Tag: devaluation

The naira has gone through thick and thin in the last one year. And its problem is far from being over because its stability or otherwise is hinged on various factors.

One is the price of crude oil in the international market. Oil prices around the globe have continued to fall, posing serious challenges to Nigerian economy and its currency which, many believe, is overvalued and needed to be adjusted.

But the Central Bank of Nigeria (CBN), under Godwin Emefiele, has insisted on exchange rate stability and defending the naira. For him, the apex bank is committed to safeguarding the value of the naira and has instituted various policies to achieve the objective.

The CBN has banned the sale of foreign exchange by banks to importers without the requisite shipping documents and also directed that only imports, which are backed with evidence of shipment and other relevant documents, will qualify for purchase of foreign exchange, among others, to keep the naira afloat.

The naira was devalued last November during the Monetary Policy Committee (MPC) meeting. The midpoint of the official window of the foreign exchange market was moved from N155/dollar to N168/dollar.

The committee also widened the band around the midpoint by 200 basis points from plus or minus three per cent to plus or minus five per cent. The naira has fallen by 15 per cent in the year and exchanges at N197 to dollar at the official window.

Despite these moves, many analysts believe that further devaluation of the naira is imminent and will boost the inflow of foreign capital and enhance economic growth. For instance, the International Monetary Fund (IMF) had predicted that the Gross Domestic Product (GDP) growth for 2015 would be around 4.8 per cent from 6.3 per cent last year.

For the Head, Africa Strategy at Standard Chartered Bank, Samir Gadio, though a further devaluation of the naira may not happen soon, but an adjustment is imminent.

“Despite the Central Bank of Nigeria’s resolve, markets  observers believe that it will eventually succumb to pressures and devalue the currency (again),” he said.

Also, Bond Fund Manager, Standard Life Investments, Kieran Curtis, said a further devaluation would restore the economy to competitiveness and promote more capital inflows.

“It will take a combination of weaker currency and higher interest rates to get us back to Nigeria,” he said, arguing that when Nigeria is compared to other oil exporters, it hasn’t had enough of a currency adjustment.

Still, Nigeria has a good number of indicators in its favour. Though at the detriment of local firms, its  foreign exchange reserve position remains healthy. As of July 7, the external reserves had risen slightly to $31.89 billion from $29.1billion as at the end of June. Foreign currency reserves were $37.3 billion in June 2014.

Analysts have predicted that foreign investors will likely remain wary of Nigeria until there is more policy certainty and a further naira devaluation leading to a dollar surge in the interbank market.

Gadio added: “Even though international investors want a piece of Nigeria, they will stay away, because, right now, they expect to make a 10 per cent loss on the foreign exchange side since devaluation is likely to happen.”

Morgan Stanley analyst Martijn Rats said the global oil and gas industry reaction is like what happened in the slump of 1986, almost 30 years ago, when Saudi Arabia triggered an oil price slide by making a bid for market share.

Then, like now, “as the oil groups cut spending, the wider workforce shrank and costs in the supply chain tumbled. The majors shored up cash flow and, in time, investors reacquired faith in their dividends,” he said.

Oil demand picked up and non-OPEC supply growth slowed, rebalancing the market.

Managing Director, Afrinvest West Africa Plc, Ike Chioke, said a strong positive correlation exists between the exchange rate and crude oil price.

Nigeria’s crude oil – Bonny Light, which traded at $110.2 per barrel in January, last year, hitting $114.6 per barrel by June same year, is now trading below $60 per barrel.

“With the discovery of the shale oil, crude oil prices are projected to moderate in coming years. In addition, the threat by the United States (U.S.) to reduce oil imports constitutes a downside risk on crude receipts of OPEC members. Consequently, the CBN must   establish a “real” and “sustainable” value for the naira as the opportunity cost of “substantial” support for the naira increases,” he explained in a report titled: Naira Trending Towards 2015.

Chioke said Nigeria’s dependence on crude oil (currently 70 per cent of total foreign exchange earnings) makes economic growth susceptible to price shocks.

Executive Director, Treasury and International Banking, UBA Plc, Femi Olaloku, said dwindling oil prices around the globe poses serious challenges to a developing economy like Nigeria’s, hence, the need for the government to also consider various diversification options.

For him, further devaluation of the naira is imminent, as such would make the importation of goods into the country more expensive, encourage local manufacturing and inflow of foreign capital.

 

CBN vs fiscal measures

With prolonged global crude downturn and sporadic lengthy fuel queues sprawled out at many petrol stations across the country, indigenous oil firms have adopted prudent approach amid fluctuating oil prices and adverse market and operating conditions.

The apex bank had last December directed all banks to reduce transactions with oil and gas companies following pending liquidity and fiscal hitches in meeting the funding demands associated with the sector, especially the upstream.

The decision was based on a recent risk-based supervision exercise conducted by the apex bank, which highlighted the financial industry’s level of exposure to the oil and gas sector combined with existing risk management deficiencies. It was seen as necessary steps to ensure that banks have sufficient capital buffers to mitigate rising risk in the industry.

Monetary policies and other regulations by the CBN have also become tighter as it continues to defend the naira and in turn, depleting banks’ earnings further.

For instance, the CBN shut down the retail Dutch Auction System/wholesale Dutch Auction System (rDAS/wDAS) segment of the foreign exchange market, and quoted an exchange rate of N198/ to dollar. That was indirect naira devaluation at the interbank foreign exchange market, igniting further pressure on the nation’s currency.

To curb naira speculation, the apex bank also banned commercial banks from re-selling dollars to other banks. it also directed that all foreign exchange needs are to be sourced from the interbank market, which has rate ranging from N197  to N198 to dollar.

 

Implications of CBN’s policies

The CBN’s policies have prompted petroleum marketers to rely on product allocations from the Pipeline Product Marketing Company (PPMC), the marketing entity of the Nigeria National Petroleum Corporation (NNPC), to alleviate the ongoing shortage.

“Marketers are caught between a rock and a hard place as importers of Premium Motor Spirit (PMS) under the Petroleum Subsidy Fund scheme, as a result of the huge outstanding fund due and payable to them by the federal government. Although the pricing template provides for a marketer to be paid the subsidy element within 45 days of submitting complete and verified documentation, the bulk of reimbursements due to importers are typically paid not less than 180 days or more,” analysts said.

They see these challenges created by liquidity squeeze, including mounting bank interest charges, and huge exposures to foreign exchange fluctuations as major threats to the survival of many operators, especially with foreign investors wary of the country’s present economic climate.

A Lagos-based analyst, Michael Obidike, said oil marketers face myriad issues ranging from fund sourcing, letters of credit, and more s restrictions on the purchase of forex, all affecting the steady flow of product importation.

“Oil marketers will find it very difficult to function without the appropriate fiscal backing required from the banks and the CBN in particular. The delays in the payment of petroleum subsidy funds by the federal government had previously led to the non-issuance of Letters of Credit for marketers, even within authorised bands of transactions. This was due to the CBN’s directive that banks become risk averse to oil and gas companies. The nature of it all is very cyclical,” he said.

The NNPC had indicated that the on-off shortage of fuel was caused by a halt in the importation of products due to ongoing delays in the outstanding payment of N264 billion subsidy claims to marketers by the government.

This payment is for product importation between July, last year till date, and marketers are also owed N100 billion in forex exposure – due to the naira devaluation – between January, last year till date and accumulated interest exposure from 2013 till date. The major marketers import close to 60 per cent of petrol consumed in the country, while the NNPC imports the balance.

Renaissance Capital (RenCap), an investment and research firm, said the clean-up of the downstream sector and how the outstanding fuel subsidies of N200billion to N300 billion is resolved, as well as regulatory/policy changes, which could negatively affect some corporates, are also potential drivers of non-performing loans (NPLs) in the sector.

“In gauging the asset-quality stress in the system and relative strengths of the banks through this rough patch, we establish each bank’s breakeven cost of risk and calculate what we call a ‘pain buffer,’ which estimates how much room we think the bank has to take on additional impairments before moving into a loss. Based on our 2015 estimates, GTBank, Stanbic, Zenith and UBA have the highest pain buffers in the sector,” it added.

Continuing, the investment and research firm in the report, also noted that with much talk about the federal government reforming the economy, in a weaker macro and fiscal environment, it would be unlikely that the banking sector would remain unscathed by some of the changes that could occur.

A year ago, the firm predicted that this year held green shoots of recovery for banks. Then, analysts at RenCap were cognisant of the tough operating environment in which the banks operate, exacerbated by an onslaught of regulatory headwinds since 2013.

“We were looking for an easing in the cash reserve requirements and a more market-friendly regulatory environment. However, the subsequent decline in oil prices,” it said.

 

Manufacturers have always been hit by shrinking profit margins and low return on their investments. While rising cost of production due to harsh operating environment is blamed for this, the fall in oil prices and devaluation of the naira added a dangerous twist to manufacturers’ woes. Most of them, who depend on foreign inputs, are buckling under the strain, forcing them to lay-off staff. Assistant Editor Chikodi Okereocha reports that the situation has also induced a rise in prices of consumer items.

It’s no longer a matter for conjecture. The widely predicted turbulence from the slide in oil prices, which started mid-last year, and subsequently led to the devaluation of the naira, has started. Manufacturers especially those who depend heavily on imported raw materials for production, such as those in food & beverage, building & construction, pharmaceutical, and brewery sectors, are now under severe pressure, as skyrocketing cost of production makes locally manufactured products un-competitive. Coming on the heels of plans to commence the implementation of the Economic Community of West African States (ECOWAS) Common External Tariff (CET) this year, manufacturers are apprehensive that this would further erode the competitiveness of locally manufactured products.

The ECOWAS CET, when implemented, will allow goods from any other part of West Africa into Nigeria without the imposition of any tax, import duty or levy. However, there fears that CET would throw the nation’s borders open to influx of goods from within the West African region thus exposing local industries and products to unequal competition. Such fears are justifiable considering that Nigeria’s economy thrives on importation, which makes the naira susceptible to international changes in monetary value.

Based on this, it is easy to see why private sector operators especially manufacturers are losing sleep over the unprecedented slide in the value of the naira following the crash in oil prices. At first, manufacturers buy their inputs or raw materials from abroad mostly in dollars. With the devaluation of the naira, it means that they now pay more naira for each unit of raw materials they import including machineries, spare parts and all other import-dependent procurements. Secondly, manufacturers who borrow from banks to import raw materials now do so at higher interest rates, sometimes between 25 and 30 per cent.

The Nation learnt that many manufacturers are already finding it extremely difficult to finance their import bills, while those who manage to do so contend with shrinking profit margins. Operators in the Small and Medium Enterprises (SMEs) sector are more adversely affected. This has been the case since June last year when oil prices started tumbling, forcing sharp drops in accruals to the foreign exchange reserves. This ultimately led to the devaluation of the naira by the Central Bank of Nigeria (CBN), a move that has thrown manufacturers into confusion because of the falling exchange rate of the naira against other major foreign currencies. .

For instance, as at February 15, 2015, naira exchanged at N204 to the dollar. The naira-dollar exchange rate was higher at the black market, selling as high as N209. Two days later, February 17 precisely, naira exchanged for N214 to a dollar. Similarly, the pound sterling sold for 314 to the naira at the Bureau De Change (BDC) segment and N310 at the black market. According to Bloomberg, the naira has tumbled 17 per cent over the past three months and may further decline to an exchange rate of N263 to the dollar, despite attempts by the Central Bank of Nigeria (CBN) to stem the slide.

The current exchange rate regime brought about by the depreciating value of the naira is said to be partly responsible for the current low tempo of activities at the ports. The Nation learnt that import volume has dropped. The Area Controller, Lilypond Command of the Nigeria Customs Service (NCS), Comptroller Mustapha Atiku, said that the depreciating value of the naira and the coming general elections have combined to work against international trade especially importation of consumer goods into the country.

The Area Controller, who spoke at a press conference, last week, said the situation affected the revenue target of the Service. Atiku said, for instance, that out of a monthly target of N1.9 billion, the command collected only N852 million in January and has so far collected N198 million in February. He expressed doubt over the command’s ability to realize in February what it collected in January.

Throwing more light on the lull in importation activities, the Commercial Officer of Lilypond Container Terminal, Mr. Kayode Daniels, disclosed that the low level of activities was not peculiar to Lilypond, but also prevalent at other terminals including the nation’s premiere port, Lagos Port Complex, Apapa. He attributed the low business activities to a drop in volume of imported cargo into the country. He said, for instance, that the volume of imported cargo by Mearsk Line was 30 per cent less than what they did in 2014.

“Market is slow; market is stagnant. We have done extensive market research with our customers and we find out that market is not moving. It is slow. Their (importers’) complaint is that their warehouses are still stocked and there was no way they could import. More so, people are not spending and when people don’t spend, it will be difficult to bring in imports. So these are the challenges that are leading to the drop in volume,” he said, assuring that the terminal has identified some customers who could help in boosting cargo volume so that the command will realize its revenue target.

However, while Customs is worried over failure to meet its revenue target, a more disturbing scenario stares Nigerians in the face: rising cost of consumer items and job losses caused by naira devaluation. “As far as the pharmaceutical sector is concerned, more than 98 per cent of raw materials used by the pharmaceutical industry are all imported and of course, this affects the prices of goods people consume within the country. So, the prices of drugs will definitely go up a bit,” President, Enugu Chamber of Commerce, Industry, Mines and Agriculture (ECCIMA), Dr. Ifeanyi Okoye, told The Nation in an interview.

Okoye, who is also Managing Director/Chief Executive Officer, Juhel Nigeria Limited, a pharmaceutical manufacturing company, blamed this on Nigeria’s mono-economy that is almost entirely dependent on proceeds from oil. “It’s a problem and we know where it came from. The nucleus of the problem actually is the fact that we have been operating as a mono economy, depending solely on oil. Because of that, as the price of oil started coming down our naira started fumbling. And the impact on the economy has to be there because people have to re-strategise,” he said, advising that “People should go for what they really want; there is no room for unnecessary expenses.”

While operators in the pharmaceutical industry may be forced to increase the prices of drugs, Fast Moving Consumer Goods (FMCG) companies, building materials companies, food processors, breweries among others, said they have already been forced to increase the prices of their products because of rising cost of production. “We are forced to raise the prices of our products because our cost of production has gone up significantly due to the devalued naira, but also our customers who have been affected by the downturn in the economy may now be unable to buy up these products, leading to increased inventory in our factories and all the attendant problems,” one of the manufacturer who declined to have his name in print, stated.

Perhaps, the most disturbing fallout of the economic crisis induced by naira devaluation is the mass retrenchment now sweeping across the sectors. Already, no fewer than 100 Nigerians working in Nigerian Bottling Company Plc (NBC), part of the Coca-Cola Hellenic Bottling company (CCHBC), have lost their jobs. The affected workers, who cut across all sections of the establishment, The Nation learnt, have already received their sack letters. Other workers who constitute the about 6,000 Nigerians in the company’s employ are jittery as about 1, 800 workers of Coca-Cola worldwide have been lined up for sack in line with the company’s restructuring exercise intended to keep the beverage firm afloat ij face of prevailing macro-economic circumstances.

Workers in Flour Mills Nigeria Plc are also apprehensive over possible loss of jobs. Already, no fewer than two million direct and indirect job cuts are expected, as the food & beverage sector face unpre3cedented increase in the price of wheat and Value Added Tax (VAT). According to the Group Managing Director/CEO of Flour Mills Nigeria Plc, Mr. Paul Gbededo, the current high price of wheat and government’s plans to increase VAT from five per cent to 10 per cent have put the jobs of over 125,000 direct employees and 1,800,000 indirect employees in the sector on the line.

With global oil lay-offs said to have topped 100,000 at the last count, workers in the Nigerian oil & gas industry are also apprehensive. Such fears and apprehension are sequel to earlier warnings by experts that oil companies may lay off workers due to the drop in oil price in the global market. “Right now, a lot of companies are trying to lay off workers due to falling oil price. It is going to be pretty rough in a couple of months to come. The best thing to do now is to go back to the banks to talk on how to restructure our finances so that people will not default. If oil price continues to fall, investors are not going to invest again,” Director, Advisory, Oil and Gas, PriceWater House Ltd. Mr. Ritch Wingo, said.

These problems are coming despite assurances by the authorities, including Minister of Finance/Coordinating Minister for the Economy, Dr. Ngozi Okonjo-Iweala and CBN Governor Godwin Emefiele, that there is no cause for alarm, crashing oil price and naira devaluation will not harm the economy.

The Minister said, for instance, that government had put in place strategies to deal with the situation, part of which was the development of scenario-based approaches to cushion the unfavourable effects of falling oil prices. Such approaches, she added, was comprehensive and supported by extensive consultations with global analysts such as the International Monetary Fund. Besides, she said short to medium term strategies mainly targeted at the poor and vulnerable had been developed.

Notwithstanding the assurances, developments in the last two months are proofs that hard times are indeed, here for Nigerians.

The Chairman, Corner stone Real Estate, Mr. Lanre Okupe, has said the impact of currency devaluation and decline in oil prices will be felt between the next four and six months.

He said since investors and other businesses would still have old stock, and that is why market prices are still the same.

However, once new orders are placed for products, price would change since the exchange rate has soared owing to the devaluation.

To this end, the economy, expectedly, would begin to experience a tougher period except measures are put in place to cushion the effect.

Going by the growth being recorded and experienced in the real sector in the last two years, experts are now upbeat that the real sector will benefit from the oil price crash as investors would look in its direction for succor.

Okupe, however, said the situation would create a problem for the economy, especially because the spending capacity of consumers will also be affected.

“If the devaluation and oil price crash continues, it will not be a problem of the real sector alone, but a general one for the economy. Besides, when prices go up, the challenge will be if there will be disposable income to buy products,” he said.

Principal Partner, Imole Ayo Real Estate, Mr. Kayode Oyedele, agreed that the devaluation of the naira had been made worse with the tumbling oil price.

According to him, people are reluctant to spend freely as they used to in the past because of the fear of the unknown.

But for him, the effect of the situation has set in. This is because properties that would have ordinarily been rented out are now delayed.

“It is a two-way dilemma in the real sector. While the property owner wants maximum profit from his asset, the buyer is weary of his finances at this period,” Oyedele said.  He said even though the sector is being looked up to for good investment opportunities for investors, availability of funds will be the bane of such investment.