By Peter Egwuatu
The Central Bank of Nigeria, CBN, and Nigeria Sovereign Investment Authority, NSIA plan to invest N50 billion into the comatose Nigeria Commodity Exchange, NCX, is part of the government’s effort to diversify the economy and boost foreign exchange earnings.
Commodity exchange presents a major opportunity for Nigeria to boost agricultural productivity, enhance economic diversification and thus rid itself of the perennial over-dependence on crude oil as a major source of forex earnings.
This has become more urgent given that crude oil, and the vagaries of its prices, has become riskier for any country to depend on it as a major source of forex earnings.
One of the ways that the country can achieve this diversification is to vigorously develop the commodity exchange market ecosystem in order to get the benefits of commodity exchange.
Recently, the CBN as part of its efforts to facilitate diversification of the economy, announced the decision to restructure the NCX.
CBN Governor, Godwin Emefiele disclosed that the apex bank and NSIA would invest N50 billion lifeline in NCX to revive the struggling premier commodities exchange.
After 23 years of existence, NCX is still floating like a baby exchange. The Exchange has trained many professionals, and many others who opted for the training as part of a retirement plan.
But sadly, over two decades post-formation, NCX remains a market without wares. Apart from government’s lethargic approach to managing the premier commodities exchange, its operations are stifled by weak legal and regulatory structures such as absence of rules, issues of efficient delivery with counterparties and warehouse receipts.
In his justification for government’s decision to recapitalise NCX, Emefiele blamed private commodities exchanges in Nigeria for hoarding agricultural commodities for arbitrage opportunities.
He said: “We have found in the market that activities of the private commodities exchanges have not helped our country and it is time for the NCX to be repositioned and restructured to perform the role which by law, it has been empowered to perform.
“We will be coming up with the agenda and framework for the restructuring and repositioning of the Nigeria Commodity Exchange and we will do so in a manner that prices must be stable in Nigeria. We will not allow some self-seeking private exchange commodity to be hoarding agricultural products and be creating problems for prices because price stability is the core mandate of CBN and we cannot shy away from the responsibility.”
But the decision to deploy N50 billion to revive the NCX, has generated divergent views from experts and stakeholders. While some appreciated the move, some however, expressed concerns bordering on the development of the commodity exchange market ecosystem and competitiveness of the commodity exchange in the country.
Generally, commodities are marketable goods and raw materials, usually traded in bulk. Commodities can be classified into four main groups:
Agricultural commodities (corn, soybean, wheat, rice, cocoa etc.) Livestock and meat (i.e. livestock, cattle); Metals (gold, silver, platinum, copper) and Energy (petroleum, crude oil).
The main characteristic of commodities is that they are interchangeable with other goods from the same group. In addition, commodities are uniform in their quality.
In practice, this means that commodities which are in the same group and quality grade are very similar and it’s hard to find a difference between their producers.
For instance, it’s hard to spot the difference between wheat from one producer and wheat from another producer.
A commodity exchange is a platform or an organised marketplace for the exchange of various commodities such as grains, sugar, cocoa, livestock, oil, gas, metals and others.
Commodity trading ecosystem can be defined as the environment within which commodities trading take place and directly or indirectly, affects activities and development of the commodities market and the exchanges.
The ecosystem encompasses all spheres of the commodity trading environment such as its operations, products traded, infrastructure, logistics, traders/brokers,commodity merchants, farmers, miners, end-users and other stakeholders.
It also covers the legal and regulatory environment. If these elements are absent, inefficient or underdeveloped, the commodities trading ecosystem would not function well and so maximum value may not be derived.
Benefits of commodities exchange
Commodity exchange promotes economic growth by fostering the development of both soft and hard commodities by efficiently linking commodities to industry, which could improve industrial output and profitability.
A thriving commodities trading ecosystem according to experts, can therefore, facilitate industrialisation of the economy and improve tax revenue.
They create employment and raise the living standard of the farming community as opportunities are provided for better access to market, produce marketing, access to market price and other important information, which could lead to improved prices for farmers, among other benefits.
Since smallholder farmers are usually the rural poor, improvement in their living standards can have positive impact on rural development and mitigate rural-urban migration.
Commodity exchange can serve as a platform for smallholder farmers to be brought into the financial sector as they get exposed to financial services such as bank deposit and credit facilities, thereby fostering much needed financial inclusion.
Commodity exchange also engender economic diversification
This is more so for an economy like Nigeria, which is heavily dependent on a single product for its foreign exchange earnings, namely: crude oil.
For an essentially agrarian economy like ours, with good solid mineral deposits, developing the commodities market remains a potent way to diversify the economy away from crude oil, as well as widen the national tax base. A diversified economy will potentially diversify the export base and improve government revenue.
History of commodity exchange formation in Nigeria
The attempt to establish a commodity exchange in Nigeria began in 1989 when an Inter-Ministerial Committee was established to examine the possibility of setting up a commodity exchange following the abolishment of the commodities marketing board.
Although the committee recommended the establishment of a commodities exchange, nothing came to fruition until August 8, 2001, when the Federal Government directed the conversion of the then Abuja Stock Exchange to a commodity exchange which is now called NCX.
It was the only commodity exchange in Nigeria for more than a decade. But in 2014, the Securities and Exchange Commission, SEC, registered AFEX Commodities Exchange, the first private sector commodities exchange.
The SEC last year registered another private sector commodity exchange known as Lagos Commodity and Futures Exchange, LCFE.
Operationally, AFEX “is established in Nigeria with an overarching outlook to develop a workable warehouse receipt system.”
The company at present thrives on buying agricultural commodities into warehouses for sale. AFEX may later graduate into full-blown trading as a structured commodities exchange. But as of now, the company has not announced its dealing member firms, settlement banks or depository which are all attributes of a structured exchange.
While not dismissing its contribution to the diversification objective of improving the country’s foreign exchange earnings, market operators and stakeholders said the decision of the apex bank to pump in N50 billion will undermine the development of viable commodities exchanges in Nigeria.
They argued that such intervention funds should not be restricted to the government’s commodity exchange only as it would muscle out others that are promoted by the private sector.
A commodity trader and Chief Executive Officer, Wyoming Partners and Capital, Mr Tajudeen Olayinka in a statement said: “Such intervention fund should be utilised for provision of financial and other market infrastructure such as Central Counter Party, CPP, a market-wide clearing for the benefit of all commodities exchanges in Nigeria.
“It is not out of place for CBN to provide an intervention fund, to support orderly functioning of a commodity market. But such intervention should not be restricted to the government-owned Nigerian Commodity Exchange.
It is capable of muscling out competition; a requirement that must be fulfilled before the economy can benefit from the law of one price.
“It must be understood that CBN’s decision to provide N50 billion intervention fund to NCX came from frustration arising from food price inflation. Solution to the problem lies in market-wide intervention, not NCX specific intervention. However, NCX may be recapitalised by CBN and other shareholders, to the extent of its capital requirement.
“Inability of NCX to function as a commodity exchange came from its decision to use its trading platform solely for spot market, where a well functioning and more efficient spot market already exists, even though it is largely informal.
“The truth is that you cannot reinvent the wheel. If we consider the more than 26 per cent contribution of agriculture to the real GDP figure in 2020, with crop production contributing more than 89 per cent of that figure.”
Continuing, he said: “Nigeria has a huge spot market for commodities, and what is needed is commodity futures that can help provide future delivery and price assurances to both farmers and end-users, in a way that also mitigates their risks.
“If NCX had started as an Exchange for commodity futures, Nigeria could have doubled the contribution of agriculture to real GDP in 2020 because commodity futures could have propelled activities in the spot market.
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“Farmers and agro-processors and consumers need price and delivery assurances to enable them function optimally. This is what would help provide price stability, by driving down food price inflation.”
Corroborating this position, Managing Partner, Corporate Farmers of Nigeria, Mr Akin Alabi, took a swipe at the announcement of N50 billion for NCX, saying: “Nigeria required commodities exchanges across all the states of the federation.”
According to him: “Government should not concentrate on one commodity exchange if the economy is to benefit immensely.”
The Chairman, Association of Securities Dealing Houses of Nigeria, ASHON, Chief Onyenwechukwu Ezeagu in his response advocated the implementation of some policies that would avail all operators in the commodities exchanges’ value chain such as farmers, aggregators, commodities brokers, lawyers, insurance and warehouse operators among others, to benefit maximally rather than create uneven competition in favour of one commodity exchange.
Having identified the challenges and obstacles to a vibrant commodity exchange market in Nigeria, time has come for the government to demonstrate the political will and put all necessary policies that would promote healthy competition and contribute to the growth of the entire economy.
The private sector and stakeholders should equally collaborate to encourage investment in all the requisite supportive infrastructure such as warehouses and storage facilities by exchanges.
Similarly, to enlarge the scope of participation, existing commodity merchants and other relevant stakeholders should be encouraged into the exchanges either as traders or investors.
There is no doubt that Nigeria needs viable commodities exchanges if we must expand our sources of foreign exchange earnings in the wake of incessant external shocks from the international oil market.
The government’s huge investment in agriculture will be further enhanced if we have structured commodities exchange.