The slow down in Nigeria’s economy is gathering pace as capacity utilisation crashes with factories shutting down or reducing shifts on the back of a debilitating foreign exchange shortage that is also creating significant price pressures for households in the country.
Analysts say Nigeria may have returned to the 1994 era when then Head of State, General Sanni Abacha, had fixed the exchange rate, specifically on January 11, 1994 and the model was for banks to buy from clients (at a fixed rate) and sell ONLY to the CBN, also at a fixed rate, making the CBN the single seller in the country and the CBN allocated FX on the directives of certain Ministers.
According to market dealers, the FX market rules are so unique and powerful that they have the potential to ruin the economy, if not running efficiently. This was the case in 1994 when the economic crisis that followed the political logjam of 1993 led to a collapse in the GDP growth to a woeful 0.91%.
“Today, we are back to 1994 and as it was then, the economy is collapsing with the paradox of inflation rising when it should be falling”, one leading economist said.
Similar sentiments were expressed in an April 12 article in the New York Times, written by Walter Lamberson, on “How To Save Nigeria’s Economy and Stop Corruption,” and published in Business Day today.
According to the New York Times, the collapse in the price of oil is putting pressure on oil exporters around the world, from Canada to Kuwait. But perhaps no country is less prepared to survive prices at about $30 a barrel than Nigeria, which until a few years ago relied heavily on petroleum exports for its revenue.
“The cracks are starting to show: While the official rate doesn’t reflect it, Nigeria’s currency, the naira, is the world’s worst performing this year.
The economic troubles could hardly have come at a worse time. Last year, Nigerians elected Muhammadu Buhari as president after he ran on a zealous anti-corruption platform. Unfortunately, Mr. Buhari’s insistence on maintaining the peg at the current official exchange rate is not only crippling production, it is also encouraging corruption. He should abandon it as soon as possible and allow the naira to devalue,” Lamberson said
Indeed, Nigeria has pegged the naira to the dollar for decades, adjusting the exchange rate according to international supply and demand. This rate is being maintained at the president’s insistence, undermining any notion of the central bank independence.”
BusinessDay learnt that the Foreign Exchange (Monitoring & Miscellaneous) Act, 2004 which has been at the centre of this newspaper’s reporting in the last week, has its history in what happened in 1994.
It was the self inflicted foreign exchange crisis for Nigeria since 1986 when the Inter-bank FX Market was introduced.
Abacha and the then Minister of Finance, Mr. Anthony Ani, quickly learnt their lessons. Encouraged by the private sector, the government of the day, interestingly, a military dictatorship, decided to promulgate a decree to prevent the military or any other government after it from ever considering fixing the exchange rate, It is that decree that is now the FEA 2004 Act.
The FMDQ OTC Securities Exchange is the recognised organiser of the fixed income and currency markets and the MD/CEO, Bola Onadele. Koko, when contacted by BusinessDay, claimed that “FMDQ OTC Securities Exchange did not advise the banks on a fixed rate to execute FX trades. FMDQ’s role is to build a platform to drive transparency and credibility by ensuring its Members (banks) offer pre- and post-trade transparency and operate with responsible market conduct in a way to deliver global competitiveness of the Nigerian financial markets”.
The National Bureau of Statistics reported on Tuesday that Nigeria’s inflation rate rate climbed to the highest level in almost four years in March and this is the highest among oil producing peers, a further signal that the Federal Government’s naira peg is pushing up food and fuel prices and adding pressure on consumer incomes.
Inflation in Africa’s largest economy and oil producer, accelerated to 12.8 percent on an annualised basis, the highest since July 2012, from 11.4 percent in February and compares with the most recent annual inflation rate of 4.3 percent in Saudi Arabia, 9.39 percent for Brazil, 3.5 percent for Malaysia, 7.9 percent for Russia, and 7.45 percent for Colombia, according to data compiled by BusinesssDay.
The approval rating of the once popular president Muhammadu Buhari slipped again last month, according to the poll by Governance Advancement Initiative for Nigeria (GAIN) the second successive monthly fall, as Nigeria’s misery index worsens, especially so among the core base of the president.
Evidence points to Nigeria’s manufacturing sector contracting further, as was the case in March, when the Purchasing Managers Index (PMI) printed at 45.9 percent, according to a March 31 report from the Central Bank of Nigeria (CBN) with the Lagos Chamber of Commerce and Industry (LCCI) forecasting that some 80,000 manufacturing jobs will disappear in Nigeria as a result.
“Across manufacturing, people are beginning to shut down. It is happening across the sector” said Babatunde Odunayo, a former CEO of Nigerian conglomerate Honeywell Group. “Family owned businesses are shutting down,” Odunayo said.
President Buhari’s policy of pegging the naira at N199 per dollar has exacerbated inflation and unemployment as traders and retailers base prices on the black market rate of N320/$1.
Deep in Buhari’s support base in northern Nigeria, the small businesses are hurting on the back of his failed foreign exchange policy and the local economy which depends on trading is crimping by the day.
“The strong dollar is really hurting”, 41 year old Abdullahi Abubakar, a fabric trader told Bloomberg in Kano as he tried to calm two angry customers.
“Our profits have really gone down. If this continues, the whole economy will suffer.”
In nearby Katsina, Buhari’s hometown, Musa Kallah, a 60 year old rice seller says, “it is terrible.”
In the last six months, he has put up the price of his 50-kg rice. “It is because of the dollar. The customers who bought 100 sacks then, can now buy only 50” he said.
Murtala Balla Maisallah, who like Abubakar, sells imported fabrics in Kano, says successive governments have only themselves to blame for the people’s preference for foreign goods. They allowed a thriving manufacturing base to collapse in the 1990s as infrastructure fell into disrepair. His fears about security have now been replaced by worries for the future of his business.
The currency rate in Nigeria is being kept artificially low at the insistence of the president, although many believe that the FX Market and Nigeria will thrive better if the CBN were to promote a thriving autonomous market.
According to one analyst, “too many wrong decisions have been taken. If the market had been opened after the swearing in of the president in May 2015, the USD may even be at $/N200 or below at the moment. That was the highest point of Nigeria, politically, and that advantage was not capitalised on.”
To compound Nigeria’s woes, MSCI Inc. is considering dropping Nigeria from its Frontier Markets Index which could put at risk about $500 million of stock investments in Africa’s biggest economy according to Renaissance Capital Ltd.
Investors following the index have $500 million staked in Nigeria, half what they would have if they were properly tracking the benchmark, and those holdings are “under threat” should MSCI exclude Nigeria, according to Charles Robertson, chief economist at Renaissance, a Moscow-based investment bank focused on developing markets.
“The risk has become acute,” Robertson said in an e-mailed note. “Being excluded from such indexes creates a higher hurdle to attract future investments. Nigeria would have to become so attractive to foreign investors that they would make it an off-index investment.”
MSCI is reviewing Nigeria’s position because of foreign-exchange controls imposed by the central bank that have led to the “continuous deterioration of foreign-exchange market liquidity,” the company said in a statement on Thursday. It will make a decision by April 29.
Nigeria’s currency-trading restrictions promoted by Buhari have already caused Nigeria to be excluded from JPMorgan Chase & Co. and Barclays Plc local-currency emerging market bond indexes, tracked by hundreds of billions of dollars of funds, increasing the country’s isolation from the global financial system.
By Our Reporter
