FX Liquidity Challenges II

By Chinedu Okoye

Summary:

 • The Association of Foreign Airlines faces escalating liquidity challenges as it threatens to strike due to substantial unpaid FX Backlogs.

 • Despite earlier optimism surrounding the securitization of future NLNG dividends, the reality has unfolded, highlighting difficulties in raising essential funds.

 • The outlook for the Naira appears bleak, compounded by factors such as the inability to attract foreign investment, and existing backlogs.

 • Strategies for dollar acquisition, including privatization, trade partnerships, and debt, could be potential solutions.

 • The Federal Government's pursuit of a $1.5 billion loan from the World Bank raises concerns regarding its impact on economic stability.  

Liquidity Challenges worsen Airlines Threaten to Strike over Unpaid Backlogs: 

On January 16, Bloomberg reported that the Association of Foreign Airlines is threatening to go on strike. The reason behind this threat is the FX Backlogs, with claims that they have only received $61 million out of the $800 million owed in FX Backlogs.

Several months ago, there was optimism as the Naira gained momentum when the Federal Government announced the securitization of future NLNG dividends to settle backlogs owed to banks, international airlines, and other foreign investors. However, reality has set in, revealing challenges in raising the necessary funds.

Bleak outlook for the Naira:

These might not suffice to clear the backlogs, and even if they did, the inability to attract foreign investment (FDI) only exacerbates the FX liquidity challenges we face. The outlook for the Naira appears grim, especially as local refineries come into operation.

Persistent scarcity is anticipated unless there is a substantial influx of foreign capital, particularly in the form of FDI. The refinery is expected to alleviate economic pressure by reducing or eliminating dollar demand on the FX markets (official and unofficial) for PMS. However, this will be a gradual process, given that Dangote Refinery is currently operating at only 53.8% capacity.

In addition to the FX backlogs and dollar liquidity challenges, factors such as heavy reliance on imported finished goods, an unrestricted free-floating exchange rate regime, US dollar-denominated debt servicing obligations, and the need for significant dollar inflows, whether through FDI, trade, or debt (specifically Non-Interest bonds from Islamic Financial Institutions), compound the economic landscape.

Strategies for Dollar Acquisition:

Avenues for rapid funding from FDI, trade, and debt; 

1. Privatization: Partial or complete privatization of Oil and Gas and Mining Assets presents a lucrative opportunity. With a sizable market in the 200 million Nigerian population and West African trading partners, this industry remains highly profitable.

2. Trade: Establishing mutually beneficial trade relationships and economic partnerships that align with industrial development goals and involve the implementation of strategic industrial policies.

3. Debt: Securing non-interest or concessional loans specifically for infrastructural development to bolster economic growth.

Economic Strategy Concerns on the $1.5 Billion Loan Quest

The Federal Government has opted for what seems like the easiest route: concessional lending, as it pursues a $1.5 billion loan from the World Bank. However, this choice exacerbates existing problems, escalating debt while the Naira faces further depreciation.

In attempting to address liquidity challenges and enhance foreign exchange supply, the administration is employing a fiscal approach to tackle a monetary issue, resembling borrowing to maintain stable Naira exchange rates.

Nigeria grapples with a precarious situation, struggling to attract foreign investors and stimulate local (real capital) investment. The borrowing costs are high, and exchange rates remain unstable, creating a recipe for economic instability. 

The decision to increase external debt by $1.5 billion further tightens the fiscal space crucial for government intervention.

Strategic Solutions to Addressing Foreign Exchange Backlogs and Fostering Long-Term Economic Stability:

The federal government has opted for the quickest option, and rightly so, considering the substantial foreign exchange backlogs it needs to address. However, I acknowledge that while this provides a short-term fix, it doesn't resolve the long-term issue as these debts still need servicing.

An alternative approach would involve privatizing lucrative yet under-managed federal assets to generate funds. These funds could then be utilized to partially clear the debts, creating space in the national budget for the capital expenditure segment. This, in turn, enables the government to allocate more funds to infrastructure and other industrial development projects.

Industrial development, fostering trade and investment simultaneously, has the potential to enhance international trade and overall current account, contributing to much-needed exchange rate stability—a fundamental aspect of price and economic stability.

Conclusion:

In navigating the complex economic landscape, the article emphasizes the need for strategic solutions to address FX Backlogs and foster long-term stability. While acknowledging the urgency of clearing backlogs, it underscores the importance of considering alternatives beyond immediate remedies. Privatizing under-managed assets emerges as a viable strategy, creating funding opportunities to partially clear debts and allocate resources to crucial sectors.

The call for industrial development, simultaneous trade and investment growth, resonates as a pathway to enhance international trade and overall economic stability. The concluding message emphasizes the delicate balance required to navigate economic challenges, urging a comprehensive approach that goes beyond quick fixes to ensure sustained prosperity.