No fiscal help as Emefiele battles naira weakness alone

Embattled Central Bank of Nigeria (CBN) Governor, Godwin Emefiele is doing a yeoman’s job trying to defend the naira currency all alone, without help from the fiscal side of the equation.

Nigeria’s newly elected president, Muhammadu Buhari has yet to appoint a Finance Minister, meaning the needed coordination between fiscal and monetary policy is lacking in turbulent economic times such as these.

The Nigerian economy is grappling with a commodity price downturn, the prospects of higher US interest rates, slower Chinese growth and power shortages crimping growth.

Removing fuel subsidies – which is the prerogative of the Fiscal authorities – could bring equilibrium to the Forex market, according to Bismarck Rewane, CEO of consulting firm Financial Derivatives.

“This would reduce the import bill by 15-20% of bogus demand, putting the naira in the real equilibrium exchange rate path,” Rewane said in a July 1 presentation.

“If subsidies are removed, the ease in currency pressure will impact positively on reserves.”

The CBN has hemorrhaged reserves as it tries in vain to defend the naira amid a 40 percent slump in oil prices in the past year.

The banks dollar reserves declined 15.3 percent to $29.01bn in June, from $34.28 billion in January 2015.

Last month the CBN unveiled another set of administrative measures that sought to curb dollar demand by stopping Nigerians from using the interbank FX market to access dollars for 40 categories of goods, ranging from private jets to rice, Eurobonds and foreign shares.

The new rules however led to increased currency pressure at the parallel market, where the naira tested new all time lows of N230 per dollar.

“There is very little the CBN governor can do in isolation and must partner with other arms of government to avoid a run-away value of the naira,” said Femi Olaloku, executive director, treasury at UBA, at a recent conference. 

“The current measures are not working.”

An influx of dollars through foreign currency borrowing could assist the CBN by improving the supply side.

Ghana’s cedi – sliding on falling oil prices, like the naira – had its first quarterly advance in two years last September, as proceeds from a Eurobond sale and a cocoa loan boosted foreign reserves.

Ghana raised $1 billion through a Eurobond sale on Sept. 12, 2014 to help close its budget deficit.   

Nigeria had plans to tap the Eurobond markets this year, which has yet to proceed due to the absence of a finance minister. 

The naira which has lost some 18 percent of its value in the past year is falling, mostly because Nigeria gets 95 percent of its dollar earnings and 70 percent of the Federal budget from the sale of one commodity, oil.

Efforts to diversify the country’s earnings away from oil, which include boosting non- oil taxes have yet to take off, as inertia remains on the fiscal side.

Non oil taxes collected by the Nigerian Federal government were worse than Emerging Market peers and equivalent to only 3.9 percent of GDP or N3.5 trillion in the 12 months to April 2015, according to data from FBN Capital. 

Plugging fiscal leakages in national oil company, NNPC and other government agencies could also aid the CBN in building up its reserves.

“Marked progress in this area would help to allay investor concerns over delays in appointments,” FBN Capital analysts, led by Gregory Kronsten said in a July 03 note.