Ada Uche slumped into her chair after speaking with her bankers who had just told her they had no dollars yet for the importer of educational children toys from China.
Uche, 45, had been on a long queue for foreign exchange for two months as Africa’s most populous nation grapples with dollar shortages caused by lower oil prices and declining foreign portfolio inflows.
Before her last attempt at getting $10,000 from her bank she had heard from a friend within the bank that she was not deemed as an essential importer and that was the reason for the prolonged delay, and that even essential commodities importers had to wait on a long queue to get dollars.
This friend however told Uche that things could change after the World Bank disburses a $1.5 billion loan to Nigeria. The money was supposed to boost dollar liquidity, a boon for several SMEs struggling with no access to foreign exchange for critical inputs.
The World Bank loan, which is by no means a lasting solution to Nigeria’s dollar shortages but could have helped pave way for autonomous foreign inflows due to the confidence boost it gives investors, has however suffered a fresh setback.
That is after the long-awaited meeting of the board of the World Bank to consider the support package for Nigeria will no longer hold at the August 7 date, as the global lender has yet to be convinced that the government and Central Bank of Nigeria are serious about commitments to put in place credible mechanisms to enhance efficiency in allocation and use of public finance.
With the board set to go on recess from August 10 to 25, the earliest another meeting can hold is in October.
Uche and other SMEs will have to wait another painful month to see if Nigeria can get its act together in boosting dollar inflows, and can get the dollars they need for their businesses to continue running.
They could wait even longer if the government does not move on the reforms required to access the loan. That wait could force painful decisions to accelerate culling of badly-needed jobs of Nigerians.
The development is also bad news for manufacturers who need dollars for key inputs and have pending dollar requests sitting with their banks. Foreign portfolio investors whose funds are trapped in the country will now also have to wait longer.
Nigeria’s foreign reserves are under $36 billion but there is probably a FX demand backlog of around $5 billion plus the estimated value of swaps of around $7 billion.
“It means the FX liquidity crisis will worsen,” Muda Yusuf, director-general of business advocacy group, Lagos Chamber of Commerce and Industry (LCCI), said in reaction to the delayed World Bank loan.
“A lot of manufacturers, retail businesses and service producers cannot get FX at the moment, not even in the NAFEX window and all of that struggle is partly due to the distortion in pricing,” Yusuf, whose LCCI draws membership from over 2,000 small businesses in the commercial capital of Lagos, said.
“A lot of demand is now flowing to parallel market as a result, but the huge premium at that market is causing untold hardship for many,” Yusuf said, saying, “It is disappointing that the government is dragging on reforms that would help alleviate some of the pain people are facing.”
The delayed funding is also likely to put pressure on the naira. The naira fell to a new low of N474/$ on Thursday at the black market, according to abokifx, which collates data from traders. That takes the spread between the I&E window rate and black market to N86/$.
The black market, which is easily the most liquid of Nigeria’s FX markets, is where many businesses have had to increasingly go to for dollars.
“There is going to be continued pressure on FX as external reserves are fast depleting,” said Kayode Tinuoye, head of portfolio management at investment bank, United Capital.
“Multilateral funding was supposed to be one of the key ways to augment FX reserves, so if the World Bank loan does not go through we will see more pressure on the naira,” Tinuoye said.
The delay in the $1.5 billion loan means the scarcity of dollars in the official markets will persist longer and more businesses will run to the black market, which could lead to a further decline in the exchange rate and rising inflation.
That is bad news for firms already struggling to manage costs and for cash-strapped households whose purchasing power will further reduce.
Why World Bank loan is stalling
Before now, the World Bank and the Nigerian government have had series of meetings to discuss the loan, but those meetings have not been fruitful, according to sources familiar with the discussions.
The World Bank wants the government to move quicker on some key reforms including unification of the country’s inefficient exchange rates, enthrone service reflective electricity tariffs and completely halt the wasteful regime of petrol subsidy.
In addition, there are also recommendations for improving tax revenues in a country where tax-to-GDP ratios are at about the lowest in the world.
These reforms were among promises made by the government to the IMF before securing a $3.4 billion loan in April. While some moves have been made, Nigeria remains far away from completing the reforms.
Seeing how Nigeria has failed to keep its promises to the IMF, the World Bank is now holding out until concrete moves are made by the government.
The decision to cancel the meeting of the board, which is rare at a time of this pandemic, sends a bad signal about Nigeria’s leadership.
“It is important that Nigeria moves quicker on reforms to pave way not only for the World Bank loan and autonomous foreign inflows,” said Taiwo Oyedele, a partner and head of tax and regulatory services at consultancy Price Waterhouse Coopers (PWC).
The removal of a costly petrol subsidy, that gulped nearly N2 trillion last year, is gathering pace with the government now allowing flexible pricing even though it is not yet a full deregulation, given that the PPPRA still determines the price on a monthly basis.
Nigeria however backtracked on the electricity reforms it promised the IMF and World Bank after the electricity distribution companies (Discos) bizarrely blocked plans to implement a cost-reflective tariff that they had championed for so long.
The finance ministry says the said COVID-19 support from the World Bank is not conditional upon enthroning a market-reflective electricity tariff.
Moves towards a unified exchange rate, which had seemed to be gathering momentum after the CBN devalued the official rate to N360/$ from the N306/$ rate it has been for three years, have also slowed.
The CBN assured the market that it would move the official rate even further until it was collapsed at the I&E window rate, where the naira is weaker at N388/$.
However, investors and analysts got a rude awakening that a full unification of all the rates could take longer than expected after the government pegged the exchange rate at N360/$ in its Medium Term Expenditure Framework to run for the next three years.
“It is not unexpected that the World Bank loan is dragging,” one economist said. “If Nigeria is going to use this crisis meaningfully, it is reform, reform and more reform. Our challenge is whether we are ready and able,” the economist said.
Another thing that is at stake if Nigeria is unable to land the World Bank loan is the implementation of its N10.8 trillion budget for 2020.
“Government’s capacity in re-activating the economy through budget spending will be hampered by a lengthy delay of the World Bank loan,” said Olusegun Omisakin, director of research at private sector advocacy body, Nigerian Economic Summit Group (NESG).
“In the face of the current economic challenges (low oil price, constrained oil production, declining oil revenue, downward trending external reserves and weak revenue mobilization), Nigeria needs huge funding.
“We need about $30 billion worth of interventions to ameliorate the impact of Covid-19 on the economy (based on our estimate). The announced government intervention stands at $16 billion making about $14 billion the funding gap. While there are options, the most viable now is still external borrowing. So, not getting this loan will be a setback,” Omisakin said.
A senior government official said the multiple FX rates practice was the main hurdle in obtaining the loan.
“The key challenge is the multiple FX rates. CBN would need to be more firm in unifying rates; the longer that persists, the longer the delay Nigeria will suffer in obtaining the funding,” the government official said.
The CBN did not respond to an email seeking answers about the timeline of its planned rate unification.
As BusinessDay reported Wednesday, the IMF had also urged the CBN to quickly come up with a clear strategy and timeline on how it intends to achieve full unification of the country’s multiple exchange rates.
According to the IMF, this would enhance foreign exchange availability for FX-strapped businesses, promote both domestic and foreign investment and create conditions for a boost in economic activity for Africa’s most populous country.
Speaking with members of the American Business Council, Jesmin Rahman, the IMF’s mission chief for Nigeria, said it was important for Nigeria to have a well-functioning foreign exchange market with uniform rules of engagement. “This will enhance confidence, improve business continuity and governance,” Rahman said.
“In addition, greater flexibility of the exchange rate is desired because of Nigeria’s low buffers.”
She is not the only one calling for the unification of Nigeria’s foreign exchange rates. Several leading economists in Nigeria as well as President Muhammadu Buhari’s economic council have long prescribed the measures as necessary for the country to exit the tough business climate in which it finds itself. At Wednesday’s breakfast meeting of the Lagos Business School, the issue was top of mind for the CEOs in attendance.
While Nigeria has vowed to merge its multiple exchange rates at the more market reflective Investors and Exporters window rate, the Central Bank has seemingly been reluctant, fearing that this could plunge the economy into further turmoil.
The apex bank has moved the official rate from N305 to the dollar first to N325, then N360 and now to N380 but the drip feed approach to the unification has occasioned more pain and confusion for investors.
IMF’s Rahman believes there is still a long way to go given the multiple windows, large parallel market premiums, and low turnover in the I&E window which many now hope will become the only market.
