The excitement over the commencement of the long-awaited Petroleum Industry Act is giving rise to a new wave of optimism that the anticipated flurry of investments in the oil sector and the planned removal of fuel subsidy will simultaneously boost forex supply and reduce pressure from the market, reports Festus Akanbi
For obvious reasons, save for the initial and sustained reactions to the signing of the Petroleum Industry Bill (PIB) into law, discussions in business and economic circles last week dwelt essentially on the instability in the foreign exchange market and the corresponding fall in the value of the naira.
Although the week opened with a measured degree of optimism as naira recorded marginal gains against the US dollar at the official market (Nafest window), analysts said the gain was too insignificant to raise traders’ hope in the market.
According to the data posted on the FMDQ Security Exchange where forex is officially traded, the naira closed at N411.39 per dollar on Wednesday, August 18, 2021 after it closed at 411.50 per $1 on Tuesday, August 17, 2021.
The last time the naira closed at N411.50 on the dot was on August 9.
This marginal gains in the official market did not reflect in the parallel market as data posted on abokiFX.com, a website that collates parallel market rates in Lagos showed that the local currency again closed at N515.00 per $1, the same rate it has been trading since August 11.
As the disparity between the official and parallel market rates continues to widen, economists described the failure of the federal government to fully utilise the nation’s potential as one of the causes of the inadequacy of the country’s external reserves put at $33.6 billion as at August 13. The narrative is that the more foreign investment that flows into the country, the more the fx that is available for productive ventures in the country.
This fact was corroborated by President Muhammadu Buhari who, on Wednesday disclosed that Nigeria lost an estimated $50 billion worth of oil and gas industry investments in 10 years as a result of stagnation in the industry occasioned by uncertainties created by the failure to pass the Petroleum Industry Bill (PIB).
PIA to the Rescue
The thinking in the government circle is that the signing into law of PIB and the anticipated end to subsidy in the petroleum sector would bring some level of relief to the foreign exchange market.
Although the federal government has clarified that the removal of subsidy will not be immediate, financial analysts said the signing of the Petroleum Industry Bill into law last week is an indication that fuel subsidy removal is a matter of time. They believe that while the federal government continues to take its time on when to remove fuel subsidy, the focus should also be put on how to achieve more inflow of fx into the economy.
One of such industry watchers, who push this kind of narrative is the Executive Director, Cordros Capital Limited, Mr, Olufemi Ademola.
However, as far as he is concerned, “There appears to be no short-term solution(s) to the exchange rate challenges the country currently faces. While our focus has been on the demand for foreign exchange, one of the major drivers of exchange rate sentiment is the supply of the currency to the market. As long as the market views our capacity to generate foreign exchange on a continuous basis as limited, speculators and arbitrageurs would continue to create volatility which pushes the rates up.”
Need for Structural Reforms
But does this mean there is nothing that could be done to improve the situation? Speaking about specific measures needed to breathe fresh air into the forex market, Ademola said, “The most effective measure will be to seek an improvement in the supply of foreign exchange. Unfortunately, this is not a monetary phenomenon alone. It would also require a significant level of structural reforms and incentives in addition to monetary intervention to increase export activities and there improve foreign exchange earnings.
“The strong focus and reform of the extractive sectors such as solid minerals and agriculture would boost the currency in the long term.
“The other alternative will be to either change from the managed float (semi-fixed) currency regime that we practice to a floating exchange rate or to restrict the free movement of foreign capital in and out of the country.
“Any of the alternatives will have different consequences, which are likely to be negative in the immediate term. They would however help to stabilise the exchange rate in the long term. This may not necessarily lead to currency appreciation but it is expected to result in exchange rate stability.”
He explained that this may therefore mean that the monetary authority would be forced to continue with the managed float regime in the immediate term while working with the fiscal authority to reform foreign exchange earning sectors and encourage investments in the sectors with fiscal and monetary incentives.
This, according to him, would continue until the sectors and businesses are able to generate a critical mass of foreign exchange earnings for the country.
When asked to justify the failure of the relative stability in the crude oil price to reflect on naira value, Ademola explained that “In addition to fundamentals, the currency exchange rate also reacts to sentiments about the host country.
“Fundamentally, it is believed that the stability in the price of crude oil is temporary and may decline in the short term as the effect of the Covid-19 pandemic continues to lower demand for oil. The increased use of renewable energy products is also affecting the attractiveness of crude oil products as a store of value.
“In addition to the fundamental, the current domestic political situation, especially with the heightened insecurity, is resulting in negative sentiments against the Naira in comparison to other currencies.”
Campaign Spending and Naira Value
Although the incumbent administration has rolled out several policies to push up the value of the naira, there are fears from certain quarters that things may get worse by next year when the campaign for the 2023 elections will begin as politicians are bound to start throwing money here and there. So, the next question is what will be the fate of naira when campaigns start?
The Cordros Capital chief also shared the belief that “There is no doubt that the increase in demand for whatever purpose will have an effect on the exchange rate due to the limited supply. It gets worse when the demand is not for productive activities. But I am not sure the experience in 2023 will be different from what we had seen in the past. It would only be that some other sectors would suffer the inability to access foreign exchange during the election period.
“The new policy of the Central Bank of Nigeria (CBN) on exchange rate would also help to ensure that genuine requests for foreign exchange would be met by the banks; thus reducing the potential fx scarcity during the election period.”
However, some economists believed that President Buhari’s administration is already addressing the issue of the shortage of dollars and the fall in naira values by signing the Petroleum Industry Bill into law. The anticipated removal of fuel subsidy and the attendant removal of pressure on the dollar, according to this school of thought will positively stabilise the forex market.
According to Head, Retail Investment, Chapel Hill Denham, Mr. Ayodeji Ebo, “While other major factors like insecurity and FX liquidity play a major role in attracting foreign direct investment into the county, the market-oriented approach can facilitate investment.
“One major concern is the elimination of fuel subsidy which will have a severe impact on Nigerians as the populace is still trying to recover from the havoc caused by COVID-19. With Oil price around $70 per barrel, landing cost will be close to N300 which is an almost 100 per cent increase if implemented. This will lead to a major price spike across several goods and services which invariably impacts the standard of living. On the other hand, removal of oil subsidy will improve business activities in the downstream sector as the NNPC has been the main importer of petrol in the past few years.”
Ebo was not the only economist who expressed hope that the planned removal of fuel subsidy would give firmness to the naira given the anticipated fall in demand for dollars.
Unlocking New Investment
Managing Director, Chief Economist, Global Research, of Standard Chartered Bank, Razia Khan, who also shares this view believes that “The passage of long-awaited oil sector legislation in H2 should create more certainty on fiscal terms, unlocking new oil investment.”
She noted that despite higher oil prices, FX reserves remain pressured, falling to $ 33.4bn in June. According to her, a number of factors likely explain this. “The current account remains in deficit, with few offsetting flows (although the deficit narrowed to $1.75bn in Q1-2021 from $5.4bn in Q4-2020, reflecting higher oil prices and reduced imports due to limited FX availability).
“With oil exports still constrained by the OPEC quota, recent data suggests that import demand has been rising faster than exports. Rising spending on fuel subsidies since January 2021 likely played a significant role,” she noted, adding that subsidies have also reduced state-owned oil company remittances to the Federation Account – the usual source of FX reserve replenishment.
However, in spite of the fears being nursed by foreign exchange market watchers, the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, is full of optimism that the latest policy by the Central Bank of Nigeria (CBN) is pushing the naira towards a unified exchange rate.
The minister, who spoke at the interactive session on the Medium Term Expenditure Framework (MTEF), organised by the House of Representatives Committee on Finance in Abuja, said the policy would end the multiple exchange rates that have bedevilled the country.
She noted that foreign investors are still avoiding the capital market due to the policies.
While speaking before the lawmakers, Mrs. Ahmed said: “We have not seen the return of foreign investors Nigerian capital market. The situation is further compounded by the devaluation of the naira by the Central Bank of Nigeria.
On his part, the CBN’s Deputy Governor, Corporate Service Department, Edward Adamu, said the outbreak of the COVID-19 and slow recovery of the oil sector are the main factors responsible for the state of the naira.
Analysts are however of the opinion that with proper policy in place, Nigeria will get over the current turmoil in the foreign exchange market.
