One down, one to go! Analysts say next up, action on FX policy one day after deregulation – Businessday

CBN

By Patrick Atuanya, Kigali

Analysts, stakeholders and business leaders are urging a more robust reform effort by Nigeria’s Federal Government, specifically focused on a new FX policy for the country, following Wednesday’s announcement of a deregulation in petrol prices. “We are happy that it is coming better late than never. We hope that it is the beginning of wholesome reforms,” Olaoye Jaiyeola, CEO of private sector think tank, Nigeria Economic Summit Group (NESG), told BusinessDay in an interview on the sidelines of the World Economic Forum for Africa, (WEF) holding in Kigali, Rwanda.

“The government needs to pivot swiftly to FX reforms. Jobs are being lost as a result of the current FX policy. We talk a lot about the demand side but more focus should be on FX supply. We appreciate the move to deregulate petrol, but we need to do much more,” Jaiyeola said.

The Nigerian government announced late Wednesday, a removal of the cap in petrol prices that will see prices rise to as much as N145 a litre from N86.5 earlier, a move welcomed by the business community.

Fuel subsidies cost the state as much as $6bn in fraudulent claims, a 2012 government report found. The country of more than 180m has been choked by a fuel crisis since March, that has further slowed economic growth. The collapse in oil prices from above $100 a barrel in mid-2014 to $45 today has hit Nigeria’s Federal budget and made subsidies on petrol unsustainable.

A leading economist in Lagos said the developments in Nigeria makes one to believe that fundamental changes were underway.

According to him, “despite the fall in oil prices, the Nigerian economy should be growing faster if the government will take the tough decisions and just move on. The market is looking for consistent and coherent policies which foster a better investment climate.” The managing director of a major oil marketing company told BusinessDay he expects the petrol supply situation to improve in matter of weeks as importers adjust to the new regime of free entry and free exit.

He, however said it would be appropriate at this time for the government to make a pronouncement on the subsidy that had built up before the market was deregulated on Wednesday.

“It is very encouraging that the Nigerian government is willing to allow a policy that will not stall economic growth. Nigeria’s public finances are on a much more sound footing with fuel subsidy payments gone,” Razia Khan, Africa chief economist at Standard Chartered told BusinessDay on the sidelines of WEF.

“We hope more reforms will happen in other areas. The absence of an FX policy is causing major problems for the economy. Not being able to obtain FX is a major issue for most businesses.”

Nigeria has held the naira at N197-N199 per dollar since March last year, even as oil revenue and export earnings fall and other crude producers from Kazakhstan to Russia let their currencies weaken. Dollar reserves have fallen 29 percent since mid-2014 to less than $27 bn, the lowest in more than ten years, as the Central Bank’s capital slowed foreign investment to a trickle. “Countries should not be afraid to use price flexibility to reduce shocks,” Benno Ndulu, governor of the Bank of Tanzania, said at the WEF session on Africa’s financial sector resilience.

Policy makers in Nigeria have been in denial over the currency, according to Hendrik du Toit, CEO of Investec Asset Management, which has about $1bn invested in Nigeria.

“Administrative exchange rate regimes are shooting themselves in the foot,” said du Toit at the WEF on Africa in Kigali, Rwanda on Thursday.

“Governments and economies in Africa need to be more open than closed, which will encourage resilience.” On Wednesday, Nigerian vice-president Yemi Osinbajo told a conference in Lagos that the country needed a “substantial review” of its foreignexchange policies, including further consideration about devaluing the naira.

Africa’s largest economy is growing at its slowest rate since 1999 as oil revenue declines due to a plunge in crude prices and the lowest production in more than 20 years. Luis Gravito, senior partner and managing director at consulting firm BCG, tells BusinessDay that the deregulation of petrol prices is a step in the right direction and it will enable a much healthier growth in the economy.

“Without a pricing system that actually reflects cost in an efficient way, the correct allocation of resources is not possible. The best signaling mechanism to allocate resources in any economy is a transparent pricing system and prices need to reflect cost for capital to make profit,” Gravito said in Kigali.

Nigeria is a major crude exporter but relies on fuel imports to meet more than 70 percent of its domestic needs, as its four state-owned, ill-maintained refineries work at a fraction of their combined 445,000 barrels per day capacity. Higher fuel prices are expected to encourage private investments in refineries and boost domestic supply, the petroleum ministry said.

However, they could also lead to short term price increases and some resistance by the country’s labour unions.

“We are appealing to labour to sheathe their swords as Nigerians are currently paying much more than that (N145/ litre) for petrol. We want what is happening in Diesel to happen to petrol, where we have seen prices actually come down, as a result of more players and a free market regime,” Jaiyeola, CEO of the NESG said.