Continuing difficulties by manufacturers and other importers in accessing foreign exchange or at least the statutory form ‘M’ cover for imports is setting the stage for a quite gloomy 2016, Business Hallmark checks have revealed.

Related to this is the fact that the pressure on the economy has continued to increase even with the release of the much awaited Medium Term Expenditure Framework for the 2016 budget; a development that is being attributed to the perceived failure of the extant monetary policies to stabilise the foreign exchange rate.

The growing consensus amongst experts therefore is that the management of the exchange rate of the naira by the Central Bank of Nigeria, CBN, has further weakened the economy with foreign investors scampering for the exit door as Nigeria continues to slide in the international financial rating charts.

Since the CBN announced the controlled foreign exchange management policy in June, ostensibly to stem the slide in the foreign reserves, by unifying the auction window of the market, prohibiting dollar deposit, and restricting 41 items from access to dollar demand, the economy has virtually plummeted.

Nigeria’s sovereign bond was downgraded by JP Morgan; the stock market has experienced its longest Bear run as portfolio investors take flight to safety; manufacturers are groaning over scarcity of dollars, while the naira has dropped precipitously toward N300 per dollar at the parallel market. 

Stakeholders now generally agree that the time is apposite for the monetary policy authorities to review its tight control on the dollar supply to meet business transactions that are needed to strengthen the economy.Nigeria’s sovereign bond was downgraded by JP Morgan; the stock market has experienced its longest Bear run as portfolio investors take flight to safety; manufacturers are groaning over scarcity of dollars, while the naira has dropped precipitously toward N300 per dollar at the parallel market. 

Stakeholders now generally agree that the time is apposite for the monetary policy authorities to review its tight control on the dollar supply to meet business transactions that are needed to strengthen the economy.

Some financial pundits assert that the CBN is becoming a willing tool in advancing the economic agenda of the incumbent administration which seems to be moving toward a closed economy and anti free market.

This, they noted is coming in spite of the fact that productive activities in the real sector of the economy has not been improved to help fixing the consumer demand gap and employment which is one of the planks of the government is being worsted.

BusinessHallmark investigation revealed that declining business activities have drastically impacted on macroeconomic recovery following the multiplier effect from international economic contractions instigated by dwindling oil price divesting foreign investors.

The fluctuation in price of oil which accounts for more than 90 percent of the nation’s foreign earning continues to have negative effects on external reserves. Analysis of the movement in external reserves in the last one year shows 15% depletion.

At the end of 2014, the gross total of Nigeria’s external reserves was $35 billion compare with $29.6 billion in the account at the moment.

Business activities in 2014 were served by the apex bank while tightening was witnessed in the financial sector as CBN strived to maintain single digit inflation target.

Also during the same period, oil price was at an average of $63 per barrel while estimated 2.1 million barrel of oil per day was produced by the nation.

However, the nation’s external reserves dropped to all time low in the last five years as the gross portion berthed at $29.6 billion in spite of the CBN’s tight fisted approach to allocating foreign exchange to importers of goods.

Meanwhile, in spite of the fact that the CBN has placed restrictions on dollar supply, the external reserves have not gained in the period.

The reserves would have dropped massively if the 2014 activities were to be sustained in 2015.

An expert who prefers not to be named explained that no nation has ever won currency valuation war. According to him, giving the naira an artificial market value is not the best for an ailing but emerging economy.

“It is unfortunate that the CBN is doing permutation and combination to check how its policies fit into the disjointed economy.

And fiscal arm is often expansionary in nature which is not expected to change for a frontier market but federal government has some misplaced priorities”, he lamented.

He further remarked that the solution to give Naira real backing is in real sector development but the authority is not ready.

Naira will be subjected to devaluation until we go back to industrialization. ”Build strong economic fundamentals, you will love to devalue your currency then”, he said.

BusinessHallmark research shows that quite a significant numbers of importers have been unable to trade due to a drastically reduced access to FX.

The situation however has caused the prices of some items to skyrocket, trending far above the general increase in price level.

Afrinvest says that low import cover of external reserves, high unmet FX demand and a bearish outlook for oil which in the analysts’ opinion reduces CBN’s capacity to defend the current exchange rate peg, have increased investors expectation of currency devaluation and stall private capital inflows.

“The objective of price stability seems to have been jettisoned for competing objectives…using administrative measures to managed FX demand has resulted to a contrived stability in the exchange rate market… the need to review the CBN exchange rate demand restrictive policy is critical in our view in the medium to long term ”, Afrinvest noted.

Experts at SCP Professionals LLC counsel that the monetary policy authorities should relax its FX management policy to allow for necessary adjustments that tally with the economic fundamentals.

At the FX market, currency traders are of the opinion that the naira does not reflect it true value, and thereby demanding for devaluation.

The analysts said that devaluation will put pressure on people. Before any long term benefits could be realized, the level of poverty must have been doubled.

As against theory, when you devalue the currency without pushing for export to earn more dollars, you will be cut in the web and be helpless.

The last devaluation has not yielded a positive result for citizens; instead dollar is out of reach. CBN seems to have realized this and introduced the PAVE initiative which is a good step for now.

The PAVE initiative encourages the nation to produce locally, add value and export to earn greenback for import.

“Devaluation of local currency is good for a country that has stock of produce that can be exported, which means there is demand somewhere around the world. Quality becomes the unique selling point and cost leadership a needed competitive edge. Anything less than that means there would be value sacrifice for selling intermediate products”; SCP Professionals LLC said.

Experts at the firm further averred that while the world is asking Nigeria to devalue her currency, but they are frowning at China doing so. Meanwhile, the difference between China and Nigeria is the productive capacity in the real sector of the economy. China is a productive economy; Nigeria is a consumer economy with high taste for imported goods. We have to look inward but expect attacks from advanced economies, they added.

At the moment, the apex bank FX restriction has readily impacted the nation’s trading activities adversely while manufacturing firms have also experienced distortions in business targets. According to analysts, the economy witnessed some level of collateral damage as a result of the apex bank austere FX supply. In the last two quarters, the GDP growth trajectory has been below three percent because of lower transactions.

Among other drastic measure taken by the apex bank include its control on deposit money banks from meeting demand for dollar from customers as well as discouraging customer dollar deposits. Supply of dollars to Bureau de Change was limited to a week, as different from the usual bi-weekly supply.

However, despite all the drastic measures to save the Naira, the local currency has not been able to retain its primary features as store of value due to rising inflation.

According to Afrinvest, for as long as CBN remains inflexible with the contrived stability in FX rates, foreign private investment inflow into equities will likely remain excluded while the market is denied of value seeking investors.

The investment banking firm in its view notes that Federal Government can alleviate demand side constraints in the economy while boosting fiscal spending.  This can be achieved by relaxing its current stance on exchange rate, a move that will nominally increase FG revenues.

BY JULIUS ALAGBE