Balancing The Books …Nigeria’s Foreign Reserve, Debt Profile, Fate of the Naira

Rivers State Deputy Governor, Engr Tele Ikuru (left) chatting with the Secretary to the State Government, Mr George Feyii, during the Children’s Day celebration at Isaac Boro Park, Port Harcourt, yesterday

The Economic growth of any nation depends on many variables some of which are its balance of trade, sound export base and value of its currency. Tthe health of Nigeria’s national foreign reserve, its capital market, debt profile and the value of the naira are negative indicators bound to have profound effect on the growth of the economy.

These fearful indications point to a less than favourable economic climate.  The drop in the foreign reserve, near collapse of the Nigerian capital market and the debt profile present a bleak economic scenario..

According to a recent Central Bank of Nigeria (CBN) report, the reserves which peaked at $62.24 billion by mid-May 2008 dropped to $35.66 billion last week, the lowest in over four years. Such depletion should and indeed have far-reaching adverse effects on the economy especially if not tied to specific projects intended to develop infrastructure.

With unemployment so rife, armed robbery and kidnapping assuming frightening heights by  the day and excessive spending by government leading to near exhaustion of the Excess Crude Account (ECA) standing at about $500 million down from $20 billion in 2007 there is need to worry.

The CBN is expected to regulate this spending which is fuelling inflation and make its numerous policies impact positively on the economy.

Clearly, the depletion of the foreign reserves may lead to the depreciation in the value of the local currency which can equally send warning signals to Nigeria’s trading partners. Already, the Naira is very weak against other major international currencies.

As at 17th May 2012, one US dollar exchanged for 158.9 Naira, while, one British Pound exchanged for 253 naira. Yet the CBN has said it does not intend to devalue the Naira even as the currency dropped to its lowest level in 13 months, last week.

CBN governor, Lamido Sanusi at a meeting of the Monetary Policy Committee (MPC) in Abuja earlier in the month said: “The Committee would continue to monitor developments in the market to ensure that measures are taken to eliminate speculative demand and exchange rate volatility.”

Analysts have however blamed the drop in the value of the Naira on the huge demands which were not met by the Central Bank.

In the face of the depleted foreign reserves and weakness of the Naira, the capital market which is expected to drive investment and economic growth is virtually prostrate, felled by all manner of market abuses.

These abuses are currently being unearthed at the on-going House of Representatives Ad-hoc Committee probe into the near collapse of the Nigerian Capital Market.

Already, there have been revelations of infractions in share buyback, misrepresentation in returns to the regulatory body – Securities and Exchange Commission (SEC) among numerous others.

It was also revealed that about 440 wonder banks defrauded the unsuspecting public of nearly 4,106 billion British pounds Sterling. All these have led to investor apathy and negatively affected the Nigerian Stock Market.

However, analysts have identified the granting of margin loans by banks, the failure of SEC and the CBN to carry out their regulatory duties and the non patronage of companies on the stock exchange as reasons for the crisis in the capital market.

To resuscitate the market on the part of sustainable growth and viability, they have called for a bail-out intervention of government as it did for the money market.

They fear that the Naira’s free fall will continue if the Central Bank fails to bridge the shortfall in its bi-weekly dollar supply to the wholesale Dutch Auction system (WDAS).

Rather than boost exports as is the case with China and India, the Naira’s depreciation against major international currencies appears to be having the opposite effect largely because of the nation’s high appetite for foreign goods while having low capacity in the production of industrial goods.

Again, the increasing theft of crude oil means that the international oil companies operating in Nigeria have not had much to sell, of late. And with the recent drastic drop in the price of the commodity, it follows that they too would have been hit by low dollar income which translates to shortage in supply of the currency at the foreign exchange market.

To curtail the nation’s dependence on food imports and with it reduce the demand for foreign currency which in itself exerts so much strain on the Naira, Dr. Ngozi Okonjo-Iweala advises the nation to diversify: “We need to diversify the economy itself into sectors such as agriculture, where we have a strong comparative advantage.

I think Nigeria should not even be importing most of the foods it currently imports. We spend about $10 billion a year on food imports that we could grow, like rice, fish, sugar, and wheat for bread. Actually, we do not grow wheat very well, but we can substitute cassava flour for wheat flour. If we pursue the development of these sectors, then we will create jobs and we will diversify”.

Analysts also called for the listing of multi-national oil and telecommunications companies either through legislation or persuasion in order to make the capital market stronger while encouraging more indigenous companies to be listed in the stock exchange.

These voices also called for proper funding of the SEC so as to carry out its regulatory functions. They argue  that a situation where SEC is partly dependent on those it regulates for financial survival  has the tendency of compromising its regulatory functions.

It would be recalled that a former Director-General of the Nigerian Stock Exchange (NSE), Prof. Ndi Okereke-Onyurke, had during her presentations before the House of Representatives’ Ad-hoc committee on the crisis in the Nigerian capital market said “the half hearted intervention in the stock exchange by NSE has kept the market comatose.”  She said SEC was collecting 0.3 percent from NSE’s operational charges.

However, the management of the nation’s debt profile has remained encouraging and the Debt Management Office (DMO) deserves commendation for good service delivery since it was resuscitated in 2000.

As at the end of March 2012, Nigeria’s total debt stock was N6.8 trillion ($44 billion) out of which N5.96 trillion ($38.3 billion) is domestic debt while N919 trillion ($5.9 billion) is external.

It would be recalled that in 2005 Nigeria paid off most of the $30 billion external debt it owed the Paris and London Club of creditors and in the process reduced its debt to Gross Domestic Product (GDP) ratio from 52 percent to less than 7 percent.

The DMO had in 2003 also set in motion the process to restructure Nigeria’s domestic debt portfolio, with the objective of lengthening the maturity of the instruments and deepening the government bond market.

As commendable as these initiatives are, government may have to watch the crowding out effect of the private sector that occurs when it borrows at an average yield of 15 percent. This makes it impossible for private sector companies to issue corporate bonds at a sustainable interest rate since those bonds are priced off the Federal Government bond benchmark.

The high interest rates that FG bonds attract have also led to the problem of the banks choosing to invest on these bonds rather than perform their primary role of financial intermediation in the economy through the provision of credit to private sector operations, small and medium enterprises and consumers.

Another thing to watch is the escalating cost of servicing domestic debt. The Federal Government’s budget for domestic debt service in 2012 is N559.6 billion, leaving less money for infrastructural and other needs. Government should be transparent by letting Nigerians know what each borrowed fund was and is to be used for.

The management of the nation’s economy can only make sense to the masses of the country when they begin to see improvements in the value of the naira, better debt management and a vibrant capital market anchored on a healthy foreign reserve.

As Nigerians hope, pray and look ahead to a better economy, more responsive fiscal management, job creation under a vibrant democratic culture in the years of the President Goodluck Ebele Jonathan Presidency, the Minister of Finance and co-ordinating Minister for the economy Dr. Ngozi Okonjo-Iweala must domesticate her world-class financial management expertise which made her the toast of the world for the World Bank Presidency and ensure that the Nigerian economy thrives.

Lilian Peters