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    Dollar scarcity, high interest rate, stifling the energy sector

    BY SEBASTINE OBASI

    When will Nigerians say goodbye to the ever present power outage that has stunted the economic development of Africa’s biggest economy?

    Naira-Dollar
    Naira-Dollar

    When will the myriad of problems bugging the nation’s oil industry be a thing of the past? These are pertinent questions that need to be answered going by the unpleasant and unfolding scenarios in the nation’s energy sector, as we enter a new calendar year.

    Over time, Nigeria’s energy sector has been beset by issues that border on unfavourable policies, government’s unwillingness to privatise, as well as labour’s unwavering support for the maintenance of the status quo.

    However, in the power sub-sector, even with the privatization, the nation is yet to make a head way as regards stabilization, as the successor companies have continued to lament government policies that impact negatively on the smooth running of their businesses.

    Currently, the scarcity of dollar and high interest rate appear to be the burning issues that need urgent attention in order to tackle the yet to improve power sub-sector. According to Kola Adesina, Chairman, Egbin Power Plc, dollar scarcity is one of the critical issues bedeviling their operations. “At the point of acquisition of these power assets, the exchange rate was N155.76 to a dollar. Today, official exchange rate is N199 and that N199 is not even readily available to those of us that work in this sector.

    “Our plant is largely run with offshore equipment, spares and tools and these spares can only be procured in dollars. Invariably, there is need for a special allocation, if we are to get the entire mix right. Otherwise, the tariff structure will not be affordable to be able to assist in the industrialization vision of the administration,” Adesina said.

    Also the Director General of the Bureau of Public Enterprises, BPE, Benjamin Dikki,believes that high interest rate is discouraging investment in the sector as investors pay as high as 25 percent interest rate. According to him, “You cannot do power business and be paying over 25 per cent interest on loan. To invest in a generating capacity, to build a thermal plant, you need a minimum of two years. If you take a loan at 25 percent interest per annum, in two years, that is 50 percent of the money. No power investor can make investments with that kind of high interest rate. Government must therefore provide low interest yielding facilities like it did for the manufacturing sector, through the Bank of Industry, BOI, to encourage investments in power.”

    He also explained that government has to create enabling environment, make the transactions in the sector bankable, so that the power sector investors can access capital to make the necessary investments, so as to increase the quantum of power and increase the ability to transmit and distribute the power.

    “ Once these critical issues are achieved, the interest rate, foreign exchange rate, regulatory clarity and consistency and long term perspective, I believe we will have a robust power sector, attracting investments and funding on a consistent basis.

    “People are willing to invest in power, but these are some of the issues creating the risk of perception. I hope these issues are being looked into by government and will be addressed shortly.”

    The power sub-sector is not alone. In the oil and gas industry, stakeholders have also been complaining of their inability to assess foreign exchange in an industry that is dollar – denominated. Consequently, many of them have been losing millions of Naira, as they find it difficult to carry out their corporate contractual obligations.  For Chika Ikenga, Group Managing Director, Eunisell, an indigenous oil and gas company, it is a growing concern, because his company has been losing hundreds of millions of Naira due to foreign exchange scarcity.

    “We have lost hundreds of millions of Naira due to exchange rate differences. If you had your contract already agreed upon at N200 to one dollar, and you now pay your suppliers at N280, you can imagine the loss being suffered as a result. If you multiply it with what you need to pay, it runs into hundreds of millions of Naira.

    “What the government needs to do is to ensure that manufacturers who are bringing in raw materials have access to foreign exchange. People who are bringing in equipment used for manufacturing have access to foreign exchange. People who are bringing in equipment in the oil industry have access to foreign exchange,” he said.

    He also explained that whereas indigenous companies supply components to the international oil companies at the official rate of N199, those components were imported at a higher rate. “If you supply components to the IOCs, you get paid at the official the exchange rate of N199, whereas the material is imported at the rate of N280. This shows that you are losing about N8,” he added.

    Also, Dada Thomas, Chief Executive Officer, CEO, Frontier Oil Limited, a wholly Nigerian-owned exploration and production company, affirms that indigenous companies are faced with significant losses in excess of 25 percent when sourcing for dollars to pay for their operating expenses.

    According to him, “The dollar scarcity in the market has created a huge gap in excess of N60 between the official interbank and Bureau De Change, BDC, or parallel market rates. The impact on the oil and gas industry is significant, especially for the gas producers who are paid in Naira at the interbank or similar rate, while the bulk of the investment and loans are in dollars and a significant amount of operating expenses are also in dollars.

    “They are faced with significant losses in excess of 25 percent when sourcing for dollars to repay lists or pay for the dollar elements of their operating expenses. The federal government through the Central Bank of Nigeria must ensure that genuine gas producing companies have access to dollars at interbank rates to fund their loan repayments and operating expenses.”

    Chambers Oyibo, former Group Managing Director of state-owned Nigerian National Petroleum Corporation, NNPC and Chairman, Prime Energy Resources Limited, explains that the dollar scarcity is affecting both small and big companies.

    “Oil, when exported, is dollar-denominated. People who export crude should be allowed to use their proceeds to run their businesses. If they are denied that, it will affect operations of the industry negatively.

    “The dollar scarcity is impacting negatively on the small oil companies, just as the big ones are feeling the impact on a higher proportion.

    “Government should sit down with the industry stakeholders, as well as the banks, so as to give special consideration to those who export their products. Also, the oil companies should be allowed to use their proceeds to procure the components needed to run their facilities,” he added.

    Specifically, the Executive Secretary of the Major Oil Marketers Association of Nigeria (MOMAN), Obafemi Olawore, said the high exchange rate has resulted in the high cost of both petrol and diesel in the country and the recent directive issued to reduce their level of exposure to oil companies in order to reduce the challenges of meeting its huge funding demand was also cited as a decision that contributed to the current fuel scarcity.

    “The unfortunate situation in which we find ourselves is that as the price of crude oil and the international price of diesel was dropping, we devalued the Naira. For example, for Premium Motor Spirit (PMS), the exchange rate for bringing products before the devaluation was N171.36 per dollar.

    “At that rate, the landing cost of PMS was N90.67 per litre. There was a time the exchange rate rose to N188, that is, N188 was the interbank rate, while the CBN gave us N171.36. But when it went to N188, the landing cost of PMS rose from N90.67 to N98.36. As at today when the exchange rate has gone to N199 (there is no window again), the landing cost rose to N103.45. So, you see that the main factor here is the exchange rate,” he said.

    The Central Bank of Nigeria’s ban on importers of some items from accessing foreign exchange from the official foreign exchange, FOREX market has made it difficult for a number of Nigerian companies to pay their overseas vendors. The development was said to have made banks in the country, which are the guarantors of those payments, to owe their counterparts abroad between $3bn and $4bn, some top bank executives told Sweetcrude.

    A top executive of one of the banks in the country, who chose to speak on the condition of anonymity because of the sensitivity of the matter, explained, “Nigerian banks currently owe a combined sum of about $4bn in outstanding settlements for credit lines extended to them by foreign banks.

    “The debts have mounted this far because Nigerian companies that imported goods from overseas could not purchase dollars from the CBN’s official window to pay the local lenders, which will in turn credit the accounts of the foreign banks.”

    The CBN had some months ago banned importers of 41 items from accessing dollars from the official FOREX market as part of measures aimed at preserving the external reserves from further depletion and thereby stabilise the Naira.

    The FOREX policy has attracted strong reactions and criticisms from companies and stakeholders, including the Lagos Chamber of Commerce and Industry, LCCI, which said the CBN’s action would lead to massive factory closures and job losses.

    According to LCCI, some of its members lost about N1.46 trillion in six months. The LCCI Director-General, Muda Yusuf, attributed the loss to stalled business activities due to inadequate supply of foreign exchange as a result of Federal Government’s policy on foreign exchange restriction.

    He said LCCI’s third quarter 2015 business environment survey showed that the Central Bank of Nigeria’s FOREX restriction policy proved the costliest of all government policies in recent years.

    Yusuf, explained that a significant number of the 41 items banned from the official FOREX market constituted major raw material inputs for many manufacturers, and as such, their exclusion from the FOREX market would jeopardise the continued operations of many companies.

    Yusuf, who noted that firms had defaulted on contracts and lost credit lines, said, “Many companies have defaulted in fulfilling foreign obligations … even blue chip companies … for the first time.”

    The LCCI DG noted that companies had also suffered from the CBN’s attempt to stop the dollarisation of the economy, adding that a ban on foreign currency cash deposits had forced firms to use informal “transfer markets,” whereby people abroad wire dollars on companies’ behalf.

    The President, Manufacturers Association of Nigeria, Dr. Frank Jacobs, also stated that a breakdown of the 41 items excluded from the FOREX market by the CBN had actually led to over 600 items in total being shut out. Both the LCCI and MAN have urged the CBN to review the ban on the 41 items by cutting down on the number.

    The CBN has yet to accede to the request. Instead, some stakeholders have speculated that the central bank is tinkering with the idea of extending the ban to other imported items in order to preserve the foreign exchange reserves.

    Some bank executives told Sweetcrude that most banks had cut credit lines to importers. However, they said that the challenges some of the importers were facing had to do with the fact that they had the Naira equivalent of the amounts they owed their foreign vendors but could not buy dollars from the CBN window due to the ban.

    A top official of a tier-1 bank explained, “Some of these importers imported the items when the dollar was going for certain rates. The naira later depreciated and the dollar went up. But they still need to buy the dollar at the CBN window to pay the banks so that the banks can in turn pay the foreign lenders. They may not source this money from the black market for a number of reasons. So, it is really a dilemma.

    “I think the economy is in a very serious situation. If the CBN should sell dollars to all these people, it means the external reserves will be depleted by $4bn. How many months of fuel imports can the remaining reserves cover then? I think the economy is at a major point and that is why I don’t even envy the CBN now.”

    Commenting on the development, a financial expert and Chief Executive Officer, Cowry Assets Management Limited, Mr. Johnson Chukwu, said the CBN needed to carry out a guided depreciation of the Naira so that the mounting debts would not destroy the credit rating of the country and the affected banks and companies.

    However, CBN had explained that implementation of the policy will conserve foreign reserve, as well as help to revive domestic industries.  “The implementation of the policy will help conserve FOREX reserves as well as facilitate the resuscitation of domestic industries and improve employment generation.

    “The only thing that will reduce pressure on our currency is by producing those things we are importing today,” CBN Governor Godwin Emefiele, said.

    “We will try as much as possible not to hurt your business, but we need to be able to work together,” he added. .

    The central bank had devalued the Naira last February and had scrapped the Whole Sale Dutch Auction System and Retail Dutch Auction System, WDAS/RDAS, all in a bid to strengthen the Naira. The regulator “will meet legitimate demand, but we will not be concerned about illegitimate demand,” Emefiele said.

    “We have seen the pressure in the FOREX market arising mostly for the lopsided dependence on imports. Today in Nigeria, toothpick, tomato paste, furniture, rice, sugar, fish and petroleum products are all being imported into Nigeria,” the CBN Governor added.


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