Saudi Arabia which has twenty times the foreign currency reserves of Nigeria is remarkably showing more urgency in tackling the negative economic fallout from tumbling oil prices by embarking on structural reforms even as Nigeria dithers.
Prince Mohammed bin Salman, the 30-something son of King Salman, in office less than a year, said on Friday that an initial public offering (IPO) of state owned Saudi Aramco may form part of the kingdom’s privatisation plans.
Nigeria’s plans to reform its corrupt national oil company, the Nigerian National Petroleum Corporation (NNPC) through a new oil bill are however stuck in parliament.
The Saudi’s who like Nigeria, rely on oil sales to fund more than 70 percent of government spending, have cut fuel subsidies, moved quickly to woo investors to play a bigger role in the economy and announced plans to introduce sales taxes on consumer goods.
By comparison, Nigeria has restricted access to dollars which has scared off foreign investors and hurt local businesses, hesitated on increasing the value added tax (VAT), stalled plans to privatise power/refining assets and continues to maintain control of fuel prices by subsidising them, despite the country’s precarious fiscal position.
“Oil prices, and Nigeria’s external balances are under renewed downward pressure. Calls for a move to a more liberalised FX regime are growing, as Nigerian businesses suffer in an increasingly FX constrained environment,” Standard Chartered Bank analysts led by Chief Economist for Africa Razia Khan, said in a Jan 7 note to investors.
“The unsustainable nature of the current FX regime is increasingly clear, with FX reserves and the real economy bearing the brunt of adjustment to the oil price shock.”
A banking source in Lagos tells BusinessDay that a large Nigerian Flour milling company which supplies about 70 percent of flour input to bakeries in the country may be on the verge of closure because it can not source enough foreign exchange to operate.
“They used to get $80 million foreign exchange monthly for their raw material inputs but as I speak, they are getting just about $2 million,” the source said anonymously because he was not authorised to speak.
The company which has been in existence in the country for about 50 years, with a milling capacity of over 6,000 metric tons per day, has already downsized considerably and shut down most of its plants.
Sources also say that about 15 percent of the over 120,000 Indian workers in Nigeria have lost their jobs since Q4, 2015 a bad indicator, as up to 10 Nigerian employees may have been let go per Indian worker.
The naira has been all but fixed at N197-N199 per dollar since early March last year, after the Central Bank of Nigeria (CBN) restricted banks’ ability to buy foreign-exchange.
In June, the CBN stopped importers of about 40 items, including toothpicks and glass, from obtaining dollars.
Despite the demand side management moves by the CBN, Nigeria’s foreign exchange reserves still plummeted by 15.61 percent year-on-year to $29.13 billion in Dec. 29, 2015 from $34.52 billion a year ago.
Saudi-Arabia by comparison has $650 billion of foreign currency reserves.
The plunge in oil prices, from $110 a barrel in 2014 to less than $35 today has pushed most oil producers to enact reforms to help cushion the shock.
In Nigeria however, government’s unorthodox policies such as cutting interest rates amid creeping inflation, maintaining subsidies and pegging the naira, despite the collapse in oil prices which threaten to increase economic distortions.
Worse still, the double speak coming from government and a lack of engagement with investors is eroding confidence.
Barely two-weeks after a budget speech, where Nigerian President, Muhammadu Buhari said: “I am however assured by the Governor of the Central Bank that the Bank is currently fine-tuning its foreign exchange management to introduce some flexibility and encourage additional inflow of foreign currency to help ease the pressure,” the President shut down any endorsement of a devaluation of the naira in a subsequent media briefing on Dec 30, 2015.
Nigerian unemployment jumped to 9.9 percent in the third quarter (Q3) of 2015 up from 8.2 percent as growth slowed to the lowest levels in more than a decade.
The economy expanded by just 2.84 percent in the third quarter of 2015, less than the population growth rate and implying negative per capita income expansion, even as inflation remains high at 9.3 percent.
Nigeria’s benchmark stock index shed 1,965 points or 5.6 percent in the first five trading days of 2016 with N650 billion in market capitalisation wiped out, adding to the 17 percent slump last year, as investors fret over a worsening macro – environment and lack of clarity on reforms that could act as a positive catalyst for equities.
“Whatever government needs to do, they must do now. Somebody has to come out and speak to the harm being done by the FX restrictions and take responsibility for it,” Ayo Teriba an economist and CEO of research firm Economic Associates, said.
PATRICK ATUANYA
