I have not written for the past few months but that does not mean I have been anything less than fully engaged. I have watched with increasing incredulity and growing despondency while our economy plunges towards the abyss. What further exasperates this avowed Naija-phile’s frustration is the paucity of communication from any branch of government and the ability of the elite to stick their heads deeper and deeper into the sand. My immediate fears are, of course, for our economy but my gravest concerns are for the future of the middle class.
I stand on the side of the great debate: a ‘strong’ currency vs. devaluation and wonder whether any of the protagonists have actually descended recently from their ivory towers. For anyone still scanning the horizon from his lofty perch let me tell you, devaluation has already happened, is continuing to happen and will accelerate beyond any bench mark that you care to pray for unless something is done.
Consider manufacturing. I am massively in favour of the campaign to patronise Nigerian products but let me disabuse those that think local production is free of imports. Almost all locally processed food has imported raw materials and packaging as part of their ‘bill of materials’. Multi-nationals have been desperately seeking to replace imports with locally sourced produce for several years with limited success. The reliability of supply, consistent quality and sufficient and guaranteed quantity are just not there. Even excluding the political pressure to ‘vertically integrate’ why would anyone go to the expense and stress of Nigerian Ports, ‘M’ forms, banking processes, customs and foreign exchange exposure if they could buy locally in Naira? Most food companies will buy as much cocoa, palm oil, corn flour and starch, flavours, wheat as they can locally but there is simply not enough. Despite the innovation of using sorghum the breweries still import over 60% of their material. Local pharmaceutical companies have made great strides in recent years but they rely on imported “API” (Active Pharmaceutical Ingredients). Most of these now come from China who have just announced they are no longer giving Export Credit support for shipments to Nigeria. One local manufacturer of medicines told me this week he has not been successful in opening an L/C (Letter of Credit) since September! Raw materials aside all local manufacturing relies on imported machinery and spare parts.
Talking to manufacturers I hear the same story. Very simply, at some point, they will run out of raw materials and packaging. Most of the food processers I have spoken to are getting a maximum of 20% of their foreign exchange requirement at a higher and higher cost. Several of the banks have stated they are getting less than 10% of their requests and much of that is going on invisibles such as school fees, medical bills and transfer of the proceeds of divestment from the NSE. By corollary, manufacturers are getting significantly less than 10% of their L/C’s funded. The International FMCG’s such as NBL, Guinness, Nestle and Unilever are able to utilise their global banking networks to get some L/C’s from International Banks such as Citibank and Standard Chartered but as one of the bank CEO’s told me recently that while his global credit team accept their clients’ risk they are more and more concerned with Nigeria’s perceived sovereign risk given recent political statements and CBN action. Even so, many of these multi-nationals are between 3 and 4 months behind on payments and their stocks are running low. One food manufacturer I spoke to has a requirement for US$15 million a month. Their last major L/C was $2 million in December. Since then they have picked up a few tens of thousands here and there. When they received their last allocations back in December the effective rate after the banks’ margins was 220. No single company I have spoken to has achieved a better rate for months. Most of them have managed a few transactions with offshore currency holders or export proceeds and even from BDC’s for urgent spare parts to keep machines running. Most tell me their average cost of US Dollars so far this year is around 260 N/$. However, given the free-fall in the last few days (as I write this sterling has gone past 500 at the parallel rate) this figure will have moved further. How can the CBN governor still be saying we are defending the currency?
Even more critical for goods on our shelves are smaller companies that make inputs – especially packaging. Nigeria imports the raw materials for packaging, predominately paper/card and plastic. Whereas companies with the size to pressure banks can get some L/C’s these smaller ones get none. I am aware the largest carton suppliers only have materials until April. By that time it is likely that any food or other products in card or cardboard cartons and packets will be under threat. As will products in laminated packs and even plastic bottles. The impact of this has been noticed at the Ports. Concessioned ports were about 15% down in volume 2015 vs. 2014 and the decline has been steeper so far in 2016. Overall, Apapa is seeing a reduction of about 40% this year. Most of the vessels coming in now will be carrying goods that were ordered on L/C’s raised in November so the real reduction of activity will be seen in April/May when the failure of importers to access forex in 2016 will be felt.
Clearly, the consequence of all of this will be shortages. A quick trip to any supermarket will see early signs of this already. The unrest in the East is partly fuelled by traders unable to trade and activity in local markets is reducing. Social media has been calling for patronage of Nasco Corn Flakes and this is obvious good sense and we should be supporting home grown and Naija made. I am not sure it will seem as compelling when supermarkets are filling empty shelves with rows and rows of the same product. (Not forgetting that Nasco presumably imports its cardboard and spare parts for its machinery too?). Shoprite and other foreign retail groups have invested many millions of dollars into this economy and are now amongst the largest employers in the country. In fact Shoprite is about to open its 17th store and has more in the pipeline for this year. Not only are they failing to find forex for their imported stock they are also unable to utilise significant deposits they have in domiciliary accounts. My sources tell me their Head office is willing to offer funding to maintain their supply pipeline but the CBN is currently refusing to open “Not for Foreign Exchange Letters of Credit”. Empty shelves in our developing super-retail sector will help neither investors, suppliers nor customers.
So what is the prognosis? Well, one impact will be a rapid climb in inflation. The Law of Supply and Demand is very clear. Officially recognised devaluation or not, as shortages kick in prices will increase. We have already seen a 14% hike in the cost of flour that is flowing through into prices of bread and bakery products. Companies who through material shortage have insufficient stock to meet demand will put up their prices significantly to maintain some revenue and margins. Distributors and traders will hoard during periods of shortage. The President himself and proponents of a protected currency have cited inflation as a key reason for not devaluing (or recognising what is already happening) but this policy will lead to rampant, uncontrolled price gauging. It will also provide massive opportunities for smugglers and other illegal arbitrage for the chosen few, all at unrestrained prices.
A key economic strategy of this government is to grow non-oil income. Preventing manufacturers manufacturing will have the opposite effect. First, we are seeing a drop in sales across all retail sectors, thus reducing VAT income. The collapse of volume through our ports is dramatically reducing customs duty income. A quick look at the results of NSE companies will show a significant decline in their profits thus impacting negatively on corporate taxation. Finally, we have started to see lay-offs and redundancies and this will worsen seriously in the coming months leading to a drop in PAYE. This collapse in government non-oil revenue will put many of their other plans at risk – far beyond the specific concerns of inflation. The failure to relate with the practical side of the real economy and a current lack of what I would call ‘joined up thinking’ will not prevent the wound of high inflation and will plant an infection in the productive side of our economy which could become near fatal.
I am not claiming that recognising the current real devaluation is a panacea. With the collapse of oil-income and an empty purse due to the profligacy and corruption of the previous regime there are no simple answers. However, a controlled devaluation within a broad band moving towards rates that would be determined by a balance between supply and demand would enable manufacturers and traders to make informed pricing decisions. There would be price increases and some inflation but these would be moderated by the commercial need to maintain sales and share in a competitive market. Those that have stockpiled hard currency, such as the airlines, would be able to make transfer decisions or sell these back to improve supply. In time, not immediately, as they gain more confidence the foreign investors will reconsider their current ‘put on hold’ investment plans. Nigerians in the diaspora will resume their transfers. There will be pain throughout the value chain until the longer term structural deficiencies of the economy are tackled but by freeing up economic activity through a pragmatic not dogmatic foreign exchange policy we will be able to tick over – or ‘manage’!
My worry is that even if we make these decisions now it may still be too late for one sector of the economy – the Nigerian middle-class. I intend to discuss these concerns in my next column.
Keith Richards
