•Anxiety mounts over likely petrol price increase
A serious cash crunch has hit the Nigerian banking system as interbank overnight lending rate jumped to as high as 40 percent on Friday, well up from 18 percent last week.
As the banks face cash crunch, businesses also groan as traders lament low sales caused by increase in prices of goods.
There were also concerns in the petroleum sector on Friday that the free fall in the value of the naira may make an increase in the price of petrol inevitable.
The current N145-per-litre fuel price was predicated on an official exchange rate of N298/$.
On Thursday, the naira fell to N330/$. It was still well above N300 on Friday.
The cash crunch followed the central bank’s draining of naira liquidity from the market to support the currency after it hit a record low, traders said.
Commercial banks were also paying for purchases of foreign currency and treasury bills, thereby further reducing the amount of naira in the banking system.
According to Reuters, the naira hit an all-time low of 331 on Friday, prompting the central bank to intervene. By midafternoon, it was trading back at about 300. The currency had slipped to more than 300 to the dollar on Thursday, a month after the central bank lifted its controls on the currency.
Traders said the more liquid banks were demanding higher interbank rates to lend funds to rivals in the market. Total banking system credit tumbled to minus 700 million naira on Friday from N26 billion in credit on Thursday, they said.
The central bank raised N207.9 billion in treasury bills on Thursday, more than it had planned to issue, and at a higher yield to soak up naira liquidity and attract foreign investors back to the country.
The Open secured Buy-Back (OBB), the rate at which banks can borrow from themselves with collateral, rose to 30 to 35 percent, one trader said.
Last week, the central bank governor flew to Britain and the United States to try to lure back investors. However, some investors said the naira’s 30 percent one-day fall in June was still not big enough to wipe out the need for the black market, where those who still have dollars to sell go.
The declining value of the naira is taking its toll on many businesses in the country, including sale of imported fairly used cars and real estate.
Hours after naira reached an unprecedented low of N331/dollar in the official market, Saturday Tribune gatherer that dealers in used imported cars, popularly known as tokunbo, predicted a marginal rise in the prices of vehicles, which will be inevitably followed by a drop in sales.
Dealers in various parts of Lagos told Saturday Tribune that business took a free fall, especially since the commencement of the payment of 35 percent levy on such vehicles.
The costs of used vehicles and clearing them at the seaports have risen in the past months.
While the current state of the naira would mean that dealers would spend more to import their vehicles, they are still being cautious as to how much they add on those cars at the point of sale, because of poor patronage.
A car seller who has a garage full of tokunbo vehicles of various brands at the Ijaiye-Agbado area off the Lagos-Abeokuta Expressway, Mr Aderibigbe Samson, lamented poor sales in the last few months.
“Aside from the customs duty and other levies that have shot costs to about 70 percent from 35 percent, the fall in naira against the dollar is affecting our business. I have reduced my prices considerably, which means I make just a little profit. The economy is bad so business is slow,” he said.
Another vehicle seller, owner of Taofik Motors, Agege, Alhaji Taofik Quadri, could not reconcile the already dull market and the need to jack up the prices of cars.
He said that with the latest fall of the naira, a lot of auto dealers, especially the low-medium sized ones would be left with no choice but to hold back on tokunbo vehicle importation and leave it to the ‘big players’ who are able to come up with more money.
“These are not fun times for us at all. For months, we have been struggling to make sales but somehow, we have been surviving, but with this latest crash in the naira value, I honestly don’t know what will become of a lot of our businesses,” he groaned.
Yet, another car seller at the Agindingbi area of Ikeja, Mr Adetutu Timilehin-Ajayi, noted that “there are no two ways to it; dealers have to also increase the prices of their wares in a way that they will still make profit, even if the profit is just going to be marginal. So, in the next few days, you may see cars recording as much 15 percent increase in prices. This means a car that went for, say, N2 million last month may now go for N2.3 million. But this is going to be difficult because before now, we were struggling to make reasonable sales.”
The sellers’ views seem to have been earlier echoed by the President of Berger Car Dealers Association, Mr Metche Nnadiekwe.
“Business has been really slow. We don’t get much patronage from buyers again. We have also been forced to reduce our imports because importing cars has become very expensive due to the present value of the naira. There is no point using all you have to import cars if there are no buyers for them.
“When things were rosy, we could get between 10 and 20 buyers in a day at this park alone. With all the other parks put together, the number was more. Now that things are so tight, we get an average of five buyers daily at this park. When you put figures together from other parks, it is about 50 buyers in the entire market,” he had said.
The same situation has been predicted for property sales and rents, as experts have predicted that the continuous fall in the value of the naira will further increase the high vacancy rate already being experienced in parts of the country.
A Lagos-based property developer, Mr Charles Iguwatu, told Saturday Tribune that “since the free fall in the naira began, companies, particularly those who depend largely on favourable foreign exchange to survive, have been facing difficulty making money and paying their staff adequately. This has reduced the power of people to change their accommodation, let alone buy new houses. This partially explains why there is an increase in the number of unoccupied houses in Lagos, especially on the Island.”
This view was echoed by a property agent who also works as a facility manager in Ikoyi, Mrs Funmi Ajero.
She explained that currently, expatriates are leaving the country in droves, a situation which, she said, has worsened the state of investments in properties on the Island.
“More than 70 percent of the properties on the Island are meant for expatriates to rent. But even expatriates are losing their jobs. Some companies are cutting down on expenses on their expatriates’ accommodation. This has also led to the high vacancy rate of houses in Ikoyi and its environs. All these can be blamed on Nigeria’s current economic and forex woes,” Ajero said.
As the naira plunged to a new record low on Friday, as it begins a sudden slide a month after its long-awaited free float, experts have continued to react.
“They said they were going to move to a free float, but then it just stuck — it’s not a free float at all,” says William Jackson, a senior emerging markets economist at Capital Economics.
“Despite the initial 40 percent drop, the naira is still overvalued. There is still a divergence between the official naira rate and the parallel black market rate,” he says, adding that the official rate needs to fall further to bring the two into balance.
Despite the free float, there are still restrictions on foreign currency in place. Some analysts suggest the shortage of dollars has contributed to the sharp moves seen this week.
A number of factors are driving demand for dollars, according to researchers at Ecobank, including Nigerians taking holidays, but implementation of the central bank’s new policy of a single foreign exchange structure and floating exchange rate is proving difficult.
“Despite the policy change, a parallel market currently still exists, suggesting the NGN is still overvalued,” said Ecobank in a note earlier this week.
Standard Bank said the shift to a free floating regime was in progress “albeit haltingly.” New regulations were introduced last month, but the bank believed market participants were unconvinced the CBN would be indifferent to any exchange rate level.
“While the country has large trade deficits, only an influx of capital flows, perhaps led by portfolio inflows, will lead to a normalisation of the FX market, we believe,” Standard Bank said.