How to suppress dollar demand in Nigeria: A quick introspection

Dear Africa interested individuals:
                                                             Dollar demand continues to rise in Nigeria where Naira is the official currency.  How can Nigeria suppress the demand for dollar and quickly?  It should be clear by now to all that the Naira has limited use because most of the things Nigerians desire must be manufactured outside Nigeria for the product to be considered real and worthy of purchase by consumers in Africa's most populated country.


This widely held purchasing character of the Nigerian consumer, has led to a continuous and ever increasing demand for the dollar by manufacturers, to purchase raw materials and finished goods for an ever increasing population.  This leads me into the probable solutions necessary to reduce dollar demand by Nigerians.


1. The Naira has to be made more attractive as a currency to hold.  This will encourage those who are hoarding dollars for speculative and legitimate reasons to sell their dollar and acquire Naira.  There will also be dollar inflows by fixed income portfolio investors and Nigerians in the diaspora.   Coupon rates on government bonds should rise to at least 20% and those selling dollars to purchase the bonds will be given first priority. The government will also assure investors of a fixed exchange rate (within a narrow band of 2%) when they decide to exit the bond.  There will be a 25% penalty on accrued interest for any investor that exits their position less than twelve months after purchase.  This in my opinion will attract huge dollar inflows to take advantage of the high coupon rates in conjunction with the assured stability on exchange rate conversion.  A form of this is already being practiced in Malawi since last year and has made Malawi Africa's best performing currency so far in 2015.  The Malawian Kwacha has appreciated against the dollar by about 5% in 2015. 


2.  The top 75 companies by market capitalization on the Nigerian Stock Exchange must have American Depository Receipts (ADR) on them at the New York Stock Exchange with a market maker in place.  Fungibility of shares must be allowed.  I can buy Zenith Bank in Nigeria and sell my position as an ADR in New York City and vice versa. This becomes a veritable way for people to source dollar and boost demand for Nigerian stocks at the same time. This second option creates a secondary outlet for dollar demand independent of the Central Bank of Nigeria.

I will stop here for now. I am trying to reduce the length of my articles for my own sake. (Smile)

Tell others to tell others about this blog; let us make this a home for facts and sober analyses of African markets, economies and companies.  Seek TRUTH: The Real Understanding of The Hegemon.  Truth will set us free; knowledge is power. 

Comments

  1. AnonymousJuly 28, 2015 at 6:38 AM

    Hi Jude,

    Thanks for the write up.

    Interesting but I have some problems with your thesis. Firstly, Nigeria's debt service to total budget is close to 25%. This reflects the rates paid out on NGN bonds which hover between 10-15% on average. If thesis is correct we should push it to 20% so where will debt service? Our budget will now tilt more towards debt and given that recurrent is heavy almost nothing for capital projects. On your second proscription again its interesting but I believe this should be optional not mandatory.

    More importantly, I think we have a strong naira obsession in Nigeria because we are heavy on consumption. If we are interested in becoming a manufacturing giant, which we should as our population size means an import dependent country is infeasible, then a policy to increase naira weakness should be on the table.

    ReplyDelete

Post a Comment

Popular posts from this blog

Earnings Quality among African companies: Recurring restatements are not welcome

Dear Africa interested professionals:                                                            When I ponder on earnings quality, it goes beyond the financial performance of the companies as provided to us by their directors.  Are the numbers provided to us possess the qualities of transparency, authenticity and longevity?  Are this year's numbers going to be adjusted (restated) next year with the reality of this already known today?  Do restatements suddenly become an annual recurring act for some companies, just the way financial reports are audited annually? Public companies that continually restate their books, change key figures significantly without any clear, detailed explanation are guilty of poor earnings quality as their audited financials are not as reliable as they should be.   I have randomly selected visible companies across different industries in Africa and reviewed their two most recent annual reports (covering three fiscal years) for restatements an
Read more

GUINNESS NIGERIA & EAST AFRICAN BREWERIES - Same Ownership - Differing Loyalties

Dear Africa interested professionals: A throwback to a thematic analysis I did looking at Diageo's subsidiaries in Kenya and Nigeria in 2015 can be found below the dotted lines.  Five years later, nothing has significantly changed for the better.  Guinness Nigeria has sold its conscience to the Nigerian environment (opaqueness and self-serving decisions take center stage) while East African Breweries still tries to hold on to transparency and proper business management and this has reflected in its performance over the years.   Guinness Nigeria's better days are behind it and current actions do not bode well for the future.  When transparency goes out the door, there is nothing left behind worth admiring.  I will pick on two simple things to reflect on. 1 . Both companies made earnings expectation announcements to their respective stock exchanges for the fiscal year ended June 30, 2020 of a significantly negative performance relative to a year earlier.   East African Breweries
Read more

The clamor for continued devaluation of African currencies reeks more and more of selfish interests

Dear Africa Interested Individuals:                                                         The clamor continues for commodities export dependent (especially oil) economies to further devalue their currencies.  I keep asking myself "when is enough finally enough?"  The clamor is largely driven by global economists across the spectrum loyal to economic theory and the countries they are domiciled in, portfolio managers and large commercial banks in the countries of focus with net positive (more dollar inflows expected than dollar outflows) dollar exposures.   What does devaluation do to the people in the countries that have devalued their currencies multiple times (or one devaluation of 20% or more) over a short period? 1. Inflation rises quickly and is driven by those directly and indirectly impacted which is everybody .   2. Chances are high that the Central Bank (Fed in the USA) will have to raise interest rates to stem inflationary pressures in the economy. T
Read more