A Central Bank of Nigeria (CBN) requirement that companies back forward dollar purchases with naira is drying up supply of the local currency, a report by Bloomberg stated Thursday.
This is just as the chief executive officer of Financial Derivatives Company Limited, Mr. Bismarck Rewane, told THISDAY Thursday that the continuous and massive injections of cash by the central bank to fund the federal government's expenditure through ways and means (or quantitative easing) would help reflate the economy, stressing that there was no easy way out of a recession.
Increased government borrowing has also spurred banks to invest in FGN bonds and treasury bills rather than lend to customers, and also drained cash out of the system.
Some banks demand naira deposits of as much as 1.5 times the amount of dollars sought in the 60-day forwards market to guard against fluctuations in the currency, the chief financial officer of May & Baker Nigeria Plc, Ayodeji Aboderin, said.
That is pressuring the company's own cash flow, he told Bloomberg.
The difference is returned to the company on the delivery of the contracts, with the amount depending on how the currencies have moved.
"Money you would have used as working capital will be taken upfront by the bank," Aboderin added.
"Last year, it was more of dollar illiquidity. This year, it is naira illiquidity."
May & Baker, which is building Nigeria's first vaccine plant, is responding by cutting production at its water bottling and instant-noodles units, and focusing on more profitable pharmaceutical lines, Aboderin said.
Interest rates on loans have also soared to as high as 25 per cent, more than double the rate May & Baker is comfortable paying, he said.
Nigerian inflation eased to 16.01 per cent last month after reaching a record 18.7 per cent in January.
The currency rule, introduced in February, is one of a series of measures aimed at managing dollar flows after a decline in the price and output of crude oil, which accounts for about two-thirds of government revenue.
The CBN sells dollars directly to lenders on an almost weekly basis, which then supply these to their customers.
According to the chief executive officer for Stanbic IBTC Holdings Plc, Yinka Sanni, by depositing cash with lenders, companies are able to assure the regulator that they have the money to buy the currency,
The amount of naira required depends on the customer's balance sheet strength, he said.
"It is within the rules. It is a product that is acceptable and endorsed by the regulator," Sanni said.
"No bank is doing anything outside the rules. If they were, the CEO would have been cautioned by the central bank," he stated.
Speaking on the central bank's quantitative easing, Rewane disclosed that the central bank last year spent N950 billion funding the federal government.
"This year, so far it has exceeded N1 trillion. So, if you are spending N1.2 trillion a year to fund the federal government, that means you are creating liquidity and you have to mop up the liquidity.
"The cost of that mop up is about 18 per cent of that money. The total fiscal deficit of this country is about N2.7 trillion in a year and now you are spending another N1 trillion.
"So it is one of those things that we are going to see to take the economy where it ought to be. There are no easy answers," Rewane said.
According to him, the central bank has to keep lending to government to keep the government's expenditure funded and to keep the currency at the level at which it is.
"It is part of the paths out of a recession. There is no easy way out. That is the price you pay to ensure productivity.
"But in the end, I believe they should allow the direction of the interest rate to change from going upwards to actually going down," he said.
Also, a banking analyst at Afrinvest West Africa Limited, Omotola Abimbola, said the central bank's efforts have in many ways helped stabilise the foreign exchange market.
"But the unintended consequence has been that banks have restricted credit extension to the private sector due to the high yields on government securities as well as low risk appetite," Abimbola added.
Growth in credit extended to the private sector slowed to 0.9 per cent this year through July, compared with 19.8 per cent in 2016, according to central bank data.
Policy makers need to tackle a lot more than dollar liquidity to bolster economic growth and reduce the country's dependence on oil, Abimbola said.
This would include easing monetary policy by lowering interest rates from a record high, addressing infrastructure shortcomings, and improving the productivity of state institutions, he said.
Nigeria's economy expanded 0.55 per cent in the three months through June, ending five straight quarters of contractions that saw gross domestic product shrink 1.6 per cent in 2016, the first drop since 1991.
The improvement came after oil output increased and authorities boosted the supply of foreign currency needed by manufacturers to import supplies.
Flour Mills of Nigeria Plc, the country's biggest miller by market value, is planning to issue as much as N40 billion in bonds next year and is also considering a rights issue to enable it to deal with funding challenges arising from a scarcity of naira and high interest rates, its Managing Director, Paul Gbededo, said.
"Continued tightening in the market will keep interest rates high," an analyst at Vetiva Capital Management, Pabina Yinkere said.
"High interest rates increase the probability of default and make banks cautious in growing loans, particularly to SMEs. If banks do not lend it affects overall economic activity and stalls growth," he noted.