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.