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T H I S D AY • WEDNESDAY, MAY 25, 2016
NEWS
Buhari’s Lagos No-show Dismays Nigerian Business At least the taxi drivers in Lagos are happy, even if businessmen in Nigeria’s commercial capital are not. A year after becoming president, Muhammadu Buhari pulled out of his first official visit to Lagos on Monday, averting citywide gridlock but angering business leaders who said the 73-year-old former military ruler is deaf to their plight. With Africa’s largest economy now contracting, the foreign exchange market frozen by red tape and a new Niger Delta insurgency sending crude oil output to a 20-year low, it is a plight that gets worse by the day. Yet businessmen say Buhari, who swept to power in an election a year ago, remains oblivious and continues to sacrifice short-term growth in pursuit of his long-term dream of overhauling the way Africa’s most populous nation works. To many, sending VicePresident Yemi Osinbajo, a Lagos commercial lawyer, to the meeting in his place despite thousands of posters
welcoming “the People's President to No. 1 Africa’s mega city” - was another sign of his disdain. “It is rather unfortunate that the federal government would raise the expectations of the people... only to cancel the presidential visit, seemingly with no obvious cogent reasons being given,” said Yemi Adeleke, director of World Trade Centre, a trade and investment agency. Buhari’s spokesman Garba Shehu said the president, who is based in the capital, Abuja, was forced to postpone his visit after being “faced with scheduling difficulties”. Buhari will visit the port city after the Muslim fasting month of Ramadan which ends at the start of July, he added. Foremost among private sector complaints are foreign exchange curbs initially introduced to protect currency reserves hammered by the decline in the price of crude oil, but which are now a pillar of Buhari’s vision of a transformed economy. In order to keep the naira at 197 to the dollar, the central
Buhari bank has scuppered the interbank foreign exchange market, blocking access to dollars for anybody not armed with a valid overseas invoice. Buhari has argued that this is about ending speculation, as well as a decades-long cycle of devaluations that has hit ordinary Nigerians in the form of high inflation and discouraged the investment needed to build a serious domestic factory sector. “It is extraordinarily frustrating for those of us in the business community
who supported him that he has chosen to be intransigent about something it seems as if he doesn’t really understand,” said Timi Soleye, president of CRYO Gas and Power. Critics, including the International Monetary Fund, point to a currency trading at almost half its official value on the black market, fuelling expectations of a devaluation that are now so widespread that investment has dried up. This view received support on Friday, when the National Bureau of Statistics revealed the economy shrank 0.4 per cent in the first quarter, with industry and manufacturing shrinking 5.5 per cent and 7 per cent respectively. “It is now clear that the adverse effects of the oil price shock have filtered through to the demand side of the economy, and we maintain our view that Abuja’s current policy framework only serves to exacerbate the oil shock,” Cape Town-based NKC African Economists said. “The economy might still find itself on a slightly firmer footing towards year-end, but
this will largely depend on Abuja abandoning some of its unconventional economic policies.” Vice-President Osinbajo hinted at changes when he called this month for a “substantial” review of foreign exchange policy, but there are few signs of this filtering down to the Central Bank of Nigeria, which announces its latest monetary policy decision Tuesday. Over the last year, Governor Godwin Emefiele’s speeches have chimed closely with Buhari’s views on the economy and currency, and this month the bank explicitly denied an online media report of an imminent devaluation to 290 to the dollar. One-month deliverable forwards - essentially a view on the currency one month out - hit 245 to the dollar on May 16 after the devaluation report, but have retraced to 224 this week, reflecting a more sober analysis of the chances of a weaker naira. All but one of 12 analysts polled by Reuters this month said the currency would be
devalued, with a median expectation of a 15 per cent weakening - although many were reluctant to be pinned down on the timing. Analysts also say Buhari’s actions now closely mirror his behaviour as a military ruler in the early 1980s. Besides sending in soldiers with bullwhips to bring order to chaotic queues at bus-stops, he tried to stimulate domestic manufacturing by banning imports and rebuffed IMF pressure to devalue the currency. Still locked in a military mindset - he came to power in a coup and left via the same route - diplomats say he is unlikely to respond in a conventional manner to public or political criticism. “Buhari doesn’t do politics. He does command and control,” said one Abuja-based diplomat. “And so far it’s working.”
recipe for abuse and it should be discouraged immediately. “Everybody should go to the autonomous market. The market structure has to be supported by market dynamics,” he said. Also, the Head of Research at Afrinvest West Africa Limited, Mr. Ayodeji Ebo, said the decision by the MPC would excite the market, adding that it was a big shift from the past stance of a fixed forex regime. “With the MPC attempting to adopt a flexible exchange rate regime, this would excite the market. I expect the equities market to sustain its positive form which was in anticipation of this flexible regime and fixed income investors would come back to the market,” Ebo predicted. The Head, Research at Cowry Asset Management Limited, Edgar Ebinum, said that the current inflationary pressure would continue unrestrained as budgetary disbursement commences. He also predicted that interest rate would continue to hover at current levels, with increased double digit outlook. “We also expect the naira to remain under pressure as market forces adjust to the fixed CBN clearing rate to a more realistic parallel market rate. Also, likely foreign exchange inflows from domiciliary accounts estimated at $20 billion as currency exchange risk minimises. “Capital market activities are expected to witness gradual recovery as foreign exchange risk diminishes with the adoption of a more flexible exchange rate regime,” he added. The Lagos Chamber of Commerce and Industry (LCCI) also commended the decision of the CBN to adopt a flexible exchange rate regime. The chamber said it believed the policy choice would help improve efficiency in foreign exchange allocation in the economy.
Director General, LCCI, Mr. Muda Yusuf, added that it would help address the distortions that currently characterise the forex market and bring the economy closer to equilibrium. Furthermore, he said it would help to improve liquidity in the forex market; lead to a reduction in the current trade arrears; and reduction in the arrears for forex requests that have accumulated in the past 18 months. “We also welcome the decision of the CBN to refrain from further tightening at this time. The current context is that the economy is contracting, unemployment is on the rise, manufacturing capacity utilisation has been weakening, and investor confidence has been at its lowest ebb. The decision not to tighten monetary policy is therefore appropriate,” he said. However, Yusuf proposed that in moving towards a flexible forex regime, the CBN should adopt a transparent policy, which guarantees a level playing field for all participants. He also pointed out on the need for clarity on what the CBN described as a special window for critical transactions for which preferential rates would apply. “We would like to caution against possible abuse and distortions that such a window could create. It could pose a risk to the entire system. We would like to be assured that the window for the critical transactions will be managed transparently and in a manner that it will not create distortions in the economy. “CBN should revisit the list of items that have been placed on the exclusion list of the forex market. Many critical inputs of manufacturing companies are on the list and this has crippled the operations of such companies creating significant job and output losses,” he said.
•This report from Reuters was published before the CBN announced on Tuesday it will introduce a flexible foreign exchange rate regime
AT LAST, CENTRAL BANK TO INTRODUCE FLEXIBLE EXCHANGE RATE REGIME they need and I imagine that people can understand that this is because of what the central bank has in its kitty as the supply of foreign exchange is too inadequate to meet demand. “So what we do is to provide what we have available and expect that those who require foreign exchange will resort to other sources.” He further foreclosed expectations that the new policy on forex flexibility would translate to the resumption of dollar sales to bureau de change (BDC) operators. “The flexibility we are talking about will be worked out and details will be provided in the coming days but of course, BDCs are part of the foreign exchange market. “But I am not by any means saying that we are going to restore BDCs as in providing dollars from the CBN to fund BDC operations. They will continue to operate in the autonomous market,” he said. He also threw more light on what he meant by supplying forex for critical transactions, stating: “There are people who would want to import plant and equipment to produce goods where raw materials are almost 100 per cent available locally. “We would support such attempts by people to set up factories, foreign direct investment coming in, or even local direct investment coming in, if they want to import plant and equipment and their raw materials are almost entirely available locally. “We will look for an opportunity to provide the incentives that they need to import the equipment so we can produce locally and stimulate growth. “Of course, where we have people who are producing items where the raw material content is so minimal, naturally we would give them assistance.
“But purely it would be for raw materials with content that is very low in terms of the import requirement, not people importing almost everything from plant and equipment to raw materials.” However, he said the committee recognised that the exchange rate is a very important macroeconomic variable, “which must be earned by increased productive activity and exports”, noting that the central bank had made very significant and satisfactory progress with the reform framework for the forex market. “The committee was of the view that the current adverse global and domestic economic and financial conditions and the imperatives imposed by the demand and supply shocks to the domestic economy and considering the express intentions of government as enunciated in the 2016 budget, the policy must respond appropriately as the market continues to demonstrate confidence in the bank’s ability to deliver a credible foreign exchange market. “Accordingly, the MPC decided that the bank should embrace some level of flexibility in the foreign exchange market. Given the imperative for growth, the management of the bank has been given the mandate to work out the modalities for achieving the desired flexibility that is in the overall interest of the Nigerian economy and when the implementation of the new framework would begin,” he said. Commenting on the outcome of the meeting of the MPC, financial analysts expressed divergent views on the decisions reached by the committee. Speaking in separate phone interviews with THISDAY, they however warned that the move by the central bank to continue to allocate forex to “critical transactions” could lead to abuse in the system.
The Deputy Managing Director at Acquila Capital Limited, Mr. Oyelami Adekola, said with inflation higher than the MPR, the decision by the MPC meant that the negative incentive to invest would continue. “This is because when inflation is 13.72 per cent, higher than your MPR of 12 per cent, then there is a big issue. Except you are telling me that the inflationary pressure is temporary, which I don’t think is the case. “That is because with petrol at N145 per litre and not likely to change and with importers not likely to get cheap dollars to import, that tells you that the inflationary pressure would continue,” he said. In terms of the MPC's pronouncement on exchange rate flexibility, Adekola said: “I think we don’t have any other option. With the MPC saying they are coming up with a flexible exchange rate structure, unlike what they have been doing which was all about attending to the demand side of forex, they are now attempting to address issues of the supply side. “That is because when you devalue, investors – the foreign direct investments and foreign portfolio investments – that have been waiting on the sidelines before would start taking us serious and that will boost the supply of dollars. When you boost supply of dollars, it reduces pressure on the parallel market. “I am sure they (MPC members) just want to watch out and see where inflation would go before they come up with measures to address the forex policy.” Also, a top bank executive, Mr. Abdulrahman Yinusa, said it was good to reintroduce the autonomous forex market, which according to him had been squeezed because there was no freedom of price determination when all the transactions were being done at N197 or N199.
According to Yinusa, what the central bank wants to do is to create some liquidity in the forex market so that the price can respond to supply and demand, noting that the CBN cannot continue to subsidise forex. “My only objection is the issue of still using the CBN rate for what they called ‘critical transactions’. There was no definition of what they called ‘critical transactions’. “It was a loose definition and there should be clarity because before you know it, CBN officials may abuse it if there is no clarity. In our own opinion, we would rather have everybody use the autonomous rate and move on. “I am also disappointed that they left all the rates unchanged. They didn’t change the CRR and MPR or even liquidity ratio. I am wondering why if Nigeria is almost heading towards a recession, nobody is trying to reflate the economy. “Nigerians had expected this at this point in time; they should have taken a gamble and put some money into the economy so that it can grow. “You cannot have an economy that is shrinking and you leave the interest rate unchanged. What they were supposed to do was to loosen liquidity. “We have to decide what to do – it is either we grow the economy or we continue to look at those statistics and keep saying we are focused on inflation-targeting. The economy is shrinking, so we need to increase money supply to jumpstart the economy,” he said. The Managing Director of Financial Derivatives Company Limited, Mr. Bismarck Rewane, described the decision by the MPC as a move in the right direction. “Adopting a flexible exchange rate policy is what I have been talking about for a long time and everybody knows that. Now, the question of having a rate for critical transactions is a