Fighting Dollar Scarcity With Homegrown Alternatives

Banks are under pressure in meeting their clients’ demands in funding dollar-based transactions. This contrasts with the old practice where banks featured prominently in syndicated dollar deals for clients. Currently, banks are rejecting such deals while businesses and consumers are in search of alternatives that would enable them to bypass the dollar challenge with homegrown substitutes for imported raw materials and products. COLLINS NWEZE captures the pains faced by businesses to stay afloat in the era of disappearing dollars and people’s declining purchasing power.

Mr Michael Olatunde, a Lagos-based banker has a passion for attending weekend parties. The party time has, for years, remained the best part of his weekends, relieving him of the stress associated with his banking job.

Olatunde was so fond of the party souvenirs that he created space in his four-bedroom apartment where he keeps the gifts.

But on Saturday, November 20, during a wedding reception held in Surulere Lagos, he had a surprise souvenir gift that cannot be kept in his apartment for long.

He was one of the over 200 guests that received unripe plantains shared as souvenirs at the wedding reception. Like Olatunde, many other guests were surprised at the souvenir choice while a few others were simply excited.

 

“It is not new that souvenirs are a part of parties. Celebrators give their guests all kinds of gifts, ranging from plastic bowls, jotters, umbrellas, soap, matches, and in recent times, power banks, boxes, and phones, among others. Never have I seen them share unripe plantains,” he said.

But what Olatunde failed to understand was the emerging trends in the economy where people are going for substitutes for items that require dollars to be imported.

The move is not only to save costs for party organisers given the rising rate of inflation which has raised prices of goods and services but to conserve foreign exchange as foreign capital inflows to the economy drop.

The National Bureau of Statistics (NBS) data showed that foreign direct investment, a major catalyst to Nigeria’s development dropped to $77.97 million in the second quarter of 2021, indicating a 49.6 per cent and 47.5 per cent decline compared to $154.76 million and $148.59 million recorded in the previous quarter and second quarter of 2020 respectively.

Also, the fall in crude oil prices has reduced Nigeria’s dollar earnings, making it difficult for the Central Bank of Nigeria (CBN) to fund imports. The scarcity of dollars meant importers now use more naira to buy few available dollars at exorbitant rates, with the costs passed to the consumers.

But, dollar scarcity has not always been the case for Nigeria. For instance, in 2013, the consortium of 12 local banks syndicated $3.3 billion loans to augment the Dangote Refinery and Petrochemical equity contribution in the refinery project.

Aliko Dangote, Chairman Dangote Group, was very excited at the ease at which the funds were raised for a milestone project expected on completion, to process about 650,000 barrels of crude oil per day.

Eight years later, the same banks are finding it difficult to fund clients seeking to acquire oil assets put on sale by the Royal Dutch Shell Plc.

Chief Executive Officer, GTBank, Segun Agbaje, said the banks are not likely to raise the estimated $2.3 billion needed to purchase the Shell assets.

“Such a deal would require a syndication of up to $1.8 billion and it will be very tough to raise such funding locally at the moment because of dipping dollar liquidity in the banks,” he said.

Shell is working on exiting its onshore oil position in Nigeria, which is no longer considered compatible with its strategic ambitions.

Findings indicate that it is not only banks that are finding it difficult to conclude dollar deals. Manufacturers are going for local raw materials instead of imported ones as naira depreciation against the dollar persists.

For instance, at the Ladipo motor spare parts market, in Mushin Lagos, motorists now buy locally-fabricated vehicle shock absorbers, brake pads, and even engine oil as prices of imported versions go out of reach.

Managing Director, Bendock Limited, Steven Kalu, said demand for foreign goods has significantly dropped as prices soared with many Nigerians looking inwards for the closest substitutes of products and services.

“The naira exchange rate at the parallel market stood at N545/$1 as of November 22, making goods and services linked to the dollars unaffordable for anyone with a legitimate need. Importers have run out of options and face consumers whose income cannot accommodate new price hikes hence, they are going for local substitutes,” he said.

Another Abuja-based businessman, who imports suits and shirts from China, Paul Okafor, said the prices of foreign suits are now out of reach of many of his customers, mostly bankers.

“My customers now go for locally-made suits and shirts which are cheaper than imported ones. We are studying the shift in consumer behaviour to enable us to move into the sale of local fabrics,” he said.

Sales Director, Hayat Kimya Nigeria (manufacturers of Molfix pampers), Motayo Latunji, said the foreign exchange crisis was not only impacting the company’s business, but also all fast-moving consumer goods businesses in Nigeria.

“If you are a manufacturer, and some quantity of your raw materials is being imported, it’s a tough time. The foreign exchange is not only high but also not easy to find. The supply chain issue is also impacting businesses. The cost of operation is very high and everything keeps going up given the level of depreciation of the naira against other foreign currencies,” he said.

The depreciation of the naira has also affected dollar loan repayment for many businesses. Top businesses, especially in the manufacturing and oil and gas sectors, are finding it difficult to repay such loans taken when the naira exchange rate was relatively stable.

With the depreciation of the naira, borrowers now require more naira than was initially intended, to pay back the loans.

Managing Director of Sahara Power Group, Kola Adesina, said his company took dollar loans at a period when the naira was stronger, but faced a major crisis in repayment following the fall in the naira exchange rate against the dollar.

He said banks are also reviewing loan pricing for risks and dealing with currency mismatch problems faced by many of their customers that borrowed in foreign currency.

“Access to capital is challenging and difficult. Banks are reviewing pricing for risks and loans. We have secured cheap capital but suffered currency mismatch because of the loans we took in dollars. Revenue has not increased in line with exchange rate changes,” Adesina said.

He said the company is, however, exploring traditional and non-traditional approaches in resolving the dollar-loan challenge.

“We are resilient. We did not expect the current naira volatility at the point of borrowing but we are sitting down and resolving it with the banks,” Adesina added.

Vice-President, Prof. Yemi Osinbajo explained what is going on. For him, the exchange rate was artificially low and deterring investors from bringing foreign exchange into the country.

“We can’t get new dollars into the system, where the exchange rate is artificially low. And everyone knows by how much our reserve can grow.

“I am convinced that the demand management strategy currently being adopted by the CBN needs a rethink, and that is just my view,” Osinbajo said at the opening ceremony of a two-day Mid-term Ministerial Performance Review retreat, held at the Presidential Villa, Abuja in October.

The CBN naira exchange rate plan places the official rate at N411/$1, and Osinbajo believes such rate does not reflect Nigeria’s economic realities.

But the CBN Governor, Godwin Emefiele explained that Nigeria, like other emerging markets that are reliant on oil exports, the retreat by foreign portfolio investors significantly affected the supply of foreign exchange into the country.

“With the decline in our foreign exchange earnings and successive exchange rate adjustments, the CBN has continued to implement a demand management framework, which is designed to bolster the production of items that can be produced in Nigeria, and aid conservation of our external reserves,” he said.

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Emefiele explained that due to the unprecedented nature of the shock, the apex bank has continued to favour a gradual liberalisation of the foreign exchange market in order to ease the exchange rate volatility and mitigate the impact which, rapid changes in the exchange rate could have on key macro-economic variables.

 

More dollar inflows coming
Despite these challenges, the International Capital Market (ICM) is providing succour to Nigerian banks in dire need of foreign capital to fund their operations. The government is also looking up to the ICM to raise an additional $2.1 billion after successfully raising $4 billion in September.

Director-General of Debt Management Office, Patience Oniha, had, in the past three months, led international roadshows to encourage investors on the viability of investing in Nigeria. The country is relying on the ICM to raise badly-needed funds to finance its infrastructure.

In September 2021, Nigeria raised $4 billion from the Eurobond market, $1 billion higher than the $3 billion targeted. The three-tranche deal will help finance projects outlined in the Nigerian 2021 Appropriation Act and fund infrastructure.

Oniha said the international investors had shown interest in engaging the government on the new offer but remained optimistic about Nigeria’s credit status.

“We need to assess the market to understand how to proceed. We remain confident international investors find our credit story enticing enough,” she said.

Director-General, Budget Office, Ben Akabueze said the investors are also concerned about debt sustainability, but the government had given them assurance on that. He admitted that the major problem was the 73 per cent debt service to revenue ratio which the government is working hard to improve.

Commercial banks are also raising additional capital through the Eurobond to enable them to provide medium-term funding and enhance their capacity to support general banking purposes. Ecobank’s $300 million Eurobond offer earlier in the year was oversubscribed by 300 per cent.

Managing Director, Ecobank Nigeria, Patrick Akinwuntan described the Federal Government’s plan for a Eurobond issuance as a good move, stressing that the fundamentals and potential of the country’s economy are strong with the capacity to meet its debt obligations.

He observed that international borrowing will allow Nigeria to access more foreign currencies, deepen external reserve, allow more confidence in the medium-term planning in the private sector, adding that it allows a benchmark to be established in terms of how funding and investment are priced within the local economy.

“It also gives more room for the local economy to be able to breathe a bit more because when the country takes on Eurobond that portion is reduced from local country financing or public sector debt within the country. All these factors play strongly to the benefit of the private sector and the entire economy.”

Akinwuntan advised those approaching the international debt market to have clarity of purpose and state clearly their strengths and weaknesses.

Eurobonds worth $500 million have been issued to offshore investors by Access Bank Plc.

Access Bank said it went to the international debt capital market with $500 million but investors, who were confident with the ability of the company to repay at maturity, staked $1.6 billion on the instrument.

Group Managing Director, Access Bank Plc, Herbert Wigwe, said the success of the transaction would significantly enhance the bank’s tier 1 and total capital ratios ahead of Basel III implementation in Nigeria.

He said the fresh capital would enable the bank to capture the strategic opportunities in payments, agency banking, and insurance across the continent to further enhance its growth profile and business diversification agenda.

More cases for homegrown substitutes
The CBN is also fighting back the dollar challenge with homegrown solutions to keep Nigeria’s import bills in check.

For instance, the CBN has commenced the process to conserve about $2 billion in foreign exchange with the funding of commercial wheat farming in 15 states of the federation in its new intervention under the Anchor Borrowers’ Programme (ABP).

Over 150,000 farmers are expected to benefit from the new intervention in the wheat value chain through the cultivation of 180,000 hectares of land in the states.

Emefiele said the apex bank has decided to add wheat to the list of focal commodities to be supported under the bank’s agricultural intervention programmes.

Nigeria’s national import of food amounted to N1.85 trillion between January and September 2020, – a 62 per cent increase when compared to the same period in 2019. The Federal Government spent a cumulative N3.35 trillion in four years on agricultural imports, Chairman, United Bank for Africa, Tony Elumelu has said.

In nearly six years of the ABP implementation, the CBN says 3.8 million farmers have so far benefited from the scheme.

CBN Director, Development Finance Department, Yila Yusuf, said N554.61 billion had been disbursed through the programme since its inception in 2015.

“The multiplier effect on the economy is huge. The ABP has helped farmers to improve their yields. For maize, we now do five metric tons per hectare and for rice; we’re improving from four metric tonnes to 10 metric tons per hectare. We will be trying out some Brazilian seeds that we will give to the anchors and their association,” he said.

Nigeria’s import bill on rice also dropped, saving foreign exchange for the economy.

In the health care sector, the CBN said it will be doubling its N100 billion intervention in the sector to N200 billion.

Emefiele said indigenous pharmaceutical companies and health care practitioners that want to expand or build their capacities would continue to benefit from the fund.

Such investments would drastically free over $1 billion spent annually on medical tourism for other developmental projects and funding for key infrastructure, adding that medical tourism puts a huge strain on Nigeria’s foreign reserves.

Expectations from SMEs
The International Finance Corporation (IFC) report indicates that approximately 96 per cent of Nigerian businesses are Small and Medium Enterprises (SMEs).

Head, Operational Risk Management/Business Continuity, Unity Bank Plc, Lasisi-Yahya Enitan said there was a need to rescue SMEs through effective policies implementation as they remain the life wire of the economy.

He explained that the COVID-19 pandemic did not only come with “economic dreaded monsters”-risks such as unemployment and inflation but also provided opportunities for businesses to research and come up with the best and suitable business model that can operate at optimal level irrespective of the prevalence of COVID-19.

Enitan said funding alone cannot be adequate for needed intermediation or intervention as a bottom-up policy development strategy should be adopted.

He said the policies are to be structured to target what needs to be done to reduce production/overhead cost, reduce the costs of factor inputs, setting up an integrated and digitalised marketplace for SMEs to aid forward and backward integrated function.

He said the policy driver should push for business automation.

“At the initial stage, SMEs should be persuaded to adopt business automation in their business processes and activities. The persuasion can come in form of lower interest for subsequent facilities. Where persuasion fails, total enforcement of business automation becomes necessary as it brings about lower cost; time savings; high accuracy; better service and greater productivity,” he said

Director at African Development Bank, Martin Orji, said Development Finance Institutions (DFIs) should work together to deploy cheap capital to Africa to support their continent’s businesses.

For him, the legal framework that allows DFIs to collaborate and pull capital to support businesses on the Continent should be implemented for the good of African consumers, businesses and economies

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