The enthusiasm for the entry into force of the long-awaited Petroleum Industry Law has sparked a new wave of optimism that the planned wave of investment in the petroleum sector and the planned removal of fuel subsidies will boost simultaneously the supply of currencies and will reduce market pressure. , reports Festus Akanbi
For obvious reasons, apart from the initial and sustained reactions to the signing of the Petroleum Industry Bill (GDP), discussions in the business and economic circles last week mainly focused on the instability of the foreign exchange market and the corresponding decline. of the value of the naira.
Although the week opened with measured optimism as the naira registered marginal gains against the US dollar in the official market (Nafest window), analysts said the gain was too small to spark the hope of traders in the market.
According to data published on the FMDQ Security Exchange where forex is officially traded, the naira closed at N 411.39 per dollar on Wednesday, August 18, 2021 after closing at 411.50 to $ 1 on Tuesday, August 17, 2021.
The last time the naira closed at exactly 411.50 N was on August 9.
These marginal gains in the official market were not reflected in the parallel market, as data posted on abokiFX.com, a website that aggregates parallel market rates in Lagos, showed that the local currency closed again at N515.00 for $ 1, the same rate it has negotiated since Aug 11.
As the disparity between official rates and parallel market rates continues to widen, economists have described the federal government’s failure to fully utilize the nation’s potential as one of the causes of insufficient external reserves. of the country estimated at 33.6 billion dollars as of 13 August. The narrative is that the more foreign investment that flows into the country, the greater the fx that is available to productive businesses in the country.
This fact was corroborated by President Muhammadu Buhari who on Wednesday revealed that Nigeria has lost about $ 50 billion in investment in the oil and gas industry in 10 years due to industry stagnation caused by the uncertainties created by the failure of the approval of the petroleum industry. Invoice (GDP).
PIA to the rescue
The opinion in the government circle is that the enactment of the GDP law and the early end of subsidies in the oil sector would bring some relief to the foreign exchange market.
Although the federal government has made it clear that the removal of subsidies will not be immediate, financial analysts said the signing of the petroleum industry bill last week indicates that the removal of fuel subsidies is a matter of time. . They believe that while the federal government continues to take its time in determining when to remove fuel subsidies, the focus should also be on how to get more fx influx into the economy.
One of those industry watchers who pushes this kind of narrative is the executive director of Cordros Capital Limited, Mr. Olufemi Ademola.
However, as far as he is concerned, “there does not appear to be any short term solution (s) to the exchange rate problems the country is currently facing.” Although we focus on the demand for currencies, one of the main drivers of exchange rate sentiment is the supply of the currency in the market. As long as the market views our ability to continuously generate currency as limited, speculators and arbitrageurs will continue to create volatility that will push rates up.
Need for structural reforms
But does that mean that there is nothing that can be done to improve the situation? Speaking of the specific measures needed to breathe fresh air into the forex market, Ademola said: “The most effective measure will be to seek an improvement in the supply of currencies. Unfortunately, this is not just a monetary phenomenon. It would also require a significant level of structural reforms and incentives in addition to monetary intervention to increase export activity and thereby improve foreign exchange earnings.
“Concentration and reform of extractive sectors such as solid minerals and agriculture would boost the currency in the long run.
“The other alternative will be either to move from the managed floating (semi-fixed) exchange rate regime that we operate to a floating exchange rate, or to restrict the free movement of foreign capital inside and outside the country. .
“Each of the alternatives will have different consequences, which are likely to be negative in the short term. They would, however, help stabilize the exchange rate in the long run. This may not necessarily lead to currency appreciation, but it should lead to exchange rate stability. “
He explained that this could therefore mean that the monetary authority would be obliged to maintain the managed float regime for the time being while working with the tax authority to reform the currency-generating sectors and encourage investment in sectors with lower levels of investment. fiscal and monetary incentives.
This, he said, would continue until sectors and businesses are able to generate a critical mass of foreign exchange earnings for the country.
When asked to justify the failure of the relative stability of the crude oil price to reflect the value of the naira, Ademola explained that “in addition to the fundamentals, the exchange rate also reacts to feelings about the host country. .
“Basically, the stability in the price of crude oil is believed to be temporary and could decline in the short term as the effect of the Covid-19 pandemic continues to depress demand for oil. The increased use of renewable energy products also affects the attractiveness of crude petroleum products as a store of value.
“In addition to the fundamentals, the current domestic political situation, especially with increased insecurity, is leading to negative feelings against the naira against other currencies.”
Campaign expenses and value in naira
Although the incumbent administration has put in place several policies to increase the value of the naira, some fear things will get worse by next year, when the campaign for the 2023 elections begins, as politicians are forced to start spending money here. and there. So the next question is what will be the fate of the naira when the campaigns begin?
The head of Cordros Capital also shared the belief that “there is no doubt that increasing demand for any purpose will have an effect on the exchange rate due to the limited supply. It gets worse when the demand is not for productive activities. But I’m not sure the experience in 2023 will be any different from what we’ve seen in the past. It would only be that some other sectors would suffer from the inability to access foreign currency during the election period.
“The new exchange rate policy of the Central Bank of Nigeria (CBN) would also help to ensure that the real demands for foreign exchange would be met by the banks; thus reducing the potential shortage of foreign exchange during the election period.
However, some economists believe President Buhari’s administration is already tackling the problem of dollar crunch and falling naira values by signing the Oil Industry Bill. The early removal of fuel subsidies and the concomitant removal of pressure on the dollar, according to this school of thought, will positively stabilize the foreign exchange market.
According to Mr. Ayodeji Ebo, Retail Investment Manager, Chapel Hill Denham, “While other major factors such as insecurity and currency liquidity play a major role in attracting foreign direct investment in country, the market-oriented approach can facilitate investment.
“One of the main concerns is the elimination of fuel subsidies, which will have a severe impact on Nigerians as the population is still trying to recover from the devastation caused by COVID-19. With an oil price of around $ 70 per barrel, the cost of landing will be close to N300, which is an increase of almost 100% if implemented. This will cause the prices of many goods and services to soar, which will invariably have an impact on the standard of living. On the other hand, removing oil subsidies will improve business activities in the downstream sector, as NNPC has been the main importer of oil in recent years.
Ebo was not the only economist who hoped that the planned removal of fuel subsidies would give the naira firmness given the anticipated decline in demand for dollars.
Unlock a new investment
Standard Chartered Bank Managing Director, Global Research, Razia Khan, who also shares this view, believes that “the passage of the long-awaited oil sector legislation in the second half of the year is expected to create more certainty on fiscal terms, unlocking new oil investments ”.
She noted that despite rising oil prices, foreign exchange reserves remain under pressure, falling to $ 33.4 billion in June. According to her, several factors probably explain this. “The current account remains in deficit, with little offsetting flow (although the deficit narrowed to $ 1.75 billion in the first quarter of 2021 from $ 5.4 billion in the fourth quarter of 2020, reflecting higher prices. oil and reduced imports due to the limited availability of foreign exchange).
“With oil exports still limited by the OPEC quota, recent data suggests that demand for imports has grown faster than exports. The increase in spending on fuel subsidies since January 2021 has probably played a significant role, ”she noted, adding that the subsidies have also reduced remittances from state-owned oil companies to the account of the Federation – the usual source of replenishment of foreign exchange reserves.
However, despite fears fueled by foreign exchange market watchers, Minister of Finance, Budget and National Planning Ms.Zainab Ahmed is optimistic that the latest Central Bank of Nigeria policy ( CBN) pushes the naira towards a unified exchange rate.
The minister, who spoke at the interactive session on the Medium-Term Expenditure Framework (MTEF), hosted by the House of Representatives’ finance committee in Abuja, said the policy would put an end to multiple tax rates. changes that have undermined the country.
She noted that foreign investors always avoid the capital market because of the policies.
Speaking to lawmakers, Ms Ahmed said: “We have not seen the return of foreign investors to the Nigerian capital market. The situation is further aggravated by the devaluation of the naira by the Central Bank of Nigeria.
For his part, CBN Deputy Governor, Department of Business Services, Edward Adamu, said the COVID-19 outbreak and the slow recovery of the oil sector are the main factors responsible for the state of naira.
Analysts believe, however, that with the right policy in place Nigeria will overcome the current turmoil in the foreign exchange market.