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Subsidizing The Naira Blocks Nigeria ’ s Economic Takeoff – Kingsley Moghalu



images 15 3 Subsidizing The Naira Blocks Nigeria ’ s Economic Takeoff - Kingsley Moghalu

The naira should be floated to find its exchange rate value on the market if Nigeria’s economy is to become productive, instead of relying on oil revenues, a dependency that has plunged our country and our citizens deeper and deeper into fiscal bankruptcy and individual poverty. Ending the elusive quest for a “strong” currency when the economic fundamentals do not support it will be painful in the short run (we have already undergone several years of devaluations forced by these fundamentals, so what’s new?) but will be beneficial in the longer term.
The notion of an artificially strong currency remains attractive for three fundamental reasons: 1. We are fundamentally an import economy, and imports are priced in dollars and other “reserve” currencies in international trade.
2. There is a lack of economic knowledge both in policy-making governance circles and in the wider population.
3. Based on the two factors earlier cited, politicians want to remain “popular” and lack the political will to do what is required to set the economy on a truly productive path. Some “technocrats”, for self-serving reasons, sing and clap along instead of providing the necessary advice and guidance.
In taking this approach, as well as others such as subsidies on consumption instead of on production, structural poverty has been entrenched in Nigeria and the Nigerian economy has remained uncompetitive in a global context, for far too long.
To measure the naira only relative to the dollar and other foreign currencies is to miss a fine point – that it matters as well to differentiate what the naira equivalent of one dollar can buy in Nigeria from what one dollar can buy in America-what economists call “purchasing power parity” – what your currency can purchase for you in your national market as a way to measure GDP and GDP per capita. This approach to measuring economies arose because sometimes currencies are manipulated, and so measuring against such currencies may not yield a fully accurate picture. As someone so brilliantly put it on a WHatsapp post I read, “in the US, a dollar may not buy you more than a bottle of water, while N500 will buy you a pack of 12 of the same bottles of water in Nigeria!”
Because we are an import economy, we want to maintain an artificially strong naira/dollar exchange rate, to subsidize the import habit of our elite, or our ability to pay school fees of our wards abroad – understandable, given the decline of education in Nigeria, but not the solution to a problem that needs to be fixed.
We produce and export nothing that is value-added. Over 90% of our forex comes from oil. When an economy lacks “complexity” (value-added manufacturing as a ratio of GDP) but depends on exports of natural commodities or minerals, the exchange rate value of its currency is determined almost exclusively by the level of its foreign reserves, which accrues mainly from income from such commodity or resource exports. These reserves determine how many months of imports such a country can pay for.
So when oil prices are high for a long period, the reserves swell, and the (say) naira value relative to foreign currencies rises. When the oil price crashes, our reserves are depleted. When reserve levels indicate that a country’s ability to pay for up to six imports is threatened, market forces weaken the strength of the currency (naira in this instance). The value of the currency crashes, because that value is not underpinned by diversified exports that earn revenues as is the case with mature economies. If oil were $100 per barrel for a long period, for example, and our reserves rose to $80 billion, the naira value relative to the dollar will go up. But we have little control over the vagaries of the oil price.
Commodity dependence therefore exposes a country to currency instability except the country builds up huge reserves (eg Saudi Arabia and the Gulf countries which long ago invested heavily in oil refining AND have huge sovereign wealth funds (we arrived at the sovereign wealth party about 40 years late!) in addition to exporting crude. It is OBVIOUS in such cases that there is backing for that legal tender in terms that are relevant internationally. The naira is not so fortunate because our economy is “naked” and globally uncompetitive.
What all this means is that the Central Bank of Nigeria’s efforts to “defend” the naira are like Sisyphus rolling the proverbial huge boulder up the hill, only for it to surely come rolling back down, economically speaking. It weakens the very value of the naira it is defending because the dollar supplies come from the external reserves, but is politically “expedient” because it creates an impression of patriotic nationalism. By the end of the first quarter of 2020, for example, the Bank is reported to have spent approximately $4 billion on naira Defence in the forex market by supplying the market with dollars.
But it’s all just populism. Foreign investors have exited, and forex is not coming in as investments aren’t at a level that can create confidence.
So the only way to reposition our economy is to shift it from an import-oriented one to one that is export-oriented. For as long as CBN continues to subsidize the value of the naira this will not happen, because they are creating incentives for an import orientation.
Forex “ban” makes the matter worse. Local productivity often is not enough to meet the gap in demand for the previously imported products. Smuggling booms. Meanwhile, in a frontier economy, “cabals” have reportedly had access to the naira at CBN rates, so they obtain huge amounts of subsidized dollars, and turn around to sell the dollars at the street market rates with huge profits. Arbitrage reigns. The black market booms.
But if CBN devalues the naira decisively rather than tentatively, or allows it find its value in the market, this will create an incentive to manufacture locally and EXPORT in order to earn forex. Because imports become more expensive.
But other policies must accompany this approach. The absence of those policies is why series of devaluations have not solved the problems, but only import inflation. This is death by a thousand cuts.
The necessary accompanying policy thrust is trade policy. Instead of forex bans, anyone should be able to import (yes, they will need forex to do so)but slap high tariffs (revenues for the government!) on imports deemed luxury items. Policy support should be provided to enable local production of such goods to be cheaper than foreign imports. That way, rich people can buy expensive imported goods, poorer people can buy cheaper “local-made”. More exports, more forex, and eventually the value of the naira stabilizes. The “cheap” exchange rate of the naira (from the perspective of foreign trade partners) will lead to greater orders of Nigerian manufactures, which = more forex earnings. Foreign investors seeking profit will also flood the country that is seen as a large and profitable market with dollars because the market is “open” and trade transparent. This will also help stabilize the naira.
But this is difficult when Nigeria is being mortgaged to a country like China. If our government treats China as a financial lifeline, can we slap the appropriate tariffs on imports from China which are so cheaply produced that it makes production in Nigeria uncompetitive? This is part of a broader problem of the absence of a worldview that includes a strategy to rise in the world, including economically.
Ideally, citizens should be well prepared, communicated to and educated about these kinds of necessary reforms. And we know that vested interests will often seek to short-circuit such reforms to still game the system. It’s like highway robbery on an unsafe road. You may be OK in the early part of the journey, but could (God forbid) run into robbers in the last mile. The role of vested-interest rent-seeking in Nigeria’s economy has been a dominant one for far too long. The phenomenon is not unique to Nigeria, but that’s no excuse. Our concern is about our country and our people and creating an enabling environment for real development. Getting right the balance betweeen the role of the state and that of markets is one of the most important factors in development. I hope that, as President Muhammadu Buhari pursues the Vision 2050, we can get these fundamentals right.

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Bearish sentiment strengthen at NSE amid weakening economic indices



images 30 3 Bearish sentiment strengthen at NSE amid weakening economic indices

Nigeria’s stock market again closed lower for the second consecutive week with the trading pattern and negative sentiments revealing selloffs in banking stocks, which pulled down the NSE market capitalisation down by N14 billion week-on-week (w-o-w).

The negative performance was down to profit taking in the shares of Zenith Bank, Stanbic, Ecobank Transnational Incorporated (ETI) and FBN Holdings. This led to the All Share Index (ASI) falling by 0.08 per cent to 25,572.57 points.

Consequently, the Month-to-Date (MtD) gain declined to 1.0 per cent, while the Year-to-Date (YtD) loss increased to -4.7 per cent.

Performance across sectors was mixed although positively skewed as three of six indices trended northward. The Industrial Goods index led gainers, up 0.5 per cent w/w on the back of bargain hunting in CAP (+8.6 per cent). Trailing, the Consumer Goods and Insurance indices rose 0.1 per cent and 0.01 per cent w/w respectively due to price appreciation in Nigeria Breweries (+2.3 per cent) and Wapic (+12.1 per cent).

Conversely, the Oil & Gas index led losers, down 1.0 per cent w-o-w following sell-offs in Oando (-4.2 per cent)while price depreciation in FCMB (-6.4 per cent) dragged performance in the Banking index by 0.7 per cent w-o-w. Finally, the AFR-ICT index closed flat. Reacting to the market performance, analysts who spoke to Daily Sun, attributed the downturn to the weak macroeconomic state of the nation and added that profit taking is likely to persist as the month of September progresses in the midst of profit booking, mismatch of economic policies and negative macroeconomic indices.

This is coming on the back of persistent pressure on consumer prices in August 2020 as headline inflation rose to 13.2 per cent year-on-year (y-o-y) from 12.8 per cent in July, according to the Consumer Price Index (CPI) report published by the National Bureau of Statistics (NBS).

Investigations by Daily Sun show that this is the 12th consecutive rise in inflation and the highest level since March 2018 while the sharp increase in headline inflation was driven by a faster m/m inflation, which was up 10 basis points to 1.3 per cent, the highest since June 2017.

Chief Operating Officer, Ambrose Omordion, explained that the August inflation data came worse than expected at 13.22 per cent, thereby deepening the negative returns of many investment windows. Omordion noted that mixed (positive and negative) sentiments would continue to dominate the market as the month of September progresses in the midst of profit booking, mismatch of economic policies and negative macroeconomic indices.

According to him, this is against the backdrop of the fact that the capital wave in the financial market may persist in the midst of relatively low-interest rates in the money market, high inflation, negative Q2 GDP of 6.1 per cent and unstable economic outlook for the rest of 2020 as government and its economic managers are going front and back with mismatch polices and implementation.

“Also, investors and traders are positioning amidst the changing sentiments in the hope of improved liquidity and positive economic indices which may reverse the current trend. We see investors focusing on portfolio adjustment and rebalancing by targeting companies with strong potentials to grow their Q3 earnings and dividend on the strength of their earnings capacity as the year last quarter is at the corner.

Again, the current undervalue state of the market offers investors opportunities to position for the short, medium and long-term, which is why investors should target fundamentally sound, and dividend-paying stocks for possible capital appreciation for the rest of the year”, He said.

For their part, Cordros Capital, said, “In the absence of a positive catalyst, and given the still uninspiring macro story, we guide investors to trade cautiously in the short term. However, we expect the market might benefit over the longer term on compelling valuations and as investors seek alpha-yielding opportunities in the face of negative real returns in the fixed income market”.

Meanwhile, a total turnover of 1.139 billion shares worth N12.692 billion in 17,109 deals were traded by investors, in contrast to a total of 1.226 billion shares valued at N10.842 billion that exchanged hands last week in 19,529 deals.

The Financial Services industry (measured by volume) led the activity chart with 870.300 million shares valued at N7.863 billion traded in 9,427 deals; thus contributing 76.43 and 61.95 per cent to the total equity turnover volume and value respectively.

The Industrial Goods industry followed with 62.689 million shares worth N1.162 billion in 1,557 deals while the ICT industry recorded a turnover of 50.859 million shares worth N2.552 billion in 619 deals. Trading in the top three equities namely FBN Holdings Plc, Guaranty Trust Bank Plc and Access Bank Plc. (measured by volume) accounted for 353.048 million shares worth N4.018 billion in 3,095 deals, contributing 31.00 and 31.66 per cent to the total equity turnover volume and value respectively.

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CIS, others, to float Securities Institute



images 31 3 CIS, others, to float Securities Institute

The Chartered Institute of Stockbrokers (CIS) in collaboration with three other professional bodies has signed a Memorandum of Understanding (MoU) to establish Chartered Institute of Securities and Investment Management (CISIM) to bring securities dealers and investment managers in Nigeria under one umbrella.

The CISIM’s Bill, which is currently with the National Assembly, will replace the Chartered Institute of Stockbrokers Act 105 of 1992 when passed into law. At the last count, apart from the CIS, the three other professional bodies that signed the historic MoU are the Association of Investment Advisers and Portfolio Managers (AIPM) The Fund Managers Association of Nigeria (FMAN), Association of Issuing Houses of Nigeria (AIHN) with ASHON’s Chairman, Chief Onyenwechukwu Ezeagu, as an observer.

The Chartered Institute of Stockbrokers Act 105 of 1992 , which established the CIS provides that individual operators that deal in securities, including Stocks,Treasury Bills, Bonds, Commodities etc, shall be trained and certified by the Institute. At the moment, certain gaps in the Act are exploited by some individuals to deal in securities without any form of certification and requisite training.

Therefore, the CISIM Bill when passed into law, will bring capital market professionals under a common objective without encroaching on one another’s business, make regulation easier, and enhance global competitiveness.

“We share common goals and there is a need for standardization to enhance our advocacy. The Association of Investment Advisers and Portfolio Managers (AIPM) subscribes to the ideals of the proposed Chartered Institute of Securities and Investment Management (CISIM) in Nigeria.

“ Our collaboration will bring about rapid development of the entire financial system. Nigeria is in dire need of funds for infrastructure development. Substantial part of the fund can be mobilised from the capital market. We implore the National Assembly to hasten the passage of the Bill in the overall interest of the economy “, said the President, AIPM, Prince Abimbola Olashore.

Commenting on the MoU, CIS President, Olatunde Amolegbe, said the proposed bill was nothing unusual, and commended the professional bodies that signed the MOU for sincerity and unity of purpose.

Amolegbe explained that the Securities and Exchange Commission (SEC) and The Nigerian Stock Exchange (NSE), the apex regulator and Self-Regulatory Organization (SRO) respectively, regulate stockbrokers but the ISA provides for individual operators that deal in securities to be certified by the Institute while their organisations are regulated by SEC and the NSE .

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Prestige Assurance extends Rights Issue



images 30 3 Prestige Assurance extends Rights Issue

Prestige Assurance Plc has extended its offer period for its Rights Issue of 13,635,796,006 ordinary shares of 50 kobo each at 50 kobo per share on the basis of 38 New Ordinary Shares for 15 ordinary shares held.

In a notice to the Nigerian Stock Exchange (NSE), it informed dealing members that the offer which was initially scheduled to close last Thursday, September 17 2020, will now close on Wednesday, September 30 2020.

“Dealing Members are hereby informed of the extension of the offer period of Prestige Assurance Plc Rights Issue of 13,635,796,006 ordinary shares of N0.50 each at N0.50 per share on the basis of 38 new ordinary shares for every 15 ordinary shares held as at the close of business on January 31 2020.

The NSE has received a confirmation from the Securities and Exchange Commission (SEC) to extend the offer period by two weeks. With this extension, the offer, which was initially scheduled to close on Thursday, 17 September 2020, will now close on Wednesday, 30 September 2020”, it said.

Shareholders of Prestige Assurance had created additional new 14 billion ordinary shares to create headroom for the new capital raising. It increased its authorised share capital from N3 billion of six billion ordinary shares of 50 kobo each to N10 billion of 20 billion ordinary shares of 50 kobo each through the creation of more 14 billion ordinary shares of 50 kobo each.

They further authorised the Board of Directors of the company to raise capital by way most suitable to the company in line with the recapitalisation requirement of the National Insurance Commission (NAICOM).

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