February 23, 2016 - 4:14 PM EST
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Policy Options for Nigeria's Economic Crises

The crisis in the Nigerian Economy seem to be worsening progressively since the crash in Oil prices from a high of about $115.09(Brent crude spot price) on June 19, 2014 to today's opening spot price of $34.83 (Brent crude). This is despite a barrage of monetary and administrative policies introduced by the Central Bank to stabilize the exchange rate and restart economic growth. While the CBN has been active in trying different options, business managers and investors are still waiting for the Managers of the Fiscal policies to present their response to the crises, which should be harmonized with those of the Monetary authorities.

This Paper is therefore designed to make some suggestions to both the Fiscal and Monetary authorizes on options to be consider while reviewing the current monetary and administrative policies and in designing an appropriate fiscal and trade policy to mitigate the crises in exchange rate, restore economic growth and moderate the impact of future crude oil price crash on the


Basic assumptions

Our thoughts are underpinned by three basic assumptions, which are that:

*Economic agents are rational, they will go to where their values will be maximized or their risk will be minimized.


does not have the financial resources to solely develop its economy in the short to medium term.

*Current global social architecture has made absolutely closed economic borders impossible.

Waiting for Policy Clarity

"Nigerian Stock Gain Most in The World as Buhari Win Triggers Rally" - Bloomberg, April 1, 2015

Nigerian stocks surged the most since March 2010, leading gains among world equity markets, after former military ruler Muhammadu Buhari won a vote marking the first peaceful shift in power since the end of colonial rule in 1960. The Nigerian Stock Exchange All Share Index rose for a ninth day to extend its longest streak of gains since December 2012. The West African nation's $500 million of Eurobonds due July 2023 advanced for the 11th day, pushing the yield down to the lowest since Dec. 8, as President Goodluck Jonathan conceded defeat, reducing the threat of post-election violence that marred previous votes.

"The political risk has certainly decreased," Thabo Ncalo, a money manager at Stanlib Asset Management Ltd., which oversees about $45 billion and has been adding to its Nigerian holdings, said by phone from

. "It bodes well for investing in
. It boosts the case for coming back into the country."

Jonathan sent his "best wishes" to Buhari after the vote, bolstering investor confidence as the country contends with a six-year war against the Islamist militant group Boko Haram. Buhari also faces the task of restoring an economy that's reeling from a 50 percent drop in the price of oil, its main export, since June.

all-share index jumped 8.3 percent, the most among 93 global measures tracked by Bloomberg, to close at 34,388.46, the highest since Dec. 31. The gauge has gained 18 percent since the start of a nine-day rally, also the world's largest advance over the period. At the end of February, it was the global laggard for the year.

Yields Fall

Yields on the nation's Eurobonds declined 22 basis points to 5.98 percent. Rates on the notes on Tuesday dropped below those of

$2 billion of debt securities due June 2014 for the first time since Dec. 11, according to Bloomberg indexes.

Nigerian dollar debt returned 3.3 percent in March, the most in

, the data show.

"The opportunity for positive change with genuinely new leadership is enormous," Samuel Vecht, who oversees $2.7 billion across five emerging- and frontier-market funds, said in e-mailed comments from

. "Within
we think the banking sector has tremendous long-term potential and trades at inexpensive relative and absolute valuations."

The above was a report from Bloomberg on April 1, 2015, a graphical look at the data of equities markets and FGN Eurobonds indicate a clear divergence between the post elections optimism and current figures.


INDEX 30,103.81 31,744.82 24,514.91

MARKET CAP (N' Trillion) 10.04 10.71 8.43


EUROBONDS Price/Yield Price/Yield Price/Yield

6.75 JAN 28, 2021 100.294/5.60% 101.771/6.38% 93.148/8.18%

5.13 JUL 12, 2018 97.517/5.63% 97.662/5.92% 95.972/6.53%

6.38 JUL 12, 2023 96.577/6.76% 99.601/6.44% 88.114/8.37%

The questions to ask are therefore:

*Have all the prospects and potentials of the Nigerian market evaporated in less than one year?

*Could the entire crises be attributed to the drop in crude oil prices?

Our take is that the potentials and prospects of the economy are still intact. The economy is still a huge market for consumer goods, capital goods, financial services, information & Telecommunication services, Agricultural goods, Oil & Gas products, Trade, Real Estate products, transport infrastructure, power infrastructure, entertainment, etc. In summary, "there is no single sector of the Nigerian economy that has fully developed, talk less of being matured".

On the second question, we believe that while the crash in crude prices may have trigger the current economic crises, but the core of our problem is the structure of our economy. Our policy response will therefore determine if and when we will come out of the current crises and if we will be enmeshed in future crude oil price crises. "Like humans, organizations and corporate entities, including nations are products of the decisions they took at critical junctures in their life".

Some defined economic policy

Regulated Exchange Rate

One of the most commented economic policies of the current administration is its decision to continue with a fixed exchange rate inspite of the precipitous drop in foreign exchange earnings as a result of the decline in crude oil prices.

While the Exchange rate policy is considered to be under the purview of the Monetary Authorities, the interventions of the President on his Policy choice as it relates to the exchange rate has made policy call on this issue by the Monetary Authorities a complicated one.

We believe that irrespective of the much trumpeted independence of the Central Bank, the Governor and members of the Monetary Policy Committee are not likely to take a decision on the exchange rate that will be contrary to the President's position without first getting him to reverse his position.

A look at the movement in exchange rate of other Oil dependent economies indicate that most of them have allowed their currency to adjust to the strength of their export earnings apart from

. The stories from the streets of
are obviously not the type that Nigerians want to experience.

Country Jan-15 Feb-16 % Appreciation/Devaluaton

.35 .35
.82 .82
.99 .14 -9%
.21 .99 -24%
.54 .96 -27%
.86 .5 -51%

Azerbijan .78 .59 -104%

Selected Oil Exporting Country's Exch. rate movement against $ Exclusion of some imports from the official market

To keep the Naira exchange rate within the N197/$ and a band of +/- 3%, the Central Bank has been engaged in aggressive demand management with the disqualification of 41 items from accessing the foreign exchange market and subsequently additional two items, which included foreign students' school fees and foreign medical bills. The reasons adduced for this policy tend to be more of nationalist than economic. We however believe that trade policies are better tools to use in discouraging the importation of goods whose import hurt local manufacturers. We have proven cases of successful use of appropriate trade policies to develop specific industries in the country. A classical example is the Cement industry where local manufacture has grown from 2,000 metric tonnes per annum to more that 40,000 metric tonnes per annum in 15 years.

has moved from a net importer of cement to a net exportor as a result of targeted use of trade policy in the subsector.

Regulated Price for some refined petroleum products

Although the government has now allowed for cost reflective price for two of the regulated refined petroleum products, Premium Motor Spirit (PMS) or Petrol and to a larger extent, Dual Purpose Kerosene (DPK) or Kerosene, this does not amount to deregulation. What the government has only done is to increase their prices above their cost of import at a time when crude prices are very low with the attendant low landing costs for these products. Should their landing cost go up when crude prices recover, government would be hard pressed to convince citizens on the need to pay higher prices for these products. But the most important drawback to the modulated pricing adopted by NNPC for PMS and Kerosene is that the policy would not encourage investment in the downstream sector of the Nigerian Oil industry hence our country's continued dependence on imports to meet domestic demand.

Limitations of current policies

While the CBN has effectively maintained the official exchange rate at N197/$, its has been impossible to meet all so called legitimate demand at the official window at the stipulated official rate hence a backlog of unmet demand which has spilled over to the shallow parallel market and driven down the Naira to between N372/$ and N385/$ as reported by the Punch and Vanguard Newspapers respectively in their Thursday, February 18, 2016 editions.

With legitimate importers of raw materials and equipment migrating to the parallel market to satisfy their demand, the Parallel market has effectively become the ruling market for pricing of imported goods and services within the country, with the exception of refined petroleum products, which seem to enjoy some preference in the allocation of forex by the Central bank. Unfortunately, the shallowness of supply in the alternative markets and huge demand is driving importers to a state hysteria, as they seem to be ready to pay any price to meet their demand.

We suspect that ordinary folks and foreign residents have joined this flight to safety and may be converting their Naira assets into dollar to mitigate additional loss in value.

The danger of an unmitigated progressive depreciation of Naira is that our national currency may lose one of the most critical attributes of money, which is "as a store of value" and should this happen, the concerns about the dollarization of the economy will become real.

Beyond the above drawbacks of the current exchange rate policy is the fact that it focuses only on demand management. At best it ignores supply improvement and in worst case scenario discourages alternative sources of supply. Because inflows for investment and other legitimate transactions would be converted at official price as against the ruling rate on the street, which will serve as the transaction rate, investors feel shortchanged to sell their inflows at the official rate hence their decision to stay away from the market pending when the official rate is reflective of the market situation.

We should also recognize that in today's society it is almost impossible to eliminate consumption of imports.

population and demography makes it all the more inevitable for the country to have a base level of imports. A classical example is that 16 years ago, personal consumption of telecommunications bandwidth in
was insignificant, but today almost every high school educated Nigerian is consuming bandwidth virtually every minute of the day and these bandwidth is not manufactured anyway in
. The providers be they local or foreign have to pay for these consumptions via foreign exchange.

2000 2010 2015

Exports (FOB) NGN 2,745,102,210,000.00 12,011,475,890,000.00 8,871,595,980,000.00

Imports (CIF) NGN 591,325,600,000.00 8,163,974,580,000.00 10,167,844,040,000.00

Population 122,876,723 159,424,742 182,201,962

According to the Central Bank,

current monthly import bill is about $4billion while earnings is less than $1billion, it then means that if we limit ourselves to the current sources of inflow, which is principally crude oil sales, the price of crude oil in the international market must rise from the current level of about $30 per barrel to about $120 per barrel before we can balance our international trade. In effect, the focus of Policy makers should be rather on encouraging the expansionof sources of forex supply against the current focus of demand management.


Expanding the Sources of Forex Inflow

Flexible Exchange Rate Management

A flexible exchange rate is like a silver bullet that can be effective for both demand management and supply expansion. When the price of a currency is adjusted to reflect the earnings capacity, the citizens capacity to consume imported goods is automatically reset at a lower level as they can no longer afford many of the non essential imported items. Irrespective of the so called inelastic demand of Nigerians for imported goods, once the currency is devalued and their Naira income is not adjusted in the same ratio, citizens will reorder their priorities and eliminate items that they can no longer afford.

In many instances, citizens will look for local alternatives to the imported items and shift their patronage to such local substitutes. The increase in demand for the local substitute will spur increase in production and possible improvement in quality. With improved quality and lower export cost, Traders may consider exporting such improved local products to neighboring African countries and may be from there to

, America and other parts of the World. For emphasis, we have a proof of concept of this model in the 1980s during the Structural Adjustment Program when made in Aba shoes, bags and other leatherwears became export commodities to
Ivory Coast
, Cameron Congo Democratic Republic, etc.

Concessioning of Infrastructure

The government has already indicated in its intention to borrow about $4.5billion from the international market to fund the budget deficit, which is basically going into infrastructure development. News have it that the government may have already started exploratory talks with AfDB and World Bank for concessionary budget loans of $3.5billion. While we support these efforts, we are convinced that the government does not and will not have the financial resources to fund the infrastructure gap in the country. Without efficient infrastructure, the country would never become a competitive market for manufacturing. We therefore believe that the way to go is to concession some of the critical infrastructure that are commercially viable such as transport infrastructure - Rail lines, Highways, Seaports, Airports, etc. and invite private sector capital to build these infrastructure under Build Operate and Transfer (BOT).

This will create a veritable channel for inflow of long-term capital into the country. A good example is the 1,342 KM standard gauge rail line from

which was awarded to a Chinese company by the Obasanjo government in 2006 at a cost of $8.3billion but canceled by the Yar' Adua government in 2007. At present, the Federal government obviously does not have money to fund such ambitious project, which is critical to the economic development of the country. Should this rail corridor be concessioned, the country will receive foreign direct investment of about $8.3billion (assuming that the cost is still the same) and still enjoy the catalytic benefit of the infrastructure toeconomic development. Several projects of similar nature that are bankable can be left in the hands of the private sector to develop. A proof of concept - virtually all the shopping malls in
were funded with foreign private equity capital.

Deregulate the downstream of the Petroleum Industry.

A proper deregulation of the prices of petroleum industry will trigger investment into that sector. The current modulated pricing system has clearly not attracted investors and would not likely attract investors. A shift from a finished products importing nation to local refining will reduce

monthly import bills from $4billion to $2.4billion based on CBN statement that refined petroleum products importation account for 40% of the total demand at the official foreign exchange market.

Beyond that, the domestication of our downstream petroleum industry will create employment and possible earn the country foreign exchange from export.

Use trade policy to stimulate specific sectors

The government should adopt policies similar to the Cement industry policy to stimulate investment in specific sectors of the economy where

has comparative advantage. The policies should be such that will encourage value addition instead of production of raw materials. For instance, the government should renew the previous government's drive towards the implementation of the Cassava policy, Sugar policy and Automobile policy. Similar policies should also be enacted for petroleum refining, palm oil/produce and vegetable oil refining, Sesame seeds, Cocoa, Cotton, Granite, furniture, leatherwears, etc. Should we grow these sectors to the point of producing globally competitive final products from the abundantly available raw materials, we would have succeeded in achieving the much desired import substitution, conserve our foreign reserve and possibly earn some foreign exchange.


While we clearly support a more flexible exchange rate management, we strongly believe that devaluation alone will not address the problems of the economy. We need a cocktail of policies which will include exchange rate adjustment, creating windows of investment for long-term funds through concessioning of commercially viable infrastructure, full deregulation of the downstream petroleum industry and stimulating investment in sectors where

has comparative advantage, as well as investing heavily in social infrastructure such as health, education, security, etc. It is such holistic approach to economic management that will change the structure on Nigerian economy and wean it from dependence on Oil for export earnings.

The concerns of the government have been that these routes will inflict pains on the citizens; unfortunately, there is not easy route out. We however believe that it is better for the citizens to take this pain once and have the economy restructured so that we will not be exposed to another crude oil crises as we suffered in the 1980s, 1990s, 2008 and 2015/16.

Mr. Johnson Chukwu is the Managing Director, Cowry Asset Management Limited

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Source: Equities.com News (February 23, 2016 - 4:14 PM EST)

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