The frustrations of an investor

The title of this article is my summary of a letter sent to me some weeks back by an expatriate investor in Nigeria of Asian descent. This investor is not a trader or portfolio investor, but has established a manufacturing operation in our country. His letter illustrates the severe challenges and frustrations investors, both domestic and foreign, are facing in the current policy environment. I publish the letter underneath substantially in full:
“I’m writing in to tell you that I really enjoyed reading your article for BusinessDay on 16.8.16 about the actions and inactions of contemporary policy…. I really hope someone out there is listening; there have been so many missteps these past 20 months sometimes you wish the authorities hadn’t done anything at all, things maybe would not have become as bad as they have. It is my sincere belief that if in the next two months radical steps are not taken then the start of next year will see blood on the streets (I don’t mean civil strife, but rather a shutting down of essential parts of the productive sector). I have even been told that some Nigerians have found it expedient to retire to their villages earlier and sit the year out, don’t know how far this is true.
“I would implore you to visit the CBN decree of the 41 items list that are not valid for forex, I am not directly affected by this but I will outline how we are all indirectly affected by this. The black market has always determined what the country’s exchange rate is. When the flow of USD was strong there was a difference of 5-10% between the rates, perfectly acceptable in a developing economy. Problems of rate divergence started coming about when the flow of foreign currency started slowing down due to the factors of lower crude oil prices, limited foreign portfolio investments, lack of credible FDI, no diaspora remittance through valid and legal channels, non-oil exports who chose not to return money through official channels, panicked CBN policies. It became a viscous cycle that grew larger as it fed on itself. The black market rate would eventually go on to determine the country’s official rate – a classic case of the tail wagging the dog! Should we not understand why the black market rate has gotten to where it has? From the above factors it is only the crude oil price that is out of control of Government while the others are definitely controllable with the correct policies not decrees.
“The pegging of the exchange rate at 197 is the root cause of the problem and that intransigence has cost the country dear. Amongst all the decrees issued by CBN none have been more harmful than the banning of 41 items from forex. Firstly the items listed fall under very broad categories; there is no attempt to refine the list based on what is manufactured here and what is not, no concern to identify the particular tariff codes for items that are not valid for forex versus those that should be valid because industries already set up within the Country need the products as either raw materials, intermediary or for packaging. Ironically the decree was to enable the manufacturing base to grow and develop in the Country. It has instead had the effect of condemning already established industries and setting back many years the already fragile manufacturing base within the country.
“If the government truly desires to see certain industries flourish it can commission reports from the major consultancies to identify which industries Nigeria has a competitive advantage in such as agro-processing, identify the sops, tax breaks it can hand out equally to all participants (not selectively), create industrial zones that are powered by IPP to remove the obstacle of power faced by industry, contract one or two construction companies to create the factory sheds and warehouses that would be needed, provide roads, security etc. to these parks so that production can go on 24/7.
“Further the fact that 41 items have been shut out from accessing forex at the official rate has thrown those importers, manufacturers at the mercies of the black market which continues to devalue the Naira which further shuts out FDI and portfolio investors and makes a mockery of the newly introduced floating Naira exchange rate which is another story of unsure policy and mid-way controls by itself. It is my belief that if the country has decided to float the Naira then there is no reason for the 41 items list. If this list is rescinded and the exchange rate is allowed to float without any CBN pre-determined rates and ALL involved are allowed to access forex from one uniform market at the rate of the day determined by inflow vs outflow, the black market rate which has a huge component of speculation within its price will come down to a more reasonable value. Further appreciation of the Naira if so desired can only be with sound policies and infra developments, that is the job of the government, not meddling with exchange rates.
“Power, Security, Legal system these are all parts of the puzzle that if tackled well can allow Nigeria to be a powerful manufacturing hub of Africa and maybe harness its potential finally. Presently the country has the following exchange rates: N197 for pilgrims, N285 for petroleum product marketers, N305-N315 (CBN-determined interbank intervention rate), N350-370 (autonomous market rate), N280 CBN Deliverable forwards, N220-N310 FMDQ non-deliverable Naira-backed forwards, N425 black market rate!!!! Is it any wonder we are where we are today? KV.”
My correspondent is a legitimate investor in Nigeria, having deployed scarce capital into the difficult Nigerian manufacturing sector. His views are representative of opinions of enlightened business people and investors, and also in accordance with my own views on the issues he writes about. He is an employer of labour who wants no more than for government to provide a stable and conducive investment climate and policy environment. Is this too much to ask for?

Opeyemi Agbaje