Nigeria is grappling with additional challenges, including a faster rate of inflation, as the gap between official and parallel segment of the foreign exchange (FX) market continues to widen.
As of yesterday (Tuesday), the differential between the two windows had hit N110, which experts said would increase informal remittances and discourage genuine investors who might be waiting to bring in funds.
This comes as the Monetary Policy Committee (MPC) retained the policy rate at 11.5 per cent yesterday as it ended the last session for the year. The policy rate is the benchmark against which other lending rates in the economy are pegged.
The liquidity ratio and cash reserve ratio (CRR) were retained at 30 per cent and 27.5 per cent respectively. The governor of the CBN, Godwin Emefiele, said the Committee voted “unanimously” to retain the parameters”. He said all the three possibilities – increase, hold, reduction – had economic benefits but that the “hold option” was most desirable to “reverse the recession and achieve the medium-term macro-economic stability.”
The governor spoke on the factors responsible for the escalating headline inflation but assured that the worrisome food price would begin to moderate on the back of harvest season, which starts soon.
The retention of the Monetary Policy Rate, CRR and liquidity ratio implies that the money supply to the economy will, other things being equal, remain unchanged in the coming months. A reduction would imply a higher money supply, more consumption, more employment but higher inflation. On the flip side, an increase would have further tightened the already-contracted economy.
While the MPC meeting was being held in Abuja, the dollar was selling between N485 and N495. The value of the naira, which recorded an appreciable gain in October, retreated last two weeks; but the tension worsened after the recession call by the National Bureau of Statistics (NBS) at the weekend.
Operators, who spoke with The Guardian, said the fresh crisis is triggered by market illiquidity. They explained they were inundated with unmet demand on daily basis whereas there is no significant improvement on the supply side.
While investors and industrialists supposedly obtain FX via the official window, accessibility has been a major challenge. A parallel market operator told The Guardian yesterday that hundreds of manufacturers buy dollars from “us as most people cannot get from the Central Bank of Nigeria (CBN).”
The source said he had requests amounting to about $300, 000, which he was yet to raise, from two manufacturing companies since last week.
“Sometimes when the orders come, you raise it from three to five different individuals. But you can only get dollars from somebody who is in need of it when you require it. But everybody seems to be getting requests now. This is the challenge,” the source said.
In a phone conversation yesterday, Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, said FX illiquidity is a major challenge to the economy with serious consequences for local production.
“Most of the manufacturers do not buy much from the parallel market, they buy from the official market. But there has been a general complaint by manufacturers. There has been scarcity, which means manufacturers are unable to buy raw materials and equipment. This affects production and outputs, which has contributed to the high inflation,” Yusuf, who called for improvement on FX management framework, said.
A survey – Manufacturers’ CEOs Confidence Index for the third quarter of 2019 – conducted by the Manufacturers Association of Nigeria (MAN), had alluded to the implication of high exchange rate at the parallel market on manufacturing. The report said the majority of the manufacturers resorted to the parallel market to source forex to purchase machines and raw materials needed for production.
With continued FX liquidity, an economist and investment expert, Abimbola Olanrewaju, said the future of the economy was becoming increasingly uncertain, but noted that the monetary authority was constrained.
“The fiscal authority, which should have complimented the monetary policy, is extremely weak. The Ministry of Finance, Budget and National Planning should get to work. The market needs serious intervention to encourage local production. FX direction is a product of demand and supply. If we produce more and export, the naira will appreciate. We cannot continue to import food and expect magic,” Olanrewaju said.
But Chief Consultant at B. Adedipe Associates Limited, Dr. Biodun Adedipe, said the fundamentals were not as bad as portrayed. He dismissed the surge in the value of the dollar at the black market; saying blind speculators who exploit the panic in the market against the economy fuel it.
Adedipe, who has done some research on the nexus between economic and currency crisis, said the key market indices were bullish and that the current speculation is not supported by any fundamentals.
He, however, said government was not doing enough with positive insights to inspire confidence in the investment market.
The economist noted: “I am not worried about what is happening at the market. This is not an election year, so nobody can attribute what is happening to the activities of politicians.
And the figures show that the economy is climbing out of recession if you compare the performance of Q2 with that of Q3, and researches conducted by different organisations, including the International Monetary Fund (IMF), have shown that the economy will grow next year.”
Adedipe canvassed overhaul of Nigeria’s commercial policies, saying the country should continue to close eyes to its interest in international relations. He observed that other countries “talk about how they benefit first’ before signing any agreement.
The financial expert urged policy makers and economic managers to dust off the “market mentality” and consider the interest of local industries before signing any pact with other countries.
“Any imported item that will compete with a locally produced commodity should suffer higher import duty. People will be discouraged from buying imported items and consuming the local substitutes. That is the way it is done all over the world.
“I have engaged with people from America, Europe, Tanzania, Kenya and several other places today. Every country talks about protecting its interest; but, in Nigeria, it is a different thing. Are we producing for foreign interests or our interests? I have been part of this conversation since 1987. We sign all manner of protocols and treaties but do we ask if our interests are protected? We accept the status of the market while creating jobs for other economies. That is why unemployment is very high here.”
Speaking about the slide of the economy, an economist, Johnson Chukwu, said there were some policy and economic missteps that made it inevitable for Nigeria to plunge into recession. He said Ghana, a country that operates a similar economic structure to Nigeria, is currently witnessing a positive growth.
According to him, the nation’s economy had been grappling with weak recovery since it emerged from the 2016 recession with GDP growth tapering around 2.3 per cent in 2019. He stated that government must build a productive economy and free up resources spent on subsidising consumption.
Chukwu, who is also the Chief Executive Officer of Cowry Asset Management Limited, also stressed the need to eliminate overlapping ministries to reduce cost of governance.
On MPC’s decision to retain MPR at 11.5 per cent, Chukwu said: “If they loosen, they would have seen more pressure in Foreign exchange (FX) and if they tighten, they would have been dealing with more contraction on the economy,” he said.
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