In June 2016, the Central Bank of Nigeria (CBN) bowed to the pressures of the foreign-exchange (forex) market and low prices in the international commodities market to float the Nigerian naira. By this move, CBN jettisoned pegging the Nigerian Naira at N197 against a dollar (at the time). This resulted in an immediate devaluation of the Naira from N197 to about N282 to a dollar, and to the current level of about N320.
CBN’s move had a profound effect on the Nigerian economy – both in terms of micro and macroeconomic stability. From a microeconomic perspective, inflation was affected by around 5 points to take the levels of inflation to about 18% (albeit, officially). It also impacted on previously fragile unemployment situation as Small and Medium Scale Enterprises (SMEs) were now facing increased production cost. From a macroeconomic view, Nigeria’s debt profile continued to increase (at least in naira terms). Nigeria also saw sovereign-creditworthiness downgrades by Fitch and Moody’s[i].
All these were expected to be balanced out by a gradual easing of the liquidity squeeze occasioned in part by the previous foreign-exchange regime. The easing was expected because with the floating of the naira, the forex market expected more liquidity inflow and a discouragement of currency hoarding and profiteering.
But things are not balancing out. The floatation of the naira and its attendant devaluation has unearthed other problems within the system. Firstly, the oil & gas remains Nigeria’s principal commodities and the chief supplier of forex into the Nigerian economy. With oil (Brent crude) prices still hovering between $49-$57 pbd and reduced oil outputs due to government’s inability to prevent attacks on oil installations in the Niger Delta region, forex earnings still remain low. Secondly, foreign-direct investments (FDI) into the country are at an all-time low (at least, the lowest in the past 10 years). This is, to some extent, due to the present administration’s uncertainty over economic policies and reforms. Forex demand by the production sector reflects the very deeply entrenched dependence of the sector on importation of raw materials and machinery. The changes introduced by the CBN did not also achieve the much-needed liquidity in the forex market.
Consequent upon the above failure, the Nigerian power sector has been badly hit by the forex-liquidity squeeze. Recall that during the privatisation of the country’s power assets, the underlying transactions which resulted in the transfer of 11 distribution companies (Discos) and 7 generation companies (Gencos) to private entities were, for the most part, denominated in dollars. The private entities that took loans from majorly local banks obtained such loans in foreign currency at a time when the naira was going for an average of N168 per dollar. This is why many of the Discos and Gencos are currently unable to meet their dollar obligations to lenders. Parties to those transactions may need to refinance to prevent lenders from exercising their termination rights under transaction agreements, with the likelihood of default. This remains so even for those entities that have slightly stronger balance sheets.
Equally crucial is the fact that the Multi Year Tariff Order (MYTO) 2.1 which regulates electricity tariff in Nigeria based its assumptions on a peg of N197 to a dollar and a gas price of $3.30 per MMScf—$2.50 for the fuel and $0.80 for transportation. That dollar assumption is almost short by a 100%. Under MYTO, fuel and capital costs are pass-through costs. They are cost paid for directly under the tariffs and consumers pay for them in naira. Therefore, the continuous devaluation of the naira has negatively affected revenue. For example, the Discos collect revenue in naira based on assumption that the exchange rate of N197/$ but pay for their debts based on an exchange rate of around N320/$. Worse still the discos are not able to collect enough revenues to support the entire value chain–both for operating costs and capital expenditure. Similarly,, Nigerian Bulk Electricity Trading Company (NBET) is unable to fully pay Gencos for capacity provided and energy supplied. So the Discos and Gencos have not been making enough capital investments into the system to help reduce losses, translating into blackouts, blackouts, and more blackouts in the country. The effect of the liquidity squeeze will further entrench the inability of the Gencos to source enough gas for the power plants.
Recently the issues surrounding the Aba ring-fence–a dispute between Interstate (owners of Enugu Disco) and Geometric Power over the right to distribute power in Aba–was resolved. But sources have disclosed that the parties are struggling to financially close out the deal due to lack of access to the required forex.
The sectorial meetings currently being held on a monthly basis under the leadership of the Federal Ministry of Power, Works and Housing, needs to advance strategies in collaboration with the CBN to help participants in the National Electricity Supply Industry (NESI) with much-needed forex. This must have informed CBN’s directive to Nigerian banks to allocate 60% of all their foreign-exchange receipts to the manufacturing and power sectors. The power sector must remain one of CBN’s priority sectors for forex allocations. It is expected that the CBN and power sector participants are utilising the futures market rather than spot sales in meeting the latter’s forex demand especially for long term capital investments.
The National Assembly reacted pessimistically when news broke that the NBET was to issue a N309bn bond last year to shore up its revenues. I think the National Assembly must look at the issues of liquidating the power sector dispassionately. Investors, especially IPPs will only invest in the sector if they have confidence in the liquidity of sector. The creditworthiness of the NBET is a crucial part of that liquidity. NBET must be allowed to explore every available mechanism to shore up its liquidity–as it key source of cashflow from the Discos is being affected by the current issues in the forex market, and technical and collection losses. Some analysts have suggested that the NBET be allowed to issue medium-term notes supported by a CBN/Ministry of Finance guarantee mechanism.
If the liquidity squeeze in the forex market persists, the cry for an upward review of electricity tariffs will come to fore.
To reduce forex pressures, industry participants must look to adopting local-content policies. The Nigerian Electricity Regulatory Commission (NERC) has a local-content policy regulation that mandates NESI licensees to have Nigerian content as a key component of their operations and execution of projects. With this policy, Nigerian companies and firms are given first consideration in the supply of goods and services in the Nigerian power sector. But the reality is that not all materials needed by the industry participants can be sourced locally. So NERC must develop and adopt a balanced policy for the power sector—a policy that does not stultify the sector’s growth but still encourages patronage of made in Nigeria equipment (such as meters, transformer, switch gears, etc.). The sector must then look to build local capacity and invest in developing local expertise.
And given the level of infrastructural deficit in the Nigerian power sector, government must continue to provide the right policy framework for the sector. Access to a more liquid forex market is critical for the power sector. Regulators must also successfully midwife the growth of local content to achieve integrated and enhanced sustainable development in the sector.
David Amakiri, practices an energy lawyer in Nigeria
[ii] https://www.moodys.com/research/Moodys-downgrades-Nigerias-sovereign-issuer-rating-to-B1-from-Ba3–PR_347437 Although some people have argued that sovereign credit ratings do not matter as much as they once did. The recent over subscription for Nigeria’s Eurobond offer seems to learn credence to this.