling oil receipts, government has turned to the foreign exchange market for relief, and from the weekly sale of foreign exchange, the Central Bank of Nigeria (CBN) hinted recently that it accumulated a minimum of N55billion, between December 2008, and January 21, 2009 on behalf of the Federal Government, as it was netting approximately N2.5billion daily.

According to Soludo, “the exchange rate was allowed to adjust to reflect the demand pressures relative to supply. After depreciating from N117 to N135 per US dollar at the end of December 2008, the rate of depreciation relative to N117 levels is approximately 20 per cent, which effectively translates to about N2.5 billion extra revenue per day to the Federation Account”.

But Nigeria’s currency strengthened by more than 5 per cent against the dollar in trading between banks on Monday to close at N138.6 to $1, prompting a shutdown in the market after breaching limits on fluctuations, traders said.

Source – the Sun

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