Lucky Fiakpa
15 December 2008
analysis
The naira depreciation which started a fortnight ago has sent cold shivers down the spines of manufacturers and are pleadingwith the monetary authorities to do something to firm the downwards movement of the currency to save their businesses, Lucky Fiakpa writes;
Alhaji Bashir Borodo, the President of the Manufacturing Association of Nigeria, MAN, would want the Central Bank of Nigeria, CBN, to do something to firm the downwards movement of the naira fast in other to save manufacturers another round of angonising moment. He believes the current operating environment is bad enough and a further fall in the value of the naira, could spell disaster for the sector.
In a chat with Financial Vanguard, the MAN President said the decline in the value of the Nigerian currency against the dollar in the foreign exchange market will have an adverse effect on the cost of production in two ways. First, he said, cost of imported raw materials will rise which will further hike cost of production and of course, lead to increase in general price level across the country.
He also believes the falling value of the naira if not arrested could also lead to increase in interest rates. Put differently, as more naira is generated to buy dollar in the foreign exchange market, what would be left for lending for businesses would be less, which will in turn push up the lending rates by banks.
Speaking on behalf of other manufacturers, he says, "We believe the Central Bank should intervene effectively to preserve the value of the naira and protect the macro-economic gains achieved in the last four years. Otherwise, we will be repeating our experiences of four years ago".
Some other manufacturers even believe the problem is worse than that. A source close to the Lagos Chambers of Commerce and Industries, LCCI, told Financial Vanguard that it will take divine intervention for businesses to survive next year if the naira continues to fall. He said there are certain businesses that take goods from manufacturers abroad, sell and return money at the end of sales. "Mind you, these contracts were entered into and the goods sold when the naira was stronger. At the current position, it means the agent in Nigeria may have to look for additional money to be able to pay the foreign manufacturer the agreed sum," he said.
Apart from that, he said that some manufacturers had opened letters of credit for imports when the naira was strong. With the fallen value of the currency now, the importer may have to source for more funds to be able to finance the same equipment or materials. "He will be lucky if he can pass on the additional cost to the consumers if not he may have to bear the cost all alone with attendant consequences on the cost of operation. This could result in drop in profit margins and there would be the temptation to lay off workers," he says.
Bola Olayinka, the Managing Director of DN Meyers Plc and Chairman, Manufacturers Association of Nigeria, Paint Group, painted a gloomier picture. "As if the situation is not bad enough for manufacturers, right now, the banks are not even willing to open letters of credit for anyone. The situation is so uncertain and only God can save the manufacturing sector from the way things are going at the moment," he said.
The naira, which had recorded relative stability over the last three years, took a turn for the worse when it shed N1.11 against the dollar two weeks ago, fuelling apprehension among major dealers and operators of a bleak next year amid a global financial meltdown. At the official market, the Wholesale Dutch Auction System (WDAS), it lost N7 and traded at N127.5 to the Dollar, a development many believe was connected with the current global financial meltdown which has weakened oil demand in the US, Nigeria's major oil importer as well as the 2009 Appropriation Bill whose indices are not too encouraging. At the parallel market and bureau de change the rates performed even poorly, nose-diving to as low as N137 to the dollar.
As against market demand of about $2 billion, the Central Bank of Nigeria, CBN had supplied only $100 million at that WDAS session, leaving banks to source for dollars from other areas thereby exerting downward pressure on the naira. Dealers at NIFEX said banks refused to quote any spreads to avoid settlement defaults, as there were no dollars to trade, which heightened fears that the Federal Government might have taken a decision to allow the naira fall to save the dollar due to a weakening of the nation's fiscal position as a result of falling oil prices.
Dashed Expectation
Nevertheless, it was thought that the fall in the naira value was precipitated by the Eid el Kabir holidays which led to the closure of the official foreign exchange market last Monday.
But at the resumption of the market last Wednesday, the naira, continued its free fall at the Wholesale Dutch Auction System (WDAS), losing N2.56 or two per cent against the United States dollar - to trade at the N132.56 to the dollar. It also shed N2 against the dollar at the inter-market to close at N134 to the dollar.
The naira had traded at N130 to the dollar and N132 to the dollar respectively at the WDAS and inter-bank market respectively the previous Friday. The inter-bank foreign exchange market is where banks, on behalf of their customers, buy foreign exchange from one another to meet their daily needs, while the WDAS moderated by the Central Bank of Nigeria (CBN) is the official market where foreign exchange end users through their banks bid for foreign exchange.
The WDAS, introduced in February 2006 to bridge the gap between the official and black market, opens for trading twice a week - Mondays and Wednesdays. The market which had hitherto been waiting for the promised intervention by the Central Bank (CBN) saw the value of the naira drop by N5.5 from the N127 to the dollar it sold for last week.
The dollar was sold at the open market for N128 to the dollar Wednesday morning but in the afternoon, when the CBN announced the result of the auction, the open market shivered and raided the stake to N140 to the dollar and N210 to the Pound Sterling.
Operators in the open market said there was a high level of uncertainty in the foreign exchange market as banks are buying to store and are not selling. A good number of operators are not very sure of the direction of the market at the moment.
The amount of dollars sold by the CBN at the auction was not enough to revive the inter-bank market, which had been shut since the middle of last week. "Demand is still building up and the Central Bank is not selling enough dollars to meet all bids at the auction," indicating that there may be some unofficial decision by the government to devalue the naira to enable it earn more naira in the face of declining oil prices and falling production levels.
Some operators see this as double standard of some kind. The CBN governor, Professor Chukwuma Soludo, had promised a fortnight ago, shortly after the initial depreciation of the currency that the apex bank would supply sufficient forex to stabilize the market. He even said that speculators would be taken by surprise when suddenly the market would be flooded with forex.
But for the same regulator to now stand by and watch the currency crash some people say speaks volume. "What is happening at the market now is at variance with what Soludo is saying unless he is making us to believe one thing and doing the opposite because, I cannot see CBN claiming to be standing for the stability of the naira and now watching or even encouraging devaluation," a market operator said.
The managing director of Personal Trust Savings and Loans Limited, Anthony Owuye, was quoted as saying that the action of CBN translates to unofficial devaluation of the naira. According to him, the fundamental problem of the budget is that the bloated N1.09 trillion deficits has to be financed and the only option left to government now is to devalue the naira so as to rake in enough to pay for its deficit.
He believes the monetary policy has failed in addressing the current problem. The only way out is to explore fiscal policy option to meet some of the objectives as spelt out in the budget.
He decried the nation's continued dependence on oil as the major foreign exchange earner, saying it portends danger for the economy. He even doubt if the proposed bonds the Federal Government intends to float will attract buyers. Worse still, he opined that since the country is operating an import dependent economy, prices of goods will rise and that will mean hardship for Nigerians.
Global head, UBA Wealth Management, Malcolm Gilroy, was also quoted as saying that some of the inherent disconnects in the economy are responsible for the crisis in the economy. He urged the modernisation of both the financial and equity markets for effectiveness of the monetary policy to address these disconnects.
"For example, when monetary policy rates reduce, you would normally expect treasury bill rates to fall, NIBOR rates to fall, consumers then renegotiate loans and have more disposable income. However, there is no consumer market so that when interest rates fall, banks don't normally react accordingly. In fact, sometimes they increase the prime lending rates."
Gilroy stated that there was no connection between what the Central Bank wants to happen in the economy and what is really happening in the real economy.
Ayo Teriba, managing director of Economic Associates, sees a gloomy picture of a global outlook in the budget benchmark of $45. He believes "it is not too late for government to upwardly review the bench mark" noting that the bench mark is not feasible for the operation of the budget next year. He advised that the global crisis should not be localised to the extent of taking hasty decisions.
Worried by the speculative demand for foreign exchange at the auction last week, Soludo promised that CBN would intervene in the market, so as to meet the demand of banks. However, dealers are yet to see the manifestations of the promise as demand continues to outstrip supply at the auctions. In fact, CBN had sold a total of $1.3 billion dollars to banks in the last two interventions against estimates of over $3 billion demand.
Be that as it may, some analysts are of the view that government stands to gain in the event of further depreciation of the naira as a weakened naira would give it additional resources ostensibly to meet the challenges posed by huge deficit in the 2009 budget.
CBN Intervention
But it appears the CBN is not sitting idle watching the currency value crash without some efforts to stem it. The Monetary Policy Committee, MPC, on Thursday met and decided to reduce banks foreign exchange net position from 20 per cent to 10 per cent to enable it deal with the continuing depreciation of the naira.
The committee decided that the Central Bank will henceforth participate actively in the daily interbank foreign exchange market by buying and selling forex through the two way quotes. This will now replace the Weekly Dutch Auction (WDAS).
In a communique at the end of the meeting of the Monetary Policy Committee, the CBN Governor, Professor Soludo said: "The sustained stability that has characterised the foreign exchange market in the last 24 months appeared to have come under threat since November 2008 largely due to the global economic and financial developments. The demand for foreign exchange at the WDAS has risen sharply since October as private inflows have shrunk and oil prices softened at the international market.
"In the light of the above, the Monetary Policy Committee decided as follows to leave the Monetary Policy Rate (MPR) unchanged at 9.75 per cent; Reduce banks' foreign exchange net open position from 20.0 to 10.0 per cent of shareholders' funds with effect from Monday December 15, 2008; and CBN to participate actively in the daily inter-bank foreign exchange market by buying and selling through the two-way quotes."
"In conclusion, the committee noted the anxiety of participants in the foreign exchange market and will like to assure the public that the CBN remains committed to a stable exchange rate regime and will continue to meet demand for foreign exchange at market determined rates."
"The committee noted the sharp rise in headline year-on-year inflation in October to 14.7 per cent from 13.0 per cent in September 2008, which is counter seasonal and driven by both food and non-food components. Similarly, core inflation rose to 7.9 per cent in October from 6.9 per cent in September. Staff projections indicate that the year-on-year headline inflation is not likely to moderate significantly in the remaining months of 2008.
"Aggregate output growth in the third quarter was estimated at 6.83 per cent compared with 5.23 per cent in the second quarter. The growth was driven largely by the non-oil sector, which grew by an estimated 9.16 per cent. However, output of the oil sector declined by 0.81 per cent. Current NBS estimate of real GDP growth for the fourth quarter of 2008 is 8.69 per cent, while the overall output growth for 2008 is estimated at 6.77 per cent compared with 6.40 per cent in 2007.
"Provisional data showed that growth in broad money (M2) moderated in October 2008. M2, which grew by 43.5 per cent, as at end-October, 2008 which when annualised translates to 52.2 per cent.
The growth in M2 has continued to be driven mainly by credit to the core private sector, which grew by 52.5 per cent (or 63.0 per cent annualised) as at end-October, 2008. Interest Rates Key interest rates moderated in late September through October following the implementation of the decisions of the Special MPC meeting held on September 18, 2008. The rates rose in early November but have since moderated.
"The committee noted with satisfaction that Nigerian banks were largely robust enough to withstand the effects of the financial turmoil. Whereas many banks abroad have been making losses and faced with potential bankruptcies, Nigerian banks have in fact been posting profits.
Nonetheless, there is in general a welcome recognition of the need to enhance regulatory and supervisory efforts to set up appropriate information profiles and risk management strategies in the banks.
The industry liquidity ratio declined from 52.95 per cent in September to 49.22 per cent in October 2008 but rose to 51.55 per cent in November. The capital adequacy ratio continued to be robust at 22.25 per cent in November, 2008.
"The MPC noted with satisfaction the level of external reserves at US$58.11 billion as at December 10, 2008. The committee also expressed concern about the effect of the continuing slide in oil prices on the domestic economy and assured that appropriate policy measures would be adopted to minimise the overall impact on the wider economy.
The general expectation is that in 2009 highly developed economies would post negative growth rates while emerging market economies are likely to register sharp slowdown as a consequence. Other developing countries are also expected to decelerate. In the circumstance, the policy responses of most developed and emerging economies have tended to focus on growth and financial stability.
Overall, the challenges facing the Nigerian economy are in respect of developments in the international oil market encompassing both slack demand from advanced economies and declining oil prices. If the current trend continues, Nigeria's fiscal and external payments positions are likely to be further weakened in 2009.
It is, however, expected that the domestic non-oil sector will rise to the challenge to offset to some extent the slack from the external sector. The optimism stems from the expected buoyant agricultural output, improvement in infrastructure as financial resources flow to the sector, and other development-enhancing activities of the government.
"The committee noted the continued weakening of the global economy despite the coordinated response by the fiscal authorities and central banks to the global financial crisis and the ensuing economic downturn.
Specifically, global unemployment has been on the rise, shortage of liquidity and acute scarcity of credit have remained visible in the financial institutions, while stock market developments have been marked by a high degree of fluctuation and corporations have continued to post financial losses.
With falling demand by developed economies, the international crude oil and other commodity prices have declined sharply during the preceding three months. Inflation, however, appeared to have moderated slightly in most developed economies and some emerging market economies.
"The committee also evaluated the outcomes of the policy decisions taken at its special meeting on September 18, 2008 and noted that the desired macroeconomic outcomes were largely achieved. Inflation rose further in October contrary to the seasonal pattern, while the naira exchange rate depreciated in all segments of the foreign exchange market since November.
In addition, key interest rates rose during the review period after some moderation in September through October following the implementation of the decisions taken at the special meeting of the committee.
The MPC also expressed concern on the potential negative impact of the rapidly declining oil prices on the fiscal operations of the three tiers of government and the overall economy. Against this background, therefore, the overall macroeconomic outlook remains challenging."
But analysts are of the view that for the CBN intervention to be effective there must be adequate supply of forex to the market. The further depreciation of the naira last week was largely as a result of scarcity of dollar in the market. As against a demand of $1.3 billion the CBN supplied just $190 million leaving a short-fall of $1.110 billion, which banks on behalf of their customers had to shop for.
The apex bank had been rationalising the sale of dollars in the last two weeks - a development that necessitated the depreciation of the naira, which has in last two weeks weakened against the dollar. Since then, the naira has reverted to the average exchange rate level witnessed in 2006 (N130 to $1).
Three Wednesdays ago the CBN sold $105 million, $100 million last week Monday, $110 million last week Wednesday, $180 million last Thursday and $918 million last Friday when it veered into the inter-bank market with a view to calming the market.
Governor of the CBN, Prof. Charles Soludo had last week Wednesday assured foreign exchange end users that there was no cause for alarm, stressing that the apex bank would meet the foreign exchange demands and that bank has financial capacity to meet the demands.
Specifically, he revealed that the apex bank would participate in the two-way quote, where a dealer gives a quote in which he indicates the price he is willing to buy and sell.
However, the naira depreciation is linked to happenings in the global market, where most the developed countries, especially United Kingdom (UK) and US have injected trillions of dollars to save their financial markets.
The three foreign banks in Nigeria - Stanbic IBTC Plc, Standard Chartered Bank and Citibank) - have been making huge demands at the foreign exchange market because foreign investors in Nigeria are divesting from the stock market. The three banks use to be major source of foreign exchange inflow into the country but have been having a tight inflow because of the global financial meltdown.
It is hoped that the current CBN intervention could bring some calm to the troubled foreign exchange market.
1. What is happening at the market now is at variance with what Soludo is saying unless he is making us to believe one thing and doing the opposite because, I cannot see CBN claiming to be standing for the stability of the naira and now watching or even encouraging devaluation
2. But it appears the CBN is not sitting idle watching the currency value crash without some efforts to stem it. The Monetary Policy Committee, MPC, on Thursday met and decided to reduce banks foreign exchange net position from 20 per cent to 10 per cent to enable it deal with the continuing depreciation of the naira.
Be the first to Write a Comment!
Copyright © 2008 Vanguard. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
