On September 8th 2015, JP Morgan Chase(JPM) released a press statement stating that they had begun the process of discharging Nigeria from its Emerging Market Bond Index from this month, and that by the end of October 2015, Nigeria will be completely off the index. The statement identified the Nigeria’s restrictions on FOREX transactions and the stringent accompanying policies as a major reason for its actions.
Earlier in the year, JPM had served Nigeria a notice of warning citing investor’s interest among other things in it. The notice of removal press statement further cited this and the nation’s liquidity crisis as a reason for the removal. The idea of a high-risk economy such as Nigeria being kicked out of a $200 billion fund index is a major cause for concern; indicating a looming financial crisis. Below are the most obvious reasons why;
- Unfortunately, President Buhari has inherited harder economic times which were looming ahead from his predecessor president Jonathon. Howbeit, the present administration is setting the grounds to blame the past administration for everything that is going wrong and will continue to go wrong until stability which could take up to two years sets in. In turn, Nigerians will blame President Buhari for failing to appoint the single most important minister, a vulnerable economy must never do without; a finance minister. Considering the fact that JPM served the country a notice of displeasure and the threat to remove Nigeria from the index 9 months ago, president Buhari should have held unto Ngozi Okonjo Iweala (NOI) until things stabilized or at least appointed a new chief economist the day he assumed office. Although, retaining NOI would have been the intelligent thing to do, in the given scenario. The lack of a finance minister has seen the CBN governor put the Nigerian economy at risk with drastic policies lacking holistic economic direction. The year 2015 has not been a good year economically for Nigeria and Nigerians. Although there were projections of hope post-May 29th, the lack of actions and inactions has created financial tensions, with no glimpse of hope in the nearest future.
- This will also mean going forward, Nigerian government acquire foreign debt at a premium as the initial 10% interest will increase to 14.5% or more. As a result, negatively impact internal corporate lending between Nigerian government, banks and local organisation. It will also make refinancing existing loans expensive as yields are on increasing.
- Thirdly, this removal will mean that there is little or no foreign demand from foreign investors. Already, since the warning issued by JPM 9 months ago, the Nigerian bond declined from a peak of $11 billion in 2013/14 to $3 billion at present. The current state of the economy suggests further decline for the Nigerian bond. What this means is that, as a volatile economy, foreign investment will decline as well. Also at risk are SME that depend on banks for small loans such as overdrafts, local purchase orders, letters of credit etc. They may also see their lending rates increase, meaning businesses will struggle, and companies will be focused to downsize and send more people back to the already overpopulated unemployment/job-market. Individuals with consumer loans should expect letters of notification from bank indicating higher interest rate on existing loans.
- Further, although Nigerian business environment is not problem-free, investors have tolerated it because of Nigeria’s strategic position in Africa. This removal will see investors moving to more conducive environments such as Ghana, Kenya and South Africa. In turn, Nigeria’s position as the largest economy in Africa will be threatened.
- By all indication, further devaluation of the Naira is imminent. As this will be prompted by frustrated investors who are bound to jump on the bandwagon of JPM decision to remove Nigeria from the index and the Nigeria’s lack of economic shocks will pave the way for the two factors that are investor’s worse nightmare; pressure and uncertainty.
- Lastly, by all indication, what the CBN has done to the Naira and the restrictive FOREX policy, is really “throwing away the baby with the bath water”. Proper observation suggests that the CBN had good intentions; however, such move is usually a slow process, originated by and based on the federal government’s long-term growth and development agenda as guided by the chief economist of the federation and healthy economic policies, CBN usually only in this case should act as a support system and not the originated of such moves. But the reverse has been the case here.
A central bank has no business taking such laws into its hands and putting the entire economy and country at risk of financial crisis. Nigeria already struggles with redistribution and high inequality rates, this singular act, spells harder times for the already vulnerable economy, the struggling Nigerian middle-class and the country’s poor and most vulnerable.