Addressing the FX Shortage

BY IJEOMA NWOGWUGWU

BEHIND THE FIGURES

After the initial euphoria that followed the Central Bank of Nigeria’s return to a managed currency float, while retaining capital controls on what it qualifies as “43 non-eligible items”, concerns have been raised among market analysts over improved dollar supply to the foreign exchange market to meet pent-up demand, estimated at anywhere between $3 billion and $12 billion. As things stand, since the CBN gave commercial banks and dealers the green light to return to the rate setting mechanism at the Investors and Exporters (I&E) window to one of a willing buyer, willing seller basis, as initially laid out by the central bank in 2017, foreign investors have continued to remain on the sidelines as they await more measures aimed at loosening FX controls.

Dr Kingsley Obiora, Deputy Governor in charge of Economic Policy at the Bank, fortunately, has assured the market of further policy changes from the central bank. For foreign direct and portfolio investors this is most critical as the reinstatement of a managed float, while viewed as a positive development for the market, it remains insufficient in pushing the needle as far as improving dollar liquidity is concerned. This was evident when on June 14, the naira first depreciated by 29% to N664.1 to the dollar at the I&E window but subsequently tumbled to an intra-day high of N815 to the dollar on July 21, before closing at N763.17 to the dollar by the close of business that day. Expectedly, by the next day, the central bank intervened in the market, selling $29.5 million to nine commercial banks to shore up dollar liquidity on the back of rising demand for the greenback.

That the CBN was forced to intervene in the I&E window eight days after it paved the way for a managed currency float did not come as a shock to market analysts, who participated in a no-holds-barred discussion on Nigeria’s new FX policy measures, organised by Nairametrics on Clubhouse, a social media audio app last week. During the dialogue, participants wondered if the CBN had sufficient net external reserves to defend the naira, given the FX backlog that has accumulated over the last three years.

Participants such as Wale Okunrinboye, Chief Investment Officer of Access Pensions were of the view that it would have been ideal if Nigeria had a Standby Arrangement (SBA) with the International Monetary Fund in the form of a short-term loan to shore up its balance of payments position. He pointed to Egypt which was in the same position as Nigeria a couple of years ago when it floated its currency, noting that even though the Egyptian pound depreciated at the time the float was introduced, its decline was not precipitous because the country’s central bank was able to fall back on its standby facility from the IMF to intervene in the market whenever the need arose.

Well, in the absence of an IMF loan, Nigeria has no choice than to comprehensively address the chronic shortage of FX through a combination of monetary and fiscal policy adjustments. For one, the issue of the negative rate of return on Nigerian bonds is an issue that the central bank cannot shy away from. Despite President Bola Tinubu’s stated preference – on day of his inauguration – for a low interest rate environment to boost economic growth, the fact still remains that with Nigeria’s inflation rate hovering at over 22% (inflation is expected to rise to 24% to 26% between June and July due to the impact of fuel subsidy removal), the central bank cannot expect to attract investors if yields on fixed income securities are below the rate of inflation.

Besides, if the Tinubu administration is desirous of distancing itself from the unorthodox and interventionist policies endorsed by its predecessor, it will do well to leave the CBN to raise interest rates to address inflationary pressure in the short to medium term. Although several market analysts have argued that goods and services had already been priced at parallel market rates for most imported items, concerns persist that the inflation rate may even rise to north of 30% by August or September this year when the impact of petrol imported at market determined exchange rates is expected to hit fuel stations. Add to this the impact of the likelihood of a supplementary budget, an increase in the minimum wage, relaxation on or reversal of cash reserve requirements, and a possible increase in electricity tariffs on inflation, and the corresponding impact on the disposable income of consumers.

However, it must said that many analysts remain brutally cynical about foreign portfolio investors (FPIs), who though highly liquid, are considered to be fickle and can flee the economy on a whim, causing economic upheavals and leaving financial disruptions in their wake. For such analysts, the government should focus on how to attract foreign direct investments (FDIs) through concerted policies and reforms that will make Nigeria an attractive destination for investors that create value and additional jobs. Whilst they have a point on the merits of FDIs vis-à-vis FPIs, the truth is that at this juncture what Nigeria needs are quick FX injections in the market that can restore the confidence of even existing FDIs that have found it impossible to repatriate their earnings in recent years.

Interest rates aside, the absence of a de facto central bank governor as well as ministers of finance and petroleum is another area that should interest investors. The persons Tinubu chooses to appoint to occupy these key positions in his government will signpost his readiness to do business and implement reforms that can engender economic growth. After the mindless incompetence of the Buhari administration and its inept economic managers, the Nigeria government needs to show the world that it can select the right persons to drive economic policy.

But for me, the biggest elephant in the room that Tinubu must tackle head on is the Nigerian National Petroleum Company Limited (NNPCL) and oil security in the Niger Delta for the country to improve FX earnings in the short to medium term. Instructively, Tinubu has identified oil theft as a major concern, hence his meetings with Mr Government Ekpemupolo, predominantly known by his sobriquet Tompolo, before the presidential election, and more recently with Mr Asari Dokubo at the State House, Abuja. Though both are ex-Niger Delta militants, whom many view as non-state actors that have no business getting involved in Nigeria’s security architecture, yet it must be acknowledged that it was the decision by the late President Umaru Yar’Adua and later former President Goodluck Jonathan to grant amnesty to these militants and their followers and engage them in securing oil and gas assets in the Niger Delta that enabled Nigeria to increase and maintain crude oil output at more that 2 million barrels per day between 2008 and 2015.

Had former President Muhammadu Buhari understood the importance of those security contracts, he would not have dismantled them and embarked on a witch hunt against Tompolo after the then president assumed office in 2015. But due to his myopia, crude oil theft was allowed to go unchecked for several years until oil production was more than halved to about 937,000 barrels per day as of September last year. Of course, by the time Buhari recalled Tompolo to secure oil and gas assets towards the tail end of 2022, the combination of crude theft and underinvestment by oil firms had done incalculable damage to Nigeria’s oil production levels.

However, a huge chunk of the blame for Nigeria’s abysmal FX earnings, despite high oil prices for over year, must also be placed squarely on NNPCL and its management led by Mr Mele Kyari. That Kyari and his team have still not been fired by Tinubu continues to beat the imagination. NNPCL under Kyari has been completely mismanaged and has made a mockery of the reforms envisaged for the company under the Petroleum Industry Act. Not only has NNPCL used contrived petrol importation figures, domestic consumption figures, and the subsidy scheme to deprive Nigeria of FX inflows that should have been paid into the Federation Account, those who were expecting that subsidy removal would immediately reduce the government’s fiscal deficit and free up money for spending on social and infrastructure projects, would have to wait for several months before government begins to feel the policy impact.

According to a Reuters report last Friday, NNPC owes oil traders and multinationals $3 billion for the fuel-for-crude swaps through which Nigeria has been importing fuel to meet domestic demand. Under the so-called Direct Purchase Direct Sale arrangement, Nigeria is meant to export crude cargoes in exchange for fuel, however, NNPCL is yet to ship the cargoes it still owes for previous imports, and this could take months to settle, said the Reuters report. By implication, much of Nigeria’s crude oil is already encumbered.

To make matters worse, no one knows how much crude oil is exchanged for petroleum products. In the past, the quantity was limited to the country’s total refining capacity of 445,000 barrels per day. With the opacity in NNPC, your guess is as good as good as mine as to what that number is today. Meanwhile, if we are to include the crude oil that has also been assigned to oil companies to offset the country’s outstanding cash call obligations, then Nigeria may have to kiss any revenue from crude oil exports goodbye, possibly till the end of this year.

Given the degree of mismanagement and graft at NNPCL, it remains a mystery how any right-thinking government can rely on the state-owned oil company to lead the way in improving crude oil production. But even as it decides on what it wants to do with NNPCL, the government must immediately begin to engage private oil companies, big and small, and incentivise them to bring back the oil rigs to the Niger Delta. Where pipelines meant to convey crude to oil terminals can be fixed, repair programmes should be initiated as quickly as possible in order to reduce the number of barges, which are more susceptible to spills and environmental degradation, that have been introduced in the last one year to move crude to the terminals. Improving the security architecture should include the deployment of technology at the oil wells, along the pipelines and terminals where crude is discharged into waiting oil tankers. This way, not only will Nigeria gradually eliminate theft and vandalism, it will begin to have more accurate records of how much of its oil is loaded and exported.

What’s My Bank’s Business with My Social Media Handles?

The Central Bank of Nigeria has come again. Pursuant to the Money Laundering (Prevention and Prohibition) Act and the central bank’s Customer Due Diligence Regulations of 2023, it mandated financial institutions in the country to collect and verify customers’ social media handles. For what, many wondered? Banks already have our BVNs, NINs, phone numbers, email addresses (where available), ID details, home addresses, and utility bills. Isn’t that sufficient customer information?

Personally, I would counsel that the CBN reverses its circular which infringes on my constitutional right to freely express myself through whatever channel I deem fit without fear of persecution or a political witch hunt. The circular, as far as I know, and law which gave CBN the temerity to issue the circular, are ultra vires and in conflict with the Constitution of the Federal Republic of Nigeria (as amended).

It will be recalled that the central bank has already shown a propensity to issue Post-no-Debit (PND) orders on customers’ bank accounts it perceives as opposition elements to the federal government. This was carried out in the aftermath of the EndSARs protest in 2020 when 20 young Nigerians, including some members of the Feminist Coalition who provided logistics support to the protesters, had their bank accounts frozen on the order of the CBN.

It was later discovered that the CBN was selective as to those it chose to harass, as some young protesters who were the children/wards of Nigerian big men, including a major shareholder of a commercial bank, were excluded from the punitive action. Three weeks after issuing the PND order on the 20 account holders, the central bank obtained an ex parte order from a Federal High Court freezing the said accounts for 90 days on the spurious allegation that they were suspected of terrorism financing.

Even after the protesters challenged the order, the judge of the court, Justice Ahmed Mohammed, kept adjourning the case until after the expiration of the 90 days. The court eventually unfroze the bank accounts in what the central bank termed, “in the spirit of reconciliation.” No compensatory damages were awarded to the affected persons for the wrongful acts of the CBN and financial institutions.

In any case, I await to see any financial institution that makes the disclosure of social media handles mandatory for opening or maintaining banks accounts. Many bank customers do not have email addresses. Likewise, banks do not make it mandatory for customers to disclose their email details before an account can be opened. The same should apply to social media handles, including those that have usernames different from their account names.

Even after the protesters challenged the order, the judge of the court, Justice Ahmed Mohammed, kept adjourning the case until after the expiration of the 90 days. The court eventually unfroze th