Investors, leading business people and analysts are urging the Nigerian government to negotiate a standby support programme with the International Monetary Fund (IMF) as a way out of the worsening foreign exchange crisis, following the president’s deep market reforms.
Since becoming president, Bola Tinubu has embarked upon the most far-reaching market reforms in Nigeria’s history, according to analysts at the Economist Intelligence Unit (EIU), including the deregulation of the foreign exchange market and petrol pricing, reform objectives routinely prescribed by multilateral organisations like the IMF.
While different investor groups have visited the country and applauded reforms by the current government, there is no chance of Nigeria receiving meaningful foreign exchange inflow unless the country’s dollar shortage is augmented by an infusion of about $10 billion, according to some economists. And this can only come from the Washington-based multilateral financial institution.
“We are like a patient undergoing a major surgery and is debating whether or not to accept the administration of anaesthesia to ease the excruciating pain he is having,” a member of an investor group told BusinessDay. “A patient like this will have a prolonged surgery that he might not or if he does, he will have needless pain which can be eased significantly by the anaesthesia.”
Analysis showed the conditions in Nigeria lends itself to IMF support. IMF provides support to countries challenged by inappropriate fiscal and monetary policies that can lead to large current account and fiscal deficits and high public debt levels, an exchange rate fixed at an inappropriate level that can erode competitiveness and result in the loss of official reserves, and a weak financial system that can create economic booms and busts.
“The problem with Tinubu’s administration is that they have sequenced the reforms very poorly. They should have negotiated with the IMF first (with the reforms being conditions precedent to a large loan package), then executed the reforms, and then received the money,” another senior finance expert told BusinessDay.
Godwin Emefiele, the former central bank governor currently on trial for terrorism charges and alleged financial crimes, implemented a fixed exchange rate regime that eroded the official reserves while defending the naira.
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In June, the Central Bank of Nigeria (CBN) let the naira float but stopped short of relaxing import controls on an array of goods, including staple foods, and failed to clear a backlog of unmet foreign exchange orders of about $7 billion, which has unnerved investors and businesses. The first audit of the CBN’s accounts since 2016 was published in August and revealed that up to 40 percent of foreign reserves were encumbered assets, tied up in either loans or derivatives contracts.
“This makes the task of dismantling the backlog which the CBN has pledged to do hard to envisage,” said analysts at EIU.
The economists said liquidity in the official market is otherwise tight owing to deeply negative real interest rates and bureaucratic frictions that encourage trade on the black market, which has supplanted the official market, possibly permanently.
“IMF loan to clear the backlog in addition to boosting liquidity is also an important signal of reform. That is something this administration (Wale Edun and Yemi Cardoso especially) do not seem to get,” the expert said.
This is why calling on the IMF appears attractive, yet there are concerns. “At the moment, is the IMF in a position to advance $10 billion to one party? I doubt it. Loans to Argentina of $44 billion is half of the IMF’s loan portfolio. And this is seriously underperforming, to say the least,” said Kaliba Bilala, founder/CEO Tanabit, a financial data analytics company.
Kelvin Emmanuel, chief executive officer of Dairy Hills Limited, recommends a more friendly option of applying for foreign support from the issuer of currency through the terms of the auction facility open at the US Federal Reserve on Intra Central Bank Lending.
“Draw up on the external asset managers of the central bank like Goldman Sachs to raise securities lending of $10 billion, to finance the payments of $6.8 billion on outstanding forwards; that will immediately crash the rate to fair value,” Emmanuel said.
He added, “The implication of such a move is that the net external reserves will now read in negative, and the unsecured nature of such a facility will most likely attract an annual percentage rate of 8 percent. This means that the central bank will have to stake. Gas sales in a forward transaction as collateral since the CBN manages the oil and gas receipts account for NNPC offshore.”
Experts have also counselled Nigeria to sell down its equity in joint ventures with international oil companies to buoy investors. With a proven reserve of about 36 billion barrels of crude, Nigeria’s share could reach over 18 billion.
Economists say a sale of about 10 percent of this could help the country ease the severe foreign exchange shortage that now threatens to slow economic growth and precipitate unrest.
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According to one estimate, at today’s price of nearly $100 per barrel and given a discount of about 25 percent, Nigeria could earn about $135 billion over the next seven to 10 years since not all of that cash will come immediately.
To achieve this, a long and growing to-do list stands before the president. Making Nigeria attractive for investment and fixing crude oil theft are top.
“I think that people from the government are running around looking for buyers. Don’t seem to be takers. The big oil companies are divesting from Nigeria,” Andrew Alli, CEO of SouthBridge Group, a pan-African financial services firm, said on social media platform X.
Alli questioned why any serious oil companies or investors with deep pockets would prefer Nigeria as an investment destination.
“The only ones that perhaps would have an interest – the Chinese, to strategically secure some additional oil supply; we gave them ‘shege’ with Addax,” Alli said on Friday. “There is no real strategic reason for anyone in the gulf to buy because they already have oil and gas beaucoup there”.
Another senior executive in Nigeria’s oil and gas sector said nobody is interested in the country’s oil stakes again as oil theft has ruined the business.
“That’s why all the oil majors are selling down their onshore stakes and nobody is investing in new production. If we are lucky, we may get good value for our offshore stakes but they won’t want to sell those ones,” he said.
“Even NLNG is no longer attractive when it can only operate at 50 percent of capacity. Barring some remarkable turnaround, our oil and gas industry is in long-term decline,” he added.
However, economists warn that the sale must be transparently done by global institutions like JP Morgan, Citi Bank, and Goldman Sachs, and none of the buyers should be allowed to borrow locally to fund their purchase.
One foreign bank executive who visited Nigeria last week, said: “This government is running out of goodwill at home and abroad and while Nigerians are already disenchanted, there is a three-month window still left abroad and, in this time, something has to be happening. The government must act fast.”
The EIU, in its October political and economic outlook for Nigeria, said Tinubu’s meagre political capital is already wearing thin as a daring economic reform agenda clash with unions, and EIU views the momentum for further market reform as being absent.
“Not sure if this administration has the political will to turn things around because the new president seems to have too many IOUs from people who have helped him win election and may also be benefitting from oil theft,” a source said.