The Renewed Search for Foreign Investment

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Central business district, Marina Lagos

The Central Bank of Nigeria is leading the efforts by Federal Government to attract foreign investments to Nigeria in a new bid to steer the economy from the path of recession, write Kunle Aderinokun and Olaseni Durojaiye

As the Central Bank of Nigeria (CBN) revved up its drive to attract foreign investments into the country with the road shows to the United States and United Kingdom, where it had gone to woo international investors, brief them on measures that are in place to safeguard their investments and reassure them of the viability of investing in the country, signs that the country’s economy may be on a recovery path may have begun to show.

The investment campaign, which was led by CBN Governor, Godwin Emefiele, and assisted by Deputy Governor, Economic Policy, Sarah Alade, met with over 140 investors in London, about 50 in Boston, close to 90 in New York and 10 in Los Angeles. That Emefiele personally led the team underscored the determination of the apex bank to woo back foreign investments both in terms of foreign portfolio investments (FPIs) and foreign direct investments (FDIs).

The outcome of the meetings was encouraging as the investors were “all enthusiastic to receive the governor and other members of his team, given their interest in Nigeria,” according to a CBN official, adding that “with the clarity provided, they were more amenable to trading in naira in a few weeks or months from now.”

Before the latest initiative, the CBN had earlier deployed some strategies to address the situation in the economy and attract foreign investments into the country. In June, it announced a more flexible FX regime, which allows the market to determine the exchange rate. In July, after the meeting of its Monetary Policy Committee (MPC) meeting, it increased Monetary Policy Rate (MPR) all in bid to attract foreign investment and boost stability in the FX market.

While announcing the market-driven flexible exchange rate sometimes in May, Emefiele stated that “The [central bank] will not allow the system to be undermined by speculators and rent-seekers,” adding that the apex bank would continue to intervene in markets to defend the naira’s value “as the need arises.”
Flexible FX regime scored good with the many analysts when it was introduced and some who argued that it was long overdue.

Others described it as a bold step towards restoring investor confidence in the economy but structural impediments have continued to weigh down on its efficacy, which necessitated the foreign road show that the CBN management had embarked on.
Leading global rating agency, Fitch Ratings, also lauded the introduction and insisted that the decision of the CBN to end currency peg and shift to a more flexible FX regime will support growth and could help the country to adjust to lower oil prices.

CBN Measures Yielding Results
There are indications that the efforts of the apex bank are yielding results after all. CBN has said there had been a gradual improvement in market liquidity, the claim a treasurer with one of the leading banks corroborated. The CBN attributed the improvement to the decision of the CBN to truly float the currency as well as the recent investment drive in the US and UK, pointing out that both helped to restore confidence among some investors who had been sitting on the side-lines.

The treasurer of the leading bank had stated that the average rate of naira during trading last week was N318.81 to the dollar adding that “It is noteworthy that the CBN’s contribution to the market was only three per cent of the total volume that was traded.”

Market analysts and watchers who see an improvement also point to the exchange rate at the interbank market as pointer to the conclusion. Indeed there was perceptible improvement in liquidity on the interbank spot FX market last week, recording a turnover of $196.14 million, with an average daily volume of $39.23 million between July 25 and 29.
Besides, sometimes last week, the naira strengthened to N311.03 to the dollar at the interbank FX market higher than N316.83 to a dollar the previous day.

Causes of FX Shortages
The FX shortage in the economy was caused largely by the fall in oil price in the international market. However, renewed militancy in the oil producing Niger Delta area of the country has further compounded the issue leading to Angola overtaking Nigeria as Africa’s largest oil producer.

According to Bloomberg, destruction of oil facilities in the Niger Delta has resulted in daily loss of around 70,000 barrels per day amounting to 1.52 million barrels monthly loss in July. Insiders in the oil industry agreed that the interplay of output and price is deeply affecting the nation’s export receipts.

Other causes include over reliance on importation and poor receipts from non-oil exportation. THISDAY findings revealed that, in 2015, the steep fall in non-oil export receipts was caused by two factors: unfavourable FX policy and lack of incentives, particularly the indefinite suspension of the Export Expansion Grant (EEG) even as non-oil exporters now boycott the Nigeria Export Promotions Council (NEPC) and embrace illegal exportation.

According to statistics, in 2015, while the value of imports into the country declined by nine per cent compared to 2014, that of export declined drastically by about 40 per cent in the same period. The imbalance has further precipitated the FX shortage leading to huge pressure on the exchange rate.

Expectedly, the shortage and pressure on the exchange rate continue to impact the economy negatively with the real sector being the most hit. Operators in the sector lamented that the FX shortage has led to reduction in capacity utilisation, closure of many businesses and retrenchment in the sector.

Analysts Express their Views
Even as the apex bank continues in its drive to improve FX liquidity in the economy, and to some extent achieving its desired result, stakeholders and analysts have continue to debate a sustainable panacea to FX challenge in the economy.

A Lagos based analyst with a foremost economic advocacy group, Wilson Irume, contended that the solution require that government reduce the country’s reliance on importation as well as address structural challenges facing the economy if the nation must achieve adequate FX in the economy and “ensure exchange rate stability.”
Irume who noted that “increasing interest rate is only short-term bait and is not a sustainable way to maintain exchange rate stability” added that “clearly, this is beyond the actions of the CBN alone.

The fiscal authorities must address the structural challenges facing the economy if we are to ensure exchange rate stability. “
Speaking further, he argued that “In 2015 alone, Nigeria spent over N1 trillion (US$5 billion) importing items such as vegetables, live animals, beverages, foodstuffs among others. We must look inwards and determine how to support local products, especially in times of economic hardship.

“Our fiscal authorities must set clear targets and timelines to end importation of certain products, and ensure proper value chain development of such products to increase local production. Improving the business environment to ease doing business in Nigeria, addressing the infrastructure gap, and specifically driving key reforms in the manufacturing sector is much needed,” he stated.

On his part a research analyst with a Lagos-based economic advocacy group, Rotimi Oyelere maintained that the solution to fixing the FX shortage is in two phases, short term to medium term and the long term. According to him the shot-term will entail government addressing the renewed militancy in the Niger Delta with a view to restoring crude production output to 2.2 million barrel per day which is the budget benchmark arguing that this would increase steady inflow of the USD to the CBN.

Speaking further, he maintained that another low hanging fruit require incentivising non-oil export by restoring the Export Expansion Grant (EEG) which he argued would encourage non-oil exporters to return to legal exportation.

“The solution to solving the FX shortage in the economy will appear in two phases – short term and medium to long term. In the short-term, government must address insecurity in the Niger Delta with a view to restoring output to 2.2 million barrels a day, (which is) the budget benchmark. This will improve steady greenback flow to the CBN.

“Another quick win on the table is incentivising non-oil exporters. If governments restore the EEG, non-oil exporters will be induced to go back to legal exportation which is another means of earning the greenback,” he stated.

Continuing, Oyelere stressed that, “from the medium to the long term, there is need to open up critical sectors of the economy for investment. Infrastructure and solid minerals are two attractive sectors but the challenge is the current provisions of the law which must be reviewed. National Assembly is already reviewing some laws that inhibit foreign investment into these sectors but the pace needs acceleration. Foreign investors are waiting on the side-lines to invest in the rail sector and solid minerals if the environment becomes more conducive. We need to reduce our import content; this will be realised if manufacturing activities is scaled up.”

Also proffering a sustainable solution to the FX situation, Director-General, West African Institute for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, said part of the solution is to produce goods locally and export same to earn foreign exchange.

According to him, “The Naira is not a convertible currency so the economy would never have enough. It is the responsibility of the apex bank to manage the foreign exchange market. In the long- run the economy must be diversified away from oil. In the short-term the demand for foreign goods must be curtailed either by total ban of certain items or a high tariff should be placed on them.”
He also suggested that, “another approach would be to approach the IMF for a short-term facility but we hope it will not get to that.”

Commenting on the FG’s latest investment campaign, Ekpo told the CBN to “convince foreign investors that the new forex regime would promote investment and that Nigeria is good economy to invest in.”
Analysts at Eczellon Capital Ltd, led by its chief executive officer, Diekola Onaolapo, also have their opinion on how to sustainably handle the forex situation to the advantage of the economy.

The analysts said: “The first key step would be to try to achieve convergence between the parallel market rate and the interbank rate. In our view, this can be done by allowing the 41 restricted items to access the interbank market, which would prune the volume of demand at the parallel market and thus drive down the cost of naira at that market. Once there is a tightened spread between both markets, it sends a clear signal as to what the true range of the country’s currency is.” This, they pointed out, would “invariably support investors’ confidence and quickens the needed USD inflows into the country as investment planning is made easier. “

Aligning with many of their colleagues, the Eczellon Capital analysts posited: “A sustainable approach however lies beyond monetary policies, and require complimentary efforts from the fiscal side. For instance, rather than restricting sales of FX to the 41 items on the CBN’s list, the fiscal authority could step in and place an outright ban on its importation into the country since the argument of the CBN is that such items can be produced in the country. Over the longer term, the country would have to diversify its export earnings, and invest heavily in building its infrastructural base so as to encourage the production of many of the goods it currently imports. This would go a long way to curtail the demand for FX and invariably boost the nation’s FX reserves. “

Nevertheless, the analysts said they “believe the decisions of the CBN in recent times have been consistent with respect to attracting portfolio investors into the Nigerian financial markets.”

“This largely influenced its decision via its Monetary Policy Committee (MPC) to hike the benchmark interest rate in the economy to 14.0 per cent, which is expected to make the Nigeria’s financial instruments more attractive and compensate for any associated risk of investing in them. What is required at the moment is for the CBN to remain consistent and ensure transparency in the implementation of the new FX regime. This should gradually garner the required confidence needed to keep the FX market active and increase its liquidity level over time,” they noted.

For the Macroeconomic and Fixed Income analyst at FBNQuest, Chinwe Egwim, the desired impact of the CBN’s new flexible, market-driven FX policy would likely be felt over time, given that the CBN is still the predominant supplier of FX. “Autonomous suppliers (other than the oil majors) are expected to enter the market tentatively and, until they return in good numbers, it is not clear to what extent the CBN can sustain FX liquidity.”

She however cautioned that, “The longer these players hold back from supplying FX to the new market, the greater the pressure on the naira exchange rate.” as “FX demand is still significantly higher than what is obtainable in the market.”

According to her, “FX inflow from autonomous players as well as the offshore community will certainly serve as part of the solution to the FX sourcing challenges. The MPC hiked its policy rate by 200bps at its meeting in July; real yields across the curve were unattractive due to the surge in the headline inflation rate. Ideally, the decision to raise the MPR should encourage portfolio investors to re-enter the market. However, most of them still remain on the side-line.”

“In addition to this, a pick-up in oil receipts will also boost FX supply in the economy. Granted, oil prices remain relatively low; however, curbing vandalism in the Niger Delta will increase production which should ultimately improve oil exports thus leading to increased oil receipts which are dollar denominated,” she also said.

An analyst, who is also an investment manager, Tola Odukoya, pointed out that, “in the short term raising interest rates in order to attract foreign portfolio inflow may help.” He, however, added that “ this is a short term fix at best as it leaves the economy vulnerable to foreign investors such as what we have experienced in the recent past.”
“On the other, and unfortunately,” Odukoya also said, “the only other probable option is for a rise in oil prices and domestic production given that oil is the primary earner of forex for the government.”

Just like the other analysts, Odukoya expressed hope that “we use this as an opportunity to build and promote local industries in order the curb the seemingly insatiable domestic appetite for imports thereby reducing the demand for forex and strengthening the domestic currency.”

Going Forward
Interestingly, stakeholders in the private sector insisted that the sustainable solution require that Nigeria must continue on the path to industrialisation and painstakingly implement targeted policy to support the manufacturing sector, ensuring it produce substantially to meet local demand, contributes significantly to the country’s Gross Domestic Product and create job opportunities for residents.

While they opined that this will help to berth an export driven economy, they added that it is a multi-stakeholder task that everybody including policy makers, private sector operators, nongovernmental organizations, development partners and the citizens must embrace and support local output as this is what will reduce demand pressure for importation.