Unintended Result of Nigerian Dollar Hunt Is Naira Shortage

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LAGOS, SEPTEMBER 21, 2017 – 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 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 unchanged at 356.99 per dollar in the interbank market as of 6:01 a.m. in Lagos on Thursday.

Limiting Access

Special auctions 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 CBN is neutralized by raising the CRR of banks, thereby limiting private-sector access to credit,” Salami said after the MPC’s July 24-25 meeting, according to a central bank statement published Tuesday.

“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.’’

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