Back in 2013, Aliko Dangote, chairman of the Dangote Group was able to easily raise $3.3bn from a consortium of 12 Nigerian banks to finance the construction of the Dangote Refinery and Petrochemical complex in Nigeria.
On completion, the plant will be able to refine about 650,000 barrels of crude oil per day. The deal was part of a $6.75bn debt financing arrangement to augment the equity contribution in the project by the group.
Eight years later, the same banks are finding it difficult to fund clients seeking to acquire oil assets put on sale by the local unit of Royal Dutch Shell Plc. Segun Agbaje, CEO of GTBank, said the banks were unlikely to be able to raise the estimated $2.3bn needed for purchasing the Shell assets.
“Such a deal would require a syndication of up to $1.8bn and it will be very tough to raise such funding locally at the moment because of dipping dollar liquidity in the banks,” he said. (Shell is in the process of exiting its onshore oil position in Nigeria, which it no longer considers compatible with its strategic ambitions.)
A sharp drop in dollar revenues forced the Central Bank of Nigeria (CBN) to devalue the currency by more than 20% last year. Still, the naira remains ‘too expensive’ and a dollar shortage is starting to hurt local businesses.
It is not just banks that are finding it difficult to conclude dollar deals. Manufacturers are also switching to local raw materials while a large number of industries now produce products that were previously imported.
At the Ladipo Market in Lagos, motorists now buy locally fabricated vehicle shock absorbers, brake pads, and even engine oil as prices of their imported versions go out of reach. Steven Kalu, MD, Bendock Limited, said demand for foreign goods has dropped as prices soared with many Nigerians looking inwards for the closest substitutes of products and services.
“The naira exchange rate at the parallel market stood at N570/$1, making goods and services linked to the dollar unaffordable for anyone with a legitimate cause. Importers have run out of options and face consumers whose income cannot accommodate new price hikes and are going for local substitutes,” he said.
The effect of the dollar crunch is having such an impact on the economy that it has become a major point of discussion and debate among political as well as business circles. For example, Yemi Osinbajo, Nigeria’s Vice-President, said the exchange rate is artificially low, and deterring investors from bringing foreign exchange into the country.
Speaking during a two-day Mid-term Ministerial Performance Review retreat, held at the Presidential Villa, Abuja in October, he said: “We can’t get new dollars into the system where the exchange rate is artificially low. And everyone knows by how much our reserves can grow. I am convinced that the demand management strategy currently being adopted by the CBN needs a rethink, and that is just my view.”
He believes the current exchange rate policy being implemented by the CBN, which places the official rate at N410/$1, does not reflect Nigeria’s economic realities.
Nigeria National Bureau of Statistics (NBS) data showed that foreign direct investment, a major catalyst to the country’s development plans, had dropped to $77.97m in Q2 2021, indicating a 49.6% and 47.5% decline compared to $154.76m and $148.59m recorded in the previous quarter and second quarter of 2020 respectively.
Import exclusion list
Bismarck Rewane, a noted economist, explains why the naira’s fortunes have continued to decline. “As oil prices dipped, the CBN has prioritised the stability of the exchange rate in the official market. It has drawn an exclusion list of avoidable imports from being funded in the official market. With the forex demand for the items transferred to the parallel market, rates in that market have soared,” he said.
Kingsley Moghalu, former CBN Deputy Governor, said the most important determinant of the value of the naira is the productivity and competitiveness of the economy.
He added that other factors such as terms of trade, inflation differential, public debt, current-account deficits, interest rates, political stability and the overall economic health are also important.
Moghalu said the earlier fall in crude oil prices had reduced Nigeria’s dollar earnings, making it difficult for the CBN to fund imports. He advised the CBN to stop subsidising the naira.
Although such a step would lead to an immediate spike in the price of the dollar, over time, the laws of demand and supply would work in favour of the naira.
“Alongside this, maintaining different exchange rates for different kinds of transactions must end. This is called rate convergence.
“Since the current practice of the CBN pumping dollars in the forex market is essentially a subsidy for imports, which has made Nigeria more and more import-dependent, letting go of the subsidy on the naira will refocus the economy towards exports,” he concluded.
In notes sent to investors, Murega Mungai, Trading Desk Manager, AZA, a global forex trading firm, speculated that the depreciation of the naira would continue until there were regulatory sanctions against illegal forex dealers, especially exporters who fail to remit export proceeds to government coffers, as spelt out in the CBN’s Foreign Exchange Manual.
High inflation, weak currency
Charlie Robertson, global chief economist at Renaissance Capital, noted that the Nigerian economy has been going through a rough patch since 2014 when the price of oil crashed. He explained that a persistently high inflation rate means a persistently weak currency.
According to him, using the Real Effective Exchange Rate methodology, an approach used to determine the value of a currency vis-à-vis a basket of other currencies based on the relative trade balance, the naira is overvalued “by a good 20-30%”.
Robertson urged the CBN to focus more on controlling inflation. “If the central bank can get inflation to 3% and it sticks there, then in 10 years the naira could be N400/N450 per dollar. So it’s all about inflation and the central bank’s success in fighting it,” he added.
Robertson said the exchange rate or the external value of the naira is the most important price in the Nigerian economy as a lot depends on how the exchange rate is managed, from the inflow of foreign investment to how much domestic industries invest and how many Nigerians are employed.
Diversified fiscal policy is needed
Ike Chioke, managing director, Afrinvest West Africa Plc, believes the incorporation of a long-term diversified strategy in fiscal policy is required to cushion shocks in various segments of the economy.
He argued that the persistent pressure on the naira could have been minimised if a counter fiscal policy had been developed, as the CBN cannot continue to defend the naira with foreign reserves.
“To reduce this pressure, an inward-looking policy (tax incentives, infrastructure development and production subsidy) should be emphasised to reduce the dependence on imported goods,” he said.
The IMF and World Bank have asked Nigeria to reform the ‘too expensive’ naira. Both institutions intensified calls on Nigeria to speed up currency reforms to achieve sustainable growth.
The IMF said a unified and flexible exchange rate would ease external imbalances and bolster activity in the economy
Godwin Emefiele, CBN Governor and Zainab Ahmed, Finance Minister, have promised to seek a more flexible and unified naira as part of a pledge made to the IMF for the release of $3.4bn in emergency financing in May.