Naira: CBN At Crossroad!

Naira: CBN At Crossroad!

Oladejo Amos
The naira remains under pressure in the last one and half year and the problem is not yet over considering the current position of the Central Bank of Nigeria, CBN, after the last Monetary Policy Committee, MPC, which ended May 24, 2016.
The CBN’s governor, Mr. Godwin Emeifele, while announcing the decision of the MPC, said that there would be flexibility in the forex market, which according to him, will be announced later. It added that a special window will be created for critical sector such as importation of manufacturing equipment for production of goods and services.
Reacting to the pronouncement, equity trading on the Nigerian Stock Exchange recorded a strong gain of 3.78 per cent on May 25, to close at 28,260.61 points to levels last seen on January 5, ending a selloff by foreign investors who had quit due to currency curbs and worries they would get caught in the middle of naira devaluation.
“The cheering news is that the CBN has come to realise that we need a flexible exchange rate regime rather than the fixed regime,” Head of Research at Afrinvest, Mr. Ayodeji Ebo, said.
But few weeks after, it has not said how this will work and this has unsettled investors who are worried about getting caught in the middle of devaluation. The delay has, however, caused the stock market to record huge losses after recording landmark gains following the announcement of the plan to adopt the policy. The benchmark index of equity has dropped to 27,232.62 points on Friday, a decline of 3.64 per cent from 28,260.61points.
Also, the local currency, which has been under continued pressure owing to the delays by the CBN in unveiling its proposed flexible exchange rate policy, has been falling persistently in the past few days. It closed at N370 to a dollar at the parallel market on Friday, from N346 to the dollar at which it closed on May 24, 2016 when the proposed flexibility was announced.
This has been hampering growth in the manufacturing sector. Consumer goods group, PZ Cussons, which generates a quarter of its profits in Nigeria, last week, warned shareholders that it will take a one-off hit of £17m due to the foreign exchange shortage in the country.
The company also warned that it expected conditions to remain challenging in Nigeria with a range of potential outcomes for the new financial year dependent on the translational and transactional impacts of any movement in the naira exchange rate.
PZ Cussons said there were low levels of dollar liquidity in the country, adding that its costs of operating in Nigeria had gone up due to the additional cost of funding naira from the secondary market. It reported a 46 per cent fall in profit after tax market year-on-year in the six months ended November 30, 2015. From N1.44 billion to N779.45 million reported in the corresponding period of 2014.
Revenues also fell by three per cent year-on-year to N30.62 billion in the period under review, compared with N31.66 billion reported in the previous year. Its first quarter pretax profit fell 37.3 per cent to N546.8 million, while revenue declined 0.44 per cent to N14.95 billion during the three months to August 30, 2015, according to the result presented to the Nigerian stock exchange.
The group said it was focusing on securing materials for its key products, while it was trying to keep pricing competitive in an economy that is suffering from soaring inflation.
This came just as UAC of Nigeria Plc said the CBN’s delays in announcing details of its proposed flexible foreign-exchange system were holding back business decisions because of confusion over future costs.
The Chief Executive Officer of the company, Mr. Larry Ettah, said the CBN should have devalued the naira yesterday, rather than tomorrow. “We are hopeful that if flexibility is introduced, it will help to bring clarity in terms of costing. People don’t like uncertainty,” he added.
The company pre-tax profit fell 44 per cent year-on-year for the 2015 full year ended on December 31, 2015. It declined to N7.94 billion, compared with N14.09 billion in 2014, while revenues also fell 15 per cent to N73.15 billion, compared with N85.65 billion in 2014. For the 2015 full year, its earnings per share fell to N1.56 compared with N3.4 in the previous year.
According to Ettah, the company is suffering from an increased blended cost from suppliers that use the black market to obtain dollars while the company struggles to get greenbacks on the interbank market.
He said it had been difficult for the company to replenish inventory at cost-competitive rates and to keep up with royalty remittances to overseas partners.
“Flexibility in Nigeria’s foreign-exchange market will bring transparency in pricing and allow us to plan in the future. If you look at the cost of raising those funds and also the amount you’ll end up raising, it’s simply cost ineffective,” Ettah said.
The chairman of Vitafoam Nigeria, Dr. Bamidele Makanjuola told National Mirror that the attendant scarcity of foreign exchange has hampered ability of manufacturing company to source raw materials overseas for production. “To avoid economic stagnation, the government should promptly relax the foreign exchange restriction,” he said, adding that with rebound in global oil prices not anticipated anytime soon, government should articulate and implement a programme of action to diversify the economy by developing non-oil sector to its full potential.
Mkanjuola, who said the foreign exchange policy has affected the company’s profitability, added that credit to real sector decline further while cost of fund becomes more onerous.
He said, “The company buys and import some of the raw materials used for production, the payment for which are made in dollars. A 10 per cent increase or decrease in foreign exchange rate will have increase/ decrease profit or loss.”
Despite increase in 2015 financial year end turnover of Vitafoam Plc, its profit after taxation declined seriously by 42.83 per cent when compared with what it made in 2014.
The company recorded N249.051 million in its profit after tax for the year 2015, from N435.595 million in 2014, a drop of 42.83 per cent. It spent over N1 billion to finance its cost of production in 2015, from N805 million it spent on the same purpose during the same period of 2014. Its earnings per share fell by 53.97 per cent in 2015 from 63kobo it earned in 2014.
The CBN had devalued twice in the last two years, from N155 in November 2014 to N197 in November 2015, as part of its efforts to defend the naira and deepen local productivity. It banned the sale of foreign exchange by banks to importers without the requisite shipping documents and also directed that only imports, which are backed with evidence of shipment and other relevant documents, would qualify for purchase of foreign exchange, among others, to keep the naira afloat.
Despite these moves, many analysts believe that further devaluation of the naira is imminent and will boost the inflow of foreign capital and enhance economic growth. For instance, the International Monetary Fund said Nigeria needs to devalue the naira by adjusting the official exchange rate of N199/dollar to a more market-determined exchange rate.
The Washington-based monetary fund said Nigeria’s economy was suffering from the impact of a sharp decline in oil prices, which made naira devaluation a necessity.
“Nigeria is facing the impact of a sharp decline in oil prices. Eliminating existing macroeconomic imbalances and achieving sustained private sector-led growth requires a renewed focus on ensuring the competitiveness of the economy.
“As part of a credible package of policies, the exchange rate should be allowed to reflect market forces more and restrictions on access to foreign exchange removed, while improving the functioning of the interbank foreign exchange market,” the IMF said this after its 2016 Article IV Mission to Nigeria.
For the Head, Africa Strategy at Standard Chartered Bank, Samir Gadio, though a further devaluation of the naira may not happen soon, but an adjustment is imminent. “Despite the Central Bank of Nigeria’s resolve, markets observers believe that it will eventually succumb to pressures and devalue the currency (again),” he said.
Also, Bond Fund Manager, Standard Life Investments, Kieran Curtis, said a further devaluation would restore the economy to competitiveness and promote more capital inflows. “It will take a combination of weaker currency and higher interest rates to get us back to Nigeria,” he said, arguing that when Nigeria is compared to other oil exporters, it hasn’t had enough of a currency adjustment.
Still, Nigeria has a good number of indicators in its favour. Though at the detriment of local firms, its foreign exchange reserve position remains healthy. As of July 7, the external reserves had risen slightly to $26,401 as at Friday, June 10, 2016 from $29.1billion as at the end of June, 2015. Foreign currency reserves were $37.3 billion in June 2014.
A Cordros report say the MPC noted that the action taken at the just concluded meeting was predicated on a less optimistic outlook for the economy, given that initial monetary injections from the budget may not immediately impact on the economy.
The Head, Research at Cowry Asset Management Limited, Mr. Edgar Ebinum, said, “We expect the naira to remain under pressure as market forces adjust to the fixed CBN clearing rate to a more realistic parallel market rate.
However, the currency traded at N199.40 to the dollar on the official interbank market, within the CBN’s pegged rate band.
“Demand for the greenback has increased amidst growing scarcity as uncertainties created by the new policy have caused individuals to start to stock dollars,” the National President, Association of Bureau De Change Operators, Alhaji Aminu Gwadabe, said last week.
Economic analysts said heightened political risks, evolving economic crisis and the CBN’s delay in unveiling its blueprint on the proposed forex policy were responsible for the fast depreciating rate of the naira at the parallel market.
An economic analyst and Chief Executive Officer of Cowry Asset Management Limited, Mr. Johnson Chukwu, said, “Foreign investors are fast losing confidence in the economy, seeing that they cannot bank on what the central bank says. It is almost two weeks now since the announcement of a new policy and yet, the blueprint has not been unveiled.
“Secondly, the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, just said that oil production had fallen significantly as a result of the disruption in the Niger Delta; this means a major drop in our forex earnings. So, this is an evolving economic crisis.”
Other analysts said the value of the local currency was dipping because customers were trying to hedge against a possible depreciation when the CBN clarifies its new forex policy.
The Head of African research at Standard Chartered Plc in London, Razia Khan, said, “The suggestion of a dual exchange rate, with the maintenance of the official window, is a concern. This might lead to continued distortions in the market, ultimately with pressure on foreign-exchange reserves.”
She said, “No one is necessarily going to be investing still if they think that there is a foreign exchange regime that is not workable because it doesn’t allow for the queue for foreign exchange that builds up to be resolved. So, the more important thing, even more important than the level of interest rate in Nigeria is what can be done to resolve the foreign exchange bottlenecks. And any investor who talks about it solely from the view of devaluation is probably coming up with the wrong argument.”
To the Director General of Lagos Chamber of Commerce and Industry, Alhaji Muda Yusuf, creating a foreign exchange control for critical window may create possible abuse and distortions. “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.
“Export proceeds, capital importation and Diaspora remittances should be allowed into the economy through the autonomous window at prevailing market rates. And the owners of such funds should have unhindered access to their funds.”
According to him, the CBN should revisit the list of items that have been placed on exclusion list of the forex market, saying that 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.
Therefore, the option for the country is either devalue or float the naira, the major problem is that this country is heavily reliant on import. It’s an addiction that has one solution: Nigeria needs to stop it’s over reliance on oil for funding its dollar cravings. However, it’s a long-term solution and will require decisions of constitutional proportions: the type that can tear a country apart.