PRESENTATION TO THE
KOREAN BUSINESS COMMUNITY
A BRIEF OVERVIEW OF THE CURRENT BUSINESS CLIMATE
IN NIGERIA
5TH DECEMBER 2016
OVERVIEW
• ECONOMIC POLICIES OF THE FEDERAL GOVERNMENT
- Background to the Economic Policies
- Current Policy Thrust of the Federal Government - Economic Policies of 2016
• FOREIGN EXCHANGE MARKET REFORM
- Revised Guidelines for the Operation of the Nigerian Interbank FX Exchange Market
- FMDQ OTC Securities Exchange and Trading
BACKGROUND TO CURRENT ECONOMIC POLICIES
The Nigerian economy is in a state of flux. In the past 1 – 2 years the following major changes have occurred:
• Fluctuating exchange rate (CBN approved rate of $1/N197 has given way to a floating exchange rate- interbank rate of $1/N310. At the parallel market, the rate is $1/N475);
• Low international oil prices (from $114 per bbl in 2014 to $37 per bbl in 2015 and $46 per bbl in 2016);
• Government transition (from a PDP-controlled government to APC-led government);
• Persistent corruption; and
• National security challenges (Boko Haram in the North and Niger Delta militants in the South and South East).
As a result the Federal Government (FG) has introduced polices aimed at dealing with a weakened Naira, unemployment, a huge fall in foreign direct investment (FDI) inflows, a falling GDP and an economy in recession.
BACKGROUND TO CURRENT ECONOMIC POLICIES
1. Inclusion of 41 imported goods and services on the list of items not valid for foreign exchange in the Nigerian foreign exchange markets (including rice, cement, meat and processed meat products, poultry products, steel sheets, kitchen utensils, clothes, soap and utensils, etc).
2. Foreign currency was only permissible for eligible purposes such as basic travel allowance, personal travel allowance, medical fees, school fees, mortgage payments etc, through banks with the use of ‘Form A’ for invisible transactions and ‘Form M’
for visible transactions.
3. Single Treasury Account where all revenue due to the Federal Government and its agencies are paid into the Treasury Single Account operated and maintained in the CBN.
BACKGROUND TO CURRENT ECONOMIC POLICIES
5. CBN's enforcement of a Bank Verification Number for bank account holders.
6. Various exchange controls- downward adjustment of maximum spending
limit on offshore credit/debit cards; suspension of the use of Naira debit cards abroad, etc.
CURRENT POLICY THRUST OF THE FEDERAL GOVERNMENT
Made in Nigeria Policy
• The FG has introduced a Made-in-Nigeria Campaign with the slogan “Buy Nigeria to Grow the Naira.” The overall aim of this policy is for Nigeria to become a more productive economy and a less consuming economy.
• This policy is not new in Nigeria. For instance the objective of the first National Development Plan 1962 – 1968 was self-reliance and self-sustainment by increasing agricultural production and raw material production for domestic consumption as well as increase manufacturing activities.
• Indeed, the theme of the 22nd Nigerian Economic Summit which held between 10th – 12th October 2016 was “Made in Nigeria” where the Minister of Budget and National Planning stated:
“We want a situation where we produce much of the food that we eat, which means agriculture must be supported; the textiles, the clothes that we wear, we must produce most of them, which means manufacturing must be supported. We want, in construction, to use more local materials, so we will support the construction industry; we will examine what components are required in that sector. In building a house, how much of the material is sourced from outside the country. We look at it sector by sector, item by item and give the necessary support”
CURRENT POLICY THRUST OF THE FEDERAL GOVERNMENT
Agricultural Promotion Policy
•
As indicated above, the aim of the FG is to increase food production and improve on the quality of agricultural produce. Intention of exporting the produce in order to impact positively on Nigeria’s balance of payments.•
The FG launched a document titled “The Green Alternative” which, according to the FG sets out the steps Nigeria needs to take in order to achieve self-sufficiency in agriculture and become major exporter of agricultural products.•
The policy objective of the document is to make agriculture the biggest alternative to oil and gas business in the bid to diversify the economy.This objective has a four-year implementation period (2016 to 2020).
CURRENT POLICY THRUST OF THE FEDERAL GOVERNMENT
Automotive Policy
• The FG’s position on the Automotive Policy introduced by the previous government (which effectively increased the tariff on imported cars by 50%) had been unclear.
Recently however, the Minister of Industry, Trade and Investment at a stakeholders forum on the Nigerian automotive policy held on 28th November 2016 in Lagos said that the FG would review the policy in order to set an effective implementation framework and incorporate a number of suggestions offered by local automakers and other stakeholders. He said, “Its main objective is to bring back vehicle assembly operations and develop local content.” He did not state when the revised policy would be released.
• The policy has so far led to a drastic drop in the importation of new and used cars into Nigeria. For instance, its was reported that 15,031 new vehicles were imported by Nigerian auto dealers in 2015 as against 45,618 in 2014. In turn, this has led to a significant drop in the revenue it realizes from the importation of cars.
CURRENT POLICY THRUST OF THE FEDERAL GOVERNMENT
Power Sector
The FG has not yet made any major policy statements indicating the direction the government will take on issues critical to the Nigerian economy. One such issue is the power sector.
During the campaign period, in an address to the Organised Private Sector, President Buhari had stated that his administration would galvanise the economy to enhance productivity through improved electricity generation, transmission and supply. He also stated that that although his party supported privatisation of power utilities, he said the party believed that privatisation must go further to include transmission of power.
However, the FG is yet to announce if the transmission system will be privatised.
The FG has allocated additional funds to the power sector/generation companies which are currently struggling with debts.
Recently, in addition to the general problems, power generation has been at an all time low following attacks by militants on critical gas pipelines earlier this year.
ECONOMIC POLICIES OF 2016
In order to shore up the Nigerian economy the FG has implemented various policies and supported various economic initiatives some of which include:
•The Central Bank of Nigeria (CBN) has directed Authorised Dealers (i.e. banks authorized by the CBN to deal in foreign exchange) to dedicate at least 60% of their total foreign exchange purchases from all sources (interbank inclusive) to end users strictly for the purpose of importation of raw materials, plant and machinery. The balance of 40% should be used to meet other trade obligations, visible and invisible (CBN, August 2016).
•The Nigerian Export-Import Bank (NEXIM) has continued to support the FG policy for non-oil exports growth through its advisory and financing activities. The CBN and the NEXIM have commenced the implementation of the N500 billion Non-Oil Export Stimulation Facility (ESF) and the N50 billion Export Rediscounting and Refinancing Facility. The two facilities were introduced by the CBN in June 2016 as part of measures to boost non-oil exports, by providing low interest loans to exporters.
ECONOMIC POLICIES OF 2016
•
The Bank of Industry (BOI) has disbursed over N36 billion in nine months in 2016 to the agro-allied sector of the economy in the country.•
To combat the high cost of lending faced by Nigerian business the CBN has brought down anchor interest rate by 200 basis points (to 12%) – the first rate reduction in six years; reduce Cash Reserve Ratio (CRR) from 25% to 20%and now 22.5% and intends to make manufacturers the target of lending of over N770 billion that the combination of these decisions will inject into the banking system as additional liquidity.
FOREIGN EXCHANGE MARKET REFORM
On the 15th June 2016, the CBN issued the Revised Guidelines for the Operation of the Nigerian Interbank Foreign Exchange Market (the Guidelines). A small official window for critical transactions was however retained at an exchange rate of $1/N310.
A system of Foreign Exchange Primary Dealers (“FXPD”) has been created whereby
interested Authorized Dealers were given access to transact FX products directly with the CBN. The main objectives for the establishment of Primary Dealership in FX products are:
i. To achieve exchange rate management policy objectives;
ii. To improve the effectiveness of CBN FX market intervention activities; and iii. To enhance market liquidity.
The CBN’s initial criteria for banks to be admitted into the FXPD class would have only allowed for 10 banks however due to pressure from other banks, 15 banks have been allowed to act as FXPDs.
FOREIGN EXCHANGE MARKET REFORM
FXPDs – FXPD will be registered as authorised dealers to deal with the CBN on a large trade sizes on a two-way quote basis and will be responsible for supplying FX to other authorised dealers (Non-FXPDs) in the inter-bank market.
Participants – Designated participants in the inter-bank FX market include authorised dealers, authorised buyers, oil companies, oil service companies, exporters, other end-users.
CBN may designate other entities as a participant from time to time.
Prohibition of BDCs to the Interbank Market – The Guidelines prohibit the sale of FX to Bureau de Changes (BDCs) through the interbank market.
Eligible FX transactions – The 41 items already prohibited for FX transaction by a CBN Circular dated 23rd June 2015 will remain ineligible for inter-bank FX. Those who wish to import these items must have recourse to alternative markets for the sourcing of foreign exchange e.g. through an offshore account or by sourcing foreign currency locally from alternative markets (such as the ordinary domiciliary accounts or the parallel market) at higher rates.
FOREIGN EXCHANGE MARKET REFORM
CBN intervention through the inter-bank market – The CBN has a discretion to intervene in the FX market through the sale of FX to authorized dealers (wholesale) or end users through authorised dealers (retail) using the FMDQ Thomson Reuters FX Auction Systems. CBN can participate through periodic interventions directly in the inter-bank market or through the Secondary Market Intervention Mechanisms.
Sanctions – The CBN can impose sanctions on any authorized dealer that fails to comply with the Guidelines. Such sanctions include the suspension of the authorized representatives of the authorized dealer, suspension of authorized dealer from FX market and/or withdrawal of the authorized dealership license
FMDQ OTC Securities Exchange (“FMDQ”)
This is an organisation with the strategic intent of developing of the Nigerian over-the- counter (OTC) financial markets. It is a Securities and Exchange Commission (SEC) registered OTC securities exchange and self-regulatory organisation.
Mandate: To bring together Nigeria’s fixed income and currency operations under a single market governance structure.
FMDQ promotes market development in the Nigerian OTC financial markets, with a primary focus on the OTC markets – fixed income (money, repos, commercial papers, treasury bills, and bonds), currencies and derivatives. It does this in line with the CBN 2016 Guidelines
FMDQ DERIVATIVES TRADING
The proposed Naira-settled over-the-counter (“OTC”) FX Futures are Non- Deliverable Forwards. On the maturity date, it will be assumed that both parties would have transacted at the Spot FX market rate. The difference between the rate agreed by the parties and Spot FX rate will be paid a settlement amount in Naira. This ensures that both parties enjoy the rate that had been guaranteed to each other through the OTC FX Futures. However, the OTC FX Futures must be backed by trade transaction (visible and invisible) or evidenced investments.
The aim of these developments with respect to the Dollar/Naira OTC FX Futures Contracts is to provide the CBN with the opportunity to kick-start the liquidity of risk management products available to end-users in the FMDQ OTC Markets.
The contracts will assist the CBN in managing the volatility in the Spot FX market thereby promoting stability and entrenching confidence in the FX market.
CONCLUSION
The reforms in the foreign exchange market introduced by the CBN does not solve the immediate issue of scarcity of Dollars in Nigeria. Parties seeking to purchase foreign exchange in the interbank market may face delays before they can obtain the foreign exchange.
However, there is a glimmer of hope to e as OPEC members agreed to cut its oil production by 1.2 million bpd. Russia had also agreed to cut its production in conjunction with OPEC. This agreement pushed the price of oil above $50 per barrel. Nigeria has been granted an exemption regarding its daily production quota because of internal conflicts which has affected its ability to meet its production quota. Whether Nigeria will be able to take advantage of this exemption and increase its production back up to 2.2 million bpd.
It is expected that this will lead to an increase in the availability of Dollars in Nigeria and, in turn lead to an improvement in the exchange rate between the Naira and the Dollars as well as other major currencies.
ACAS-LAW – CONTACT DETAILS
9th Floor
St. Nicholas House Catholic Mission Street
Lagos – Nigeria
Phone: +234 –1-4622094, 4622480, 7406743 Fax: +234 –1-4613140
E-mail: acaxton-martins@acas-law.com bunaegbunam@acas-law.com
Web: www.acas-law.com
Barristers + Solicitors
