Nigeria Still In Forex Cobweb | Independent Newspapers Limited
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Nigeria Still In Forex Cobweb

stable currency; stock market
Posted: May 31, 2016 at 6:07 am   /   by   /   comments (0)


In his former role as the managing director of Zenith Bank, one of Nigeria’s leading lenders, Godwin Emefiele had a reputation for being soft-spoken and unassuming. In the year since he became governor of the central bank, he has stood out for the opposite, the Financial Times noted.

The change is being put down to one thing: the control he wields over the scarcest commodity in Africa’s biggest economy today: dollars. One businessman says Mr. Emefiele has become so central to the running of the country that “no one can operate without him”.

Business, economists and indeed former peers are blaming the policies he has introduced — restrictions on imports and tight control of the foreign exchange market including its artificially pegged foreign exchange rate — for compounding the worst economic crisis Nigeria has experienced in generations. Many are equally critical of President Muhammadu Buhari’s endorsement of the governor’s unorthodox policies and say his repeated public backing of them has undermined the independence of the central bank.

“The economy was a mess anyway and Nigeria was heading for a hard fall, but?…?should the fall be this hard?” asks Kayode Akindele at TIA Capital, a Lagos-based investment firm.

That question is nagging at a growing section of the public, angered that Buhari, the ascetic former military ruler elected on a wave of optimism last year, has not only failed to react fast enough to the changing climate but made matters worse by experimenting with outmoded remedies that have not stemmed the economy’s freefall. Supermarkets in Lagos are struggling to keep their shelves stocked, fuel is rationed and food prices have soared.

“The pain level is going up,” says Olisa Agbakoba, former head of the Nigerian Bar Association. “Everything is in short supply.”

The fortunes of Africa’s most populous nation and leading oil producer have long ebbed and flowed with the price of oil, on which Nigeria depends for more than 90 percent of hard currency earnings. But economists list several factors that make the current downturn markedly more worrying.

The structural change in the global oil industry since shale reserves were opened up by the development of new fracking techniques in the US makes it unlikely that major oil producers like Nigeria will see a significant price recovery any time soon.

In 2008, the last time crude prices crashed, Nigeria had savings to fall back on. This time it doesn’t: the administration of former President Goodluck Jonathan squandered the proceeds of the boom years in a bonanza of profligacy and corruption before he was voted out of office, according to the new government of Buhari.

Then there is what critics describe as the “self-inflicted” wounds — the currency policies and associated import controls set up to conserve hard currency by prioritising strategic imports when Buhari took power 12 months ago. These have starved existing businesses of inputs, leading to a collapse in supplies of everything from medicines to spare parts, while incidents of price gouging have risen. The policies are also blamed for encouraging capital flight while forestalling fresh investment. Inflows dropped by nearly 75 percent to $711 million in the first four months of 2016.

“No one, even investors like us with a long-term view, is going to put money into Nigeria in the expectation of losing a third of the value of that investment,” says a senior partner in a UK-based private equity fund. He and other investors say that despite the president’s visceral opposition to devaluation, it appears inevitable.

The impact has been chilling. Nigeria’s economy, which grew annually at an average rate of 7 percent in the decade to 2014, contracted by 0.36 percent in the first quarter. According to most forecasts it is heading into recession.

The import controls and restrictions on foreign exchange have hit the manufacturing sector hard, eroding the credibility of the Buhari administration’s ambition to diversify the economy.

“Growing non-oil income is a key economic strategy of this government,” says Keith Richards, a veteran of Nigeria’s consumer goods industry who used to run a subsidiary in the country of Guinness, the brewer. “Blocking manufacturers manufacturing will have the opposite effect.”

More than half a million workers lost their jobs in the first four months of this year, according to official statistics. The livelihoods of tens of millions more people employed in the informal sector have been hit by inflation of nearly 14 percent, spurred by escalating shortages of basic goods and the rapid devaluation of the naira on the parallel market, where most traders are now compelled to source their foreign exchange.

And while a new wave of militancy in the oil-producing Niger Delta has triggered a rally in the global price — it hit $50 per barrel last week for the first time in seven months — the violence is making matters worse at home, with any gains offset by production losses. In recent weeks, pipeline attacks have cut production to 1.45 million barrels a day — far short of the 2.2m assumed in this year’s expansionary budget.

Oil revenues typically account for more than two-thirds of government income. Collapsing prices and falling production mean the government is now operating on about one-quarter of the $5 billion in monthly revenues it had before the price fall began in mid-2014. Many state governments are now unable to pay salaries while power generation levels are at their lowest in years.

“Investors fear Nigeria is on a stagflationary road to Venezuelan-style multiple exchange rates and eventual meltdown,” says Charlie Robertson, chief economist at Renaissance Capital. “[But] we think reformists will help Nigeria swerve in time and avoid that car crash,” he said, after a government decision earlier this month to raise the price of fuel by 67 percent in response to months of crippling shortages.

The price rise was interpreted as the government accepting the reality of severe dollar scarcity. But it fell short of the deregulation of state-set fuel prices that has long been urged by economists seeking to ease the chronic distortions in the economy. It left many observers saying shortages will return unless the government loosens its grip on the price of both fuel and the naira.

In a speech on Sunday marking his first year in office, Buhari said he had inherited a “state near collapse”, ill-equipped for the strain of low oil prices. Insecurity was widespread, “corruption and impunity were the order of the day” and the treasury had been emptied. The initial challenge for his government had been to block leakages and reconstruct “the spine of the Nigerian state”.

The central bank last week admitted that the exchange rate cap — defended by Emefiele as a way of protecting strategic imports from the low oil price and shielding the poor from inflation — is failing and should be abandoned. The comments fuelled speculation of a policy switch. Buhari, on Sunday, appeared defensive about the approach taken so far but acknowledged that he had been forced to listen to advice to change course. He said he supported the central bank’s new strategy “to ensure alignment between monetary policy and fiscal strategy.”

The president also hinted in a briefing with local media that he was open to considering his options. “The?…?economists come and talk things to me, and when I raise issues they talk over my head instead of inside my head,” he was quoted as saying in a national newspaper. “On the value of the naira, I’m still agonising over it?…?I need to be educated on this?…?I am under pressure and we’ll see how we can accommodate the economists.”

Emefiele has been crucial to the president’s defence that tight currency controls are the best response to the economic crisis. The two men meet frequently at the presidential villa, according to one of Buhari’s spokesmen, and statements on monetary policy by the two over the past year are virtually indistinguishable.

Business argues that a controlled devaluation would allow manufacturers and traders to make informed pricing decisions, less dependent on the central bank governor’s will. Despite the recent comments, however, companies are not holding their breath.

Others in the government insist that the new budget will kick-start the economy. External borrowing to finance it has yet to be secured, however, and business remains unconvinced that government spending alone will be enough.

“It’s a monumental waste of money to be trying to stimulate the economy on the one hand and slowing it down on the other,” says Oyin Anubi, an Africa economist at Bank of America in London.

The damage is not just economic. The country’s travails have overshadowed progress the president has made on the problems he most wanted to tackle: the Islamist insurgency of Boko Haram and pervasive corruption in government.

Most damaging though is the political impact that is beginning to cost Buhari allies. His decision-making style appears, even to senior members of the administration, overly secretive. Some criticise him for failing to consult with his cabinet and view his refusal to listen to alternative points of view.

Obiageli Ezekwesili, who served as a minister in two previous administrations and once led the World Bank’s Africa division, recently criticised Buhari’s economic policies as “opaque” and “archaic”, saying that something that “did not work in 1984 cannot possibly be a solution in a global economy that’s much more integrated”.

Advisers to the president say his original priority was to lift people out of poverty. It was not to please the wealthy business community and skittish foreign portfolio investors. But those close to the administration claim there are signs of a shift in ideology within government: from the unbridled crony capitalism of the past to a more state-driven vision for promoting industry and jobs.

Buhari’s initial instinct, say advisers, was to batten down the hatches, and pursue capital and import controls similar to those pursued by China in the 1980s, while gradually building up export capacity in sectors beyond oil.

The aim was to engineer the beginnings of an industrial revolution, create jobs and dedicate investment towards rebuilding infrastructure. Ethiopia, on the other side of the continent, has spurred the beginnings of an economic transformation using similar methods.

In Nigeria’s case, however, it could already be too late. The government’s ability to control the capital account — the deficit doubled to 3.7 percent of GDP in 2015 — and restrict imports in a country rife with smuggling is questionable.

A Venezuela-style meltdown — once dismissed out of hand — now no longer seems such an outlandish prospect. Some observers argue that this doomsday scenario is forcing officials, including the president, to accept the need for a course correction.

“The bunker mentality has changed [in the past month] to a more open-to-discussion one”, says Bismarck Rewane, chief executive of Financial Derivatives, a consultancy in Lagos. “Even if the change [in policy] is involuntary, the combination of inflation, slowing GDP, exchange rate pressure and the drop in oil production?…?will bring change.”