- Economic stance hampering manufacturing competitiveness, disrupting value chain – Experts
Bemoan high cost of governance, financial indiscipline among executive, legislature
Nigeria’s current economic imbalance has been linked to the mismatch that exists between the policies of the fiscal and monetary authorities. While the latter is working very hard to mop up excess monies heating up the economy, government at both the federal and state levels keep unsettling the system through irrational spending, and the ordinary man on the street pays the price. BAMIDELE FAMOOFO writes.
Nigeria’s economy is in a troubled state, and the authorities are battling to reverse the situation. The task is basically between the fiscal and monetary policy authorities. Both constitute the dual labyrinth of the challenging environment – one complementing the other’s efforts.
The Central Bank of Nigeria on the monetary policy side is firing from all cylinders to fix the challenge. Since the change of baton at the apex bank in the third quarter of 2023, the new leadership has been combing all corners, vigorously, for real and perceived ‘enemies’ of the system.
This has created multiple policy measures targeted at reining in inflation, achieving stable exchange rate and buoying the value of the naira.
The monetary policy authorities believe that boosting forex liquidity is central to achieving these objectives. And that has been the focus of most of the actions and policy initiatives of the new CBN leadership.
The Governor of the Central Bank of Nigeria, Olayemi Cardoso, again expressed his frustration at a public function in Lagos, noting that Nigerians are facing the consequences of excess money supply into the economy, citing the N27 trillion Ways and Means loan and N10.5 trillion interventions of the past administration.
“The urgency with which the President Tinubu-led administration wants the naira to appreciate against the dollar and other foreign currencies is not the best approach to return the currency to a stronger position”
He said, “Interest rate is not set by the governor of the Central Bank. The interest rate is set by the members of the monetary policy committee. Thankfully, we have a monetary policy committee composed of independent-minded people who are solely driven by data.
“The MPC has made it very clear that for them the major issue is taming inflation and has also made it very clear that they will do whatever is necessary to tame inflation. Sadly, we have a situation where a lot of money supply went into the system. We all saw Ways and Means soar to N27trn. We saw interventions of N10.5trn. It has its consequences. In large respect, that is what we are paying for now.”
Ways and Means is the money that the Central Bank of Nigeria lends to the Federal Government in the meantime to augment spending based on the time the revenue is generated.
Under the previous administration, the then CBN governor, Godwin Emefiele, without approval from the National Assembly, allegedly printed the sum of N22.7 trillion for former President Muhammadu Buhari under Ways and Means.
CBN’s actions to salvage economy
Under Cardoso as CBN Governor since September 9, 2023, the economy has witnessed radical actions and policy measures to tackle the steep depreciation of the naira.
These include reversal of the ban on 43 items formerly prohibited from official forex window and review of activities of International Money Transfer Operators which led to a lull in their operations in the country.
There was also a directive to the banks to sell off excess dollar reserves in their system through a new Net Open Position limit arrangement and a ban on the use of foreign currency denominated collaterals for naira loans.
The CBN equally announced the removal of the ±2.5% cap spread it had previously placed on interbank foreign exchange transactions.
During the period, the regulator further directed the banks “to borrow and lend in the same currency (natural hedging) to avoid currency mismatch associated with foreign risk.”
While the apex bank battled with the flurry of policy measures, it found the crypto currency platform blameworthy for the worsening depreciation of the naira. CBN subsequently directed all banks to close the accounts of persons engaging in crypto currency trading. It thereafter went beyond that.
In February, 2024, two of Binance’s top executives – Nadeem Anjarwalla, regional manager for Africa and Tigran Gambaryan head of financial crime compliance, who arrived the country on a business trip were detained by Nigerian authorities for weeks as part of the wider clampdown on crypto currency trading.
Gambaryan has since been prosecuted and is facing a lawsuit in Abuja after his colleague, Nadeem escaped from custody in March.
The battle to save the naira has moved to the field as the Economic and Financial Crimes Commission constitutes the combat squad to rescue the sinking domestic currency.
Since the year, the anti-graft agency has been combing business centres and premises of the Bureau De Change operators to clamp down on suspected speculators and those involved in ‘kill the naira’ game.
Recently, operatives of the EFCC expanded its clampdown on BDC operators, arresting traders in Abuja, Lagos, Kano and Port Harcourt. This came as the naira weakened further against the United States dollar at both the official and parallel foreign exchange markets about Mid-May.
Earlier, some BDC operators were arrested in Abuja for allegedly speculating against the naira. Despite resistance and protest by the BDC operators, law enforcement officials have continued to conduct regular raids on them and others identified as unauthorised currency traders.
Recently, a senior official of the Association of Bureau De Change Operators, who chose to remain anonymous, provided insight into the ongoing depreciation of the naira, stating that inadequate supply was a major factor causing the depreciation.
The official also strongly refuted claims in some quarters that BDC operators are to blame for the recent fluctuations in exchange rates.
“We do not manufacture dollar, we depend on CBN for supply. But the supply has been grossly inadequate hence we turn to the parallel market to meet the needs of our customers. There would be no problem if there was adequate supply in the economy,” the ABCON official told The Point.
ABCON reacts
The ABCON’s position gives insight into the heart of the challenge: productivity. Economic and investment experts who spoke to The Point insist that the problem resides in the fiscal policy side – the government and its agencies. They argue that the CBN will be fighting a lost battle if the structural defects and unyielding culture of waste in government are not addressed.
They recalled that the biting economic hardship stems majorly from the eight years of the immediate past government which managed the economy in the most deplorable manner. They noted that Nigeria’s main forex earner is crude oil and that the oil sector has remained the albatross of the economy over the years.
For instance, the Nigerian National Petroleum Company Limited made zero remittance to the Federation Accounts Allocation Committee in 2022 while the nation lost $10 billion to oil theft in that year, according to NNPCL.
The petroleum subsidy budget was executed in the least transparent manner, consuming about $10 billion of tax payers’ money while the government continued to live on Ways and Means expenditure that added N30 trillion to the nation’s debt stock.
According to the Senate, Nigeria spent over N11 trillion in fixing the nation’s four moribund refineries in the past 10 years without receiving a drop of refined petroleum products from the facilities. Instead, the government continued to spend on the idle refinery staff every year, running into billions of naira. This worsened the nation’s fiscal situation and impacted negatively on the forex status.
Also, the unbearably high cost of governance in Nigeria, the culture of financial indiscipline among the Executive and the excesses of the lawmakers portray the fiscal and monetary policy authorities working at cross-purposes. While the CBN aims to tighten, the government is bent on loosening.
The National Assembly without hesitation approved President Tinubu’s supplementary budget for the purchase of new vehicles for lawmakers and the executive.
The Federal Government also approved N180 billion and 216 trucks of rice for the 36 states of the federation as palliative to cushion the effects of the petrol subsidy removal. These did not create avenues to boost productivity.
In addition, the fiscal indiscipline of the government manifest in the ministries, departments and agencies.
The 2020 Audit report published by the Auditor General of the Federation in February 2024, accused 101 Federal Government ministries and institutions of unaccounted funds totaling N149.36 billion. It subsequently revealed how 28 MDAs illegally withdrew N13.95 trillion from the treasury of the government.
With the economy in doldrums, the nation’s debt stock continued to mount. The DMO said as of March 31, 2024, the country’s domestic and external debts stood at N121.67 trillion ($91.46 billion).
Nigeria’s debt rose by N24.33 trillion within three months – from N97.34 trillion ($108.23 billion) in December 2023 to N121.67 trillion ($91.46 billion).
The manufacturing companies which provide employment to a large population of the workforce are not faring better, as they lament over high cost of production in an increasingly hostile environment. Data from their 2023 financial statements showed that virtually all of them recorded huge losses in their operations.
Economic experts emphasise that the Central Bank doesn’t manufacture dollars, so the nation has to earn it through production and exportation of goods and services.
“If the economy is not producing and exporting, how will it earn forex? An unproductive economy cannot earn forex. Resorting to borrowing to shore up the naira is a misnomer,” said Mukhtar Mukhtar, an investment analyst.
Manufacturers groan
Available data have shown that the aggressive monetary policy drive of the CBN has not reflected positively on the productive sector of the economy, if anything it seems to have worsened the situation, according to stakeholders.
The umbrella body of major manufacturers in Nigeria, the Manufacturers Association of Nigeria recently declared that 767 manufacturing companies shut down while 335 others became distressed in 2023 as CBN’s tight monetary policy bites harder.
The manufactures lamented that the continuous adoption of tight monetary policy is worsening the already bad situation of the real sector, and called for a robust synergy between the monetary and fiscal authorities.
The Director General of MAN, Segun Ajayi-Kadir, said, “In broad terms, the implications of maintaining the same pattern of monetary policy decisions in the last two years is evident in the continuous macroeconomic instability prevalent in the economy with overwhelming impact on the manufacturing sector in Nigeria.
“Undoubtedly, macroeconomic instability will continue to disrupt production plans, jeopardize investments, and cloud the sector’s prospects. For instance, the current monetary stance will amongst others result in further decline in manufacturing competitiveness; disruption of manufacturing value chain; and further reduction in access to credit.”
Kudos, knocks for CBN
In April, the CBN gave kudos to itself for what it called the positive outcome of its “bold” monetary policy measures and aggressive actions to wedge the weakening stance of the naira. This was based on the rebounding of the naira in mid-April when it exchanged N1, 100/$1 in the official window.
Curiously, the ‘strengthening’ of the naira coincided with the dwindling of Nigeria’s external reserves.
Findings showed that as of April 17, 2024, Nigeria’s foreign exchange reserves had lost a total of $2.33 billion in 31 days, dropping from $34.45 billion on March 18, 2024 to $32.12 billion on April 17.
The April 17 figure was the lowest the reserves had witnessed in seven years since September 20, 2017, when it stood at $32.08 billion.
It was evident that this fall had started in mid-March. Before that, the reserves had grown by $1.28 billion between February 5 and March 18, 2024. But from March 18, the foreign reserves had begun to dip. Between March 18 and March 19, the reserves dropped from $34.45 billion to $34.39 billion.
The next day, it fell to $34.32 billion. Two days later, it further dropped to $34.26 billion. The drop was so consistent that in 18 days, the foreign exchange reserves had lost $1.02 billion. Within a month, that figure had almost been doubled to $2.33 billion.
The CBN Governor denied the allegation that the foreign reserves were being depleted by “currency subsidy”.
He said that the decrease in the nation’s reserves was caused by debt repayments and other standard financial obligations. But some economic and financial experts thought otherwise.
They recalled that the CBN, in violation of its “willing buyer willing seller policy” sold the foreign exchange to the BDCs at the rate of N1,301 per dollar, with a proviso: “All BDCs are allowed to sell to end-users at a margin NOT MORE THAN one per cent (1%) above the purchase rate from CBN.”
On March 26, the CBN sold the second tranche of foreign exchange to the BDCs, allocating $10,000 per BDC at N1, 251 per dollar. On April 8, the CBN allocated $10,000 to each eligible BDC at the rate of N1, 101 for each dollar.
“The CBN does not have the dollar backing to sustain what it is doing. It’s a temporary relief that is not going to last and Nigerians must not be deceived into believing that the naira has rebound,” Mukhtar said.
He added that the apex bank’s inflation targeting framework is not sustainable as it does not address the crux of the matter, moreover as the CBN continued to raise interest rate.
Meanwhile, data from the CBN showed that Nigeria’s external reserves have bounced back, reaching $35.05 billion as of July 8, 2024. This is the first time it has crossed the $35 billion ceiling under the administration of President Bola Tinubu.
The exchange rate as at Thursday, July 11, 2024, showed that both at the official and parallel markets, the Naira has again tumbled against the dollar. In the official NAFEM market, the naira closed at N1, 554.65 per dollar. In the parallel market, it ended the day at an average of N1, 540 per dollar.
Analysts proffer solution
Economic experts and financial analysts advised the government to boost the infrastructure space and create the conducive environment for productive economic activities.
The founder of Stanbic IBTC Group and ANAP Foundation, Atedo Peterside, said trying to make naira appreciate in a hurry won’t work.
He observed that the urgency with which the President Tinubu-led administration wants the naira to appreciate against the dollar and other foreign currencies is not the best approach to return the currency to a stronger position.
“Nigerians must move away from the myopic excessive focus on exchange rates and focus squarely on growth driven by investment in infrastructure”
He advised the government to build the reserves over time and the naira will naturally find its level.
A financial analyst, Kalu Aja, urged the government to focus more on productivity than forex volatility.
He said in his X handle, “A nation gets rich by Net Exports. A currency must facilitate net exports, thus weak enough to be competitive but not too weak to make imports of inputs unbearable.
“Nigeria can’t do import substitution because it’s too expensive to manufacture in Nigeria. This means a weak Naira advantage can’t be achieved in Nigeria until local manufacturing costs drop. (Cost like power.)
“So does Nigeria then seek a strong Naira? Nigeria does not have the FX reserves to maintain a strong Naira. To keep the Naira strong, the CBN has to peg it (even a silent peg) and support the peg with constant FX sales. The CBN needs robust Net Exports to boost its reserves,” he said.
Aja added, “Refocus away from exchangeratenomics into a massive investment in infrastructure to lower the cost of doing business locally in Nigeria.
“Power supply is the number one cost for Nigerian businesses, especially SMEs. The power supply in Nigeria is unreliable, and most manufacturers have to generate their own power, which is considerably more expensive. Local costs like power must fall for local manufacturing to kick in and replace imports via import substitution. As Nigeria gets import substitution right, the Naira gains as imports fall.
“Nigerians must move away from the myopic excessive focus on exchange rates and focus squarely on growth driven by investment in infrastructure.”
In its recent advisory, the International Monetary Fund noted that the cheer about the continuous rise in the value of the naira after the strong performances of the past few weeks “could be a pipe dream if Nigeria does not take on a fundamental approach to rejuvenating its economy,” warning that “the country’s economy could be at risk if it simply fails to produce.”
