- Currency regulations threaten to curb economic growth
- May & Baker is cutting production to cope with rising costs
First Nigerian businesses were hit by a dollar shortage. Now
there aren’t enough naira.
A central bank requirement that companies back forward
dollar purchases with naira is drying up supplies, helping to underpin a 2.1
percent gain since the local currency fell to a record low against the
greenback on Aug. 9. At the same time, an increase in government borrowing is
spurring banks to invest in the safety of sovereign debt rather than lending to
businesses or consumers, also draining cash out of the system.
Some banks demand naira deposits of as much as 1.5 times the
amount of dollars sought in the 60-day forwards market to guard against
fluctuations in the currency, said Ayodeji Aboderin, chief financial officer
for May & Baker Nigeria Plc, a Lagos-based pharmaceutical and food
processing company. That is pressuring the company’s own cash flow, he said.
The difference is returned to the company on the delivery of the contracts,
with the amount depending on how the currencies have moved.
“Money you would have used as working capital will be taken
upfront by the bank,’’ Aboderin said. “Last year, it was more of dollar
illiquidity. This year, it is naira illiquidity.”
May & Baker, which is building the country’s first
vaccine plant, is responding by cutting production at its water-bottling and
instant-noodle units, and focusing on more profitable pharmaceutical lines,
Aboderin said. Interest rates on loans have also soared to as high as 25
percent, more than double the rate May & Baker is comfortable paying, he
said. Nigerian inflation eased to 16.05 percent last month after reaching a record
18.7 percent in January.
Within Limits
The currency rule, introduced in January, is one of a series
of measures aimed at managing dollar flows after a decline in the price and
output of crude oil, which accounts for about two-thirds of government revenue.
The regulator sells dollars directly to lenders on an almost weekly basis,
which then supply these to their customers.
By depositing cash with lenders, companies are able to
assure the regulator that they have the money to buy the foreign currency, said
Yinka Sanni, chief executive officer for Stanbic IBTC Holdings Plc. The amount
of naira required depends on the customer’s balance sheet strength, he
said.
“It is within the rules. It is a product that is acceptable
and endorsed by the regulator,” Sanni said. “No bank is doing anything outside
the rules. If they were, the CEO would have been cautioned by the central
bank.’’
A spokesman for the central bank didn’t respond to calls and
emailed messages seeking comment. The naira was down 1.25% at 361.5 per dollar
in the interbank market as of 16.13 p.m. in Lagos on Thursday.
Limiting Access
Special auctions that are being used by the central bank to
make “massive injections of cash” to the government, effectively raised banks’
cash-reserve requirements beyond the stipulated 22.5 percent, said Monetary
Policy Committee Doyin Salami, who has previously been critical of the policies
of Governor Godwin Emefiele.
“We thus find ourselves at a point where government
borrowing from the central bank is neutralized by raising the cash-reserve
ratio of banks, thereby limiting private-sector access to credit,” Salami said
after the monetary policy committee’s July 24-25 meeting, according to a
central bank statement published Tuesday.
Nigeria sold 364-day bills at a yield of 17 percent and
182-day securities at 16.8 percent at an auction on Wednesday, according to the
regulator.
“The Central Bank of Nigeria’s efforts have in many ways
helped stabilize the foreign-exchange market,” said Omotola Abimbola, a banking
analyst at Afrinvest West Africa Ltd. in Lagos. “But the unintended consequence
has been that banks have restricted credit extension to the private sector due
to the high yields on government securities as well as low risk appetite.”
Growth in credit extended to the private sector slowed to
0.9 percent this year through July, compared with 19.8 percent in 2016,
according to central bank data. Policy makers need to tackle a lot more than
dollar liquidity to bolster economic growth and reduce the country’s dependence
on oil, Abimbola said. This would include easing monetary policy by lowering
interest rates from a record high, addressing infrastructural shortcomings,
such as road, rail and power, and improving the productivity of state
institutions, he said.
Nigeria’s economy expanded 0.55 percent in the three months
through June, ending five straight quarters of contractions that saw gross
domestic product shrink 1.6 percent in 2016, the first drop since 1991. The
improvement came after oil output increased and authorities boosted the supply
of foreign currency needed by manufacturers to import supplies.
Flour Mills of Nigeria Plc, the country’s biggest miller by
market value, is planning to issue as much as 40 billion naira in bonds next
year and is also considering a rights issue to enable it to deal with funding
challenges arising from a scarcity of naira and high interest rates, Managing
Director Paul Gbededo said.
“Continued tightness in the market will keep interest rates
high,” said Pabina Yinkere, an analyst at Vetiva Capital Management in Lagos.
“High interest rates increase the probability of default and make banks
cautious in growing loans, particularly to SMEs. If banks do not lend it
affects overall economic activity and stalls growth.’’
Source: www.bloomberg.com
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