By Rafiq Raji, PhD
Return to normalcy can take a while
About a month after the Central Bank of Nigeria (CBN) adopted a more flexible FX regime, liquidity was yet to return to the market. This was in part due to the CBN’s continued domineering role. At below 300 naira to a US dollar in mid-July, the naira was believed to be still overvalued. Market participants, especially foreign ones, asserted that the CBN needed to allow the naira to depreciate further – that is, hands off a little bit – if it hoped to restore liquidity and attract much needed foreign portfolio and capital flows. The country’s apex bank finally let go later in July 2016, allowing the naira exchange rate to be determined by market forces. Expectedly, the naira weakened further, albeit boosting confidence. Not that there were no immediate gains from the liberalisation move hitherto. There was less uncertainty, for instance. And longrunning negative views by prominent economists and development partners like the International Monetary Fund (IMF), the World Bank and the United States (US) became positive by and large afterwards. The US government, in particular, hitherto implored President Muhammadu Buhari to reconsider his intransigent stance on the naira. Still, the country’s leader did not conceal his continued scepticism of the naira float move thereafter. It was later revealed that Mr Buhari’s reluctance was a major reason why the CBN sought to support the naira at below 300 to the US dollar after it announced its flexible stance. When it became clear that foreign investors were still being cautious, Mr Buhari had little choice but to see reason.
In the period prior to its adoption of a flexible FX regime in June 2016, the CBN insisted it could meet genuine and productive requests for foreign exchange. Its assertion was in the face of obvious constraints. Quite naturally, it couldn’t keep its word. Dwindling foreign exchange reserves – US$26.6 billion (5 months of imports) in May 2016, a 10.7 percent year-on-year drop then – due to lower crude oil prices was why. An earlier ban on the sale of foreign exchange to importers of some forty-one items – ranging from packed sardines to toothpicks and which remained in place as at July 2016 – was one of a series of measures the country’s apex bank took to manage demand. The evidence from market participants was that even when the CBN approved FX purchase requests, they were not supplied on time – the US$4 billion demand backlog cleared by the CBN in June 2016 was accumulated over months. Consequently, foreign trading partners refused to do business with some Nigerian importers – after letters of credit were not being settled on time and foreign banks increasingly took precautions in their dealings with Nigerian banks. Inflation rose consequently, to double-digits: the annual headline rose to 16.5 percent in June 2016 from 9.6 percent at the beginning of the year.
Fuel shortages hitherto were due to foreign exchange scarcity as well. As fuel marketers no longer received subsidy payments from Nigerian authorities, there was not much incentive for them to import products if they couldn’t also secure foreign exchange from official sources in a timely manner – the official fuel pricing template assumed the overvalued official exchange rate: this was eventually reviewed upwards in May 2016 to reflect the higher blended cost of acquiring FX from the official and parallel markets. Consequently, the retail price of petrol was capped at 145 naira per litre, a 67 percent increase. With the exchange rate now ‘market-determined,’ it is expected that this would be reviewed as needed. To get an idea of the extent of the FX scarcity back then, consider this: half of Nigeria’s crude oil earnings of US$550 million in April 2016 was required to meet fuel import requirements in that month alone, an all too risky move the authorities chose not to make in light of other very important obligations – foreign debt service, for instance. Until the two-third price increase in the retail pump price of petrol, marketers were not able to transfer the higher FX costs to consumers. The upward price revision was forced when the national oil company could not meet demand fast enough, as it became the sole importer of petroleum products in the absence of private sector participation. Add to that power shortages on the back of gas supply shortfalls due to vandalisation of pipelines – incidents have increased due to renewed agitations by aggrieved residents of oil-producing areas who feel marginalised by the central government and then low water levels at rivers – due to inadequate rains – that fed hydroelectric dams. Businesses had to deal with a myriad of constraints.
Adapted from a paper by the author in July 2016 for the NTU-SBF Centre for African Studies at Nanyang Business School, Singapore