Nigeria Still Battling Crisis of Confidence

ANALYSIS 2

President Muhammadu Buhari’s delay in making key appointments and policy pronouncements several months after assuming office in 2015, negatively affected monetary policy and damaged investors’ confidence, which the government is still battling to revive two years after, writes Obinna Chima

Exactly two years ago today, President Muhammadu Buhari assumed office as the fifth democratically elected president of Nigeria. While it was clear that in 2015, the president inherited an economy that was in parlous state, his inability to drive urgent macroeconomic stabilisation programme to save the economy further worsened the situation and destroyed investors’ confidence.

In addition, certain negative comments about the economy from the president few weeks after he took over, either at home or abroad did not help the market either. The challenges that economy was facing clearly manifested in job losses in the economy, spiralling inflation, foreign exchange scarcity as investors that were not clear about the government’s policy direction sat on the fence. The economy also sank into its worst economic recession in 29 years.

However, since 2017, there have been positive projections on the economy following initiatives taken by the government to correct the initial missteps.

Inflation

The Consumer Price Index (CPI), which is used to gauge inflation in Nigeria, had risen sharply by 91.5 per cent in the last two years, from nine per cent in May 2015, to 17.24 per cent as at April 2017.

The high level of inflation was evident in the spiralling cost of goods and services in the economy in the past two years. Nigerians were faced with high cost of living as could be seen in transportation, health, housing, prices of goods and services. The social implication of the economic hardship in the country has also manifested in the rising wave of social vices in the economy. The high inflation rate has been largely blamed on the scarcity of foreign exchange in the country.

Exchange Rate/FX Management

No doubt, when the president assumed office in 2015, the monthly foreign exchange (FX) inflows into the Central Bank of Nigeria (CBN) had reduced significantly from about US$3.6 billion monthly, to less than $1 billion monthly. The development was largely caused by the decline in crude oil prices. Yet, the demand for FX from the market continued to be about US$4.8 billion monthly.

This also had attendant effect on the performance of the naira. In fact, as at June 2016, the CBN abandoned a 16-month-old currency peg of N197 to the dollar, as it adjusted the official exchange rate to N305 to the dollar. Also, on the parallel market, the naira which was about N218 to the dollar, when the president took over, depreciated to as low as N525 to the dollar, before the central bank introduced measures to halt the naira slide. The naira currently trades around the band of N380 to the dollar on the parallel market.

In the last two years, the CBN has initiated far-reaching reforms in the FX market in a bid to stabilise the nation’s currency and bridge the gap between market segments. For instance, the central bank last year reformed the foreign exchange market by introducing a flexible FX policy. The central bank took the decision following findings of round tripping and other sharp practices that had provided room for speculative attacks and arbitrage opportunities on the naira.

Although the initiative did not yield the expected results, the central bank thereafter announced further reforms in the FX market which among other things led to its aggressive foray in the FX interbank market and increased supply, reduction of the maximum waiting time for banks to take delivery of foreign currency through its forward sales contracts to 60 days from 180. It also introduced a special FX window for investors. So far, about $5 billion has been injected into the interbank FX market since February this year, even though its delayed intervention also impacted the market negatively.

In addition, the bank has introduced various FX trading instruments and platforms to enhance the availability of FX.  It also published a list of 41 items, which it stopped from accessing FX from the interbank FX market and has continued to preach against the heavy consumption of foreign goods by Nigerians, saying it is detrimental to the domestic economy.

“Why exactly should we spend scarce FX resources paying for things we can produce here in Nigeria? I believe that only entrenched interests, who do not have the interests of ordinary Nigerians at heart, would want us to do so,” CBN Governor, Mr. Godwin Emefiele said recently.

Speaking on the rationale behind the continuous exclusion of 41 items from the FX market, Emefiele who said the policy was basically borne out of necessity to conserve FX, urged policymakers across the country to pay attention to global trends and ensure that they reflect upon their strategy and thinking. Furthermore, he pointed out that there were the new realities of nationalist and populist sentiments sweeping across the world.

Interest Rate

In terms of decisions reached at its bi-monthly monetary policy committee (MPC) meetings in the last two years, the CBN has maintained a restrictive monetary policy regime as a result of the inflationary pressure in the country. The monetary policy rate (MPR) which was 13 per cent when the president took over is currently at 14 per cent. Prime lending rate which was 17.24 per cent when the president took over is presently at 17.43 per cent, while maximum lending rate has gone up to 30.18 per cent presently, from 26.84 per cent two years ago.

External Reserves

The country’s external reserves which stood at $29.1 billion when the president took over, fell below $26 billion last year, but have been on the upswing since this year. It closed at $30.49 billion as at May 25. Nigeria’s external reserves are majorly derived from the proceeds of crude oil sales. Therefore, its performance is largely influenced by events in both the domestic and international oil market.

 State of the Banks

Although the CBN has maintained that Nigerian banks have enough buffers to withstand shocks, in the face of the headwinds in the economy, the industry’s non-performing loans (NPLs) climbed to 14 per cent at the end of 2016, far above the five per cent threshold set by the regulator.

However, Moody’s Investors Service recently maintained its stable outlook on the Nigerian banking system, reflecting the rating agency’s view that acute foreign-currency shortages in the country will gradually ease.

Moody’s stated that with oil prices and economic activity gradually recovering in Nigeria, it expects banks’ dollar liquidity pressures to gradually ease.

Vice President and Senior Analyst at Moody’s, Akin Majekodunmi said: “We expect asset quality to worsen slightly over the outlook period, as historically low oil prices, currency depreciation and economic contraction experienced in 2016 continue to generate new nonperforming loans in 2017.”

The rating agency anticipates Nigeria’s real Gross Domestic Product (GDP) growth of 2.5 per cent in 2017 and 4per cent in 2018, after a 1.5 per cent contraction last year, as noted in March 2017.

The revival will be supported by government’s measures to expand non-oil sectors and its commitment to fund large infrastructure projects as well as by a partial rebound in global oil prices from lows last year, it stated.

“Nigerian banks should have sufficient capital to absorb expected losses, though Moody’s expects system-wide tangible common equity (TCE) to only decline slightly to 14.1 per cent of adjusted risk-weighted assets by year-end 2018 from 14.7 per cent at the end of 2016,” the agency added.

Meanwhile, Fitch Ratings believes that significant financial risks persist in the industry. Fitch in its assessment of the banks’ 2016 earnings pointed out that the healthy 2016 net income was lifted by large one-off revaluation gains after Nigeria allowed its currency to devalue in June.

 Anchor Borrowers’ Programme

The central bank as part of its Development Finance function has been promoting its Anchor Borrowers’ Programme, which is focusses on specific crops in the agriculture sector.

The bank recently disclosed that it had disbursed N33.34 billion to 146,557 farmers under the Anchor Borrowers Programme. The central bank also said contrary to speculations, farmers on the scheme have commenced repayment of the loans. Details of the loan disbursement and repayment indicated that as at March 31, 2017, N33.34 billion had been released through 12 participating finance institutions in respect of 146,557 farmers across 21 states cultivating over 180,018 hectres of land. Of the total amount of N33.34 billion released to date, about N15.137 billion disbursed to 73,941 Kebbi State farmers have fallen due for repayment with N7.119 billion representing 47 per cent, repaid and returned to CBN.

Path to Recovery

To Renaissance Capital analyst, Charles Robertson, with a seeming clear direction as well as with the on-going reforms in the economy, the various investment windows in the Nigerian financial market are attractive.

He noted that with the naira at around N400/$ on the parallel market, the currency currently offers a five per cent discount to his firm’s estimated fair value (this discount will likely disappear due to inflation over 2017), “while we think equities and naira bonds are cheap.”

Robertson said: “We believe we have learnt enough to justify a more optimistic stance towards Nigerian assets.”

But a former CBN Governor, Prof. Chukwuma Soludo noted that despite the stability achieved in the FX market, the CBN still has a lot of work to do in order to restore confidence in the system, including eliminating the multiple exchange rate regime, which he said is causing distortions in the economy.

The former CBN governor however acknowledged that there have been some “bright spots” in the quest to lift the economy out of recession, especially with the launch of the Economic Recovery and Growth Plan (ERGP).