ECONOMIC DOWNTURN: FG goes for more foreign loans
· Leaves domestic funds for entrepreneurs
· CBN floats the Naira
The Federal Government announced two major economic policies on
Wednesday: the floating of the Naira and more external borrowing.
While the first policy is designed to address the hitches in the
foreign exchange market, the second is targeted at freeing funds in the
domestic market for borrowing by local entrepreneurs.
The twin-decisions were announced yesterday by the Federal Executive Council (FEC) and the Central Bank of Nigeria (CBN).
The decision of the government to take more external loans was
approved by the FEC during its meeting chaired by the Acting President
Yemi Osinbajo at the State House, Abuja.
The Minister of Finance, Mrs. Kemi Adeosun and the Minister of State
for Budget and National Planning, Hajia Zainab Ahmed, explained the new
borrowing and debt management strategy to State House correspondents
after the meeting.
Hajia Ahmed said: It is important for us to move away from short-term
borrowing to longer-term borrowing and to move away government
borrowing from the domestic market as much as possible to cheaper
external loans. The purpose of that is that the (domestic) financial
system will have more resources to lend to the real and productive
sectors.
“The Medium Term Expenditure Framework (MTEF) has a plan to reduce the
level of debt from what it is in 2016 to 25% in the next three years
and that is what this plan is really conforming to,” she said.
Adeosun added that the strategy will span from 2016-2019 following
the expiration of the previous strategy last December and the need to
align with the current economic challenges, with a view to reflating and
diversifying the economy.
”We felt there was a need for a new debt strategy based on MTEF to
reduce our domestic debt from one percent of Gross Domestic Product
(GDP) to 0.7 percent by 2019.
“The reasons for this is that the government recognises that for the
next three years, to really stimulate this economy and provide the
infrastructure that we need, we will need to be borrowing. We need to
borrow at the most cost-effective rate and at the most cost-effective
and beneficial terms.
“And also, the government recognises that there is a need to stimulate
the private sector. For the private sector to really grow, banks must
lend to the operators; so we don’t want government borrowing to crowd
out the private sector.
“The government had taken a strategic decision that where possible, we
will borrow more externally; that is, the external debt in dollars or
in other currencies. This is because the interest rates are cheaper, the
tenures are longer and there is more room for banks to lend to the
private sector, especially Small and Medium Enterprises (SMEs),” she
explained.
However, in doing this, FEC suggested that while accumulating more
debts in dollars or other foreign currencies, emphasis should be laid
on more exports, especially non-oil exports.
The minister said that “there was a lot of discussions around reforms
that we would need Customs and other ministries to make it easier to
export Nigerian goods and agricultural produce and solid minerals that
there is demand at the moment.
“Some of the bottlenecks that exist in Customs and those (produce)
under quarantine need to be removed. If we do this, that will create
foreign exchange earnings so that these borrowings which are in dollars,
when they need to be repaid, we will have dollar revenues to pay
them.”
Besides, multi-lateral loans from agencies like the World Bank and
African Development Bank (AfDB) are to be taken on optimal terms as “the
Cabinet agreed that these are not grants but loans and therefore
Nigeria should be confident enough to negotiate with some of these
multilateral agencies on terms that are advantageous to Nigerians,”
Adeosun said.
CBN floats the Naira
And while unfolding the highlights of the guidelines for the flexible
foreign exchange management framework, the CBN announced the
introduction of Foreign Exchange Primary Dealers (FXPD) and Single
Market Structure.
The arrangement leaves the value of the Naira to be determined by market forces.
With the reintroduction of the flexible inter-bank exchange rate
market, the foreign exchange rate is expected to be market-driven with
occasional interventions by the CBN to ensure transparency and check
abuse of the process, the apex bank Governor, Mr. Godwin Emefiele, said.
At a press conference in Abuja, Emefiele explained that the apex bank
has over $27 billion reserves to meet and stabilise foreign exchange
demands.
Further, the CBN said that in order to prevent risks associated with
uncertainty of foreign exchange fluctuations, it has introduced rates
which make it possible for future transactions to be agreed and
concluded under a prevailing rate.
Emefiele explained that with the apex bank’s guarantee, the client
would be reimbursed the naira equivalent of the excess rate if the rate
turns out to be higher than the agreed rate at the time of
actualisation of the transaction, while if the foreign exchange rate is
lower, the client would reimburse CBN the dollar equivalent of the
reduced rate.
Also, the new guidelines on foreign exchange rate management still
excludes the 41 items previously excluded from accessing foreign
exchange.
Emefiele said that for an appointment as the Foreign Exchange Primary
Dealer, an applicant must be capable of handling minimum of $10
million transaction, in addition to meeting two of the following
criteria as at May 31, 2016.
The criteria include: Minimum Shareholders’ Fund Unimpaired by losses
of at least 200 billion; Minimum of N400 billion in Total Foreign
Currency Assets and Minimum Liquidity Ratio of 40 percent.
According to him, the highlights of the flexible foreign exchange
include: “The market shall operate as a single market structure through
the inter-bank/autonomous window; the Exchange Rate would be purely
market-driven using the Thomson-Reuters Order Matching System as well
as the Conversational Dealing Book.
“The CBN would participate in the market through periodic interventions to either buy or sell FX as the need arises,” he said.
“The 41 items classified as ‘Not Valid for Foreign Exchange’ as
detailed in a previous CBN circular shall remain inadmissible in the
Nigerian FX market, he said.
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