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Government struggles to settle $7b letters of credit as foreign reserve falls to $27.3b

By Collins Olayinka (Geneva) and Chijioke Nelson (Lagos)
09 June 2016   |   2:06 am
More trying times await the country as its foreign reserve slowed to $27.3 billion with a deficit of $7billion outstanding letters of credit to settle, The Guardian has learnt.
ILO

ILO

•‘How forex crisis depressed banks’ profits’
• Industry grapples with oil sector loan default

More trying times await the country as its foreign reserve slowed to $27.3 billion with a deficit of $7billion outstanding letters of credit to settle, The Guardian has learnt.

A knowledgeable source on the nation’s economy told The Guardian yesterday in Geneva, Switzerland that the $27.3 billion could hardly fund three and a half months’ import, which could spell gloomier days for manufacturers.

The source said: “As at today, Nigeria has only $27.3billion in its foreign reserve and this cannot fund more than three and a half months’ imports. The fact that the foreign reserve is depleted is the reason government allowed the Central Bank of Nigeria (CBN) to adopt a flexible exchange rate.”

Besides, the threat issued by the Minister of Labour and Employment, Dr. Chris Ngige to withdraw the operating licences of bank and financial institutions that retrench workers have drawn the ire of the Nigeria Employers Consultative Association (NECA).

Responding to the threat yesterday at the ongoing 105th International Labour Conference (ILC) of the International Labour Organisation (ILO), the Director General of NECA, Olusegun Oshinowo, berated the minister for lacking basic principles of labour relations.

According to Oshinowo, the labour arena is guided by laws, regulations and practices as dictated by relevant laws as well as the guidelines of the ILO. He noted that the threat had left many of the sacked employees in a worse state as the minister had refused to devout his time to demanding exit strategies for the workers and had instead embarked on empty threats.

While admonishing the Federal Government to move swiftly and fix the economy, the NECA chief insisted that employers would embark on retrenchment whenever the occasion demands such an action.

His words: “The minister is getting very reckless with his disposition and comment on the issue of retrenchment. He is appropriating to himself the power which the state has not conferred on him. His comment on the withdrawal of licence at a global forum is a shame and embarrassment to Nigeria. It is a comment that is ‘unministerial’ and simply painted a very ugly picture of governance and government in Nigeria.

The minister has continued to miss the point . Our disposition is not ideological or sectional. We have challenged his action on the basis of rule of law, structure of engagement, dispute resolution procedure and objectivity. He also fails to realise that labour relation is not a pedestrian discipline.

It has its own body of knowledge, institutionalised practice and nuances. The minister’ s comments and actions have not demonstrated an iota of understanding of these basics. We once again reiterate that employers will retrench if it becomes necessary and compelling and would respect the law in doing that by discussing with the union, where one exists, including paying redundancy benefits to affected employees.”

Oshinowo posited that the job of the Ministry of Labour and Employment is to ensure that employers do the needful in line with the law by asking if they follow the rule of law in carrying out the retrenchment .

Oshinowo also berated Ngige over the need to engage in Collective Bargaining Agreement (CBA), asking what employers would do where there is no labour union that would negotiate on behalf of workers.

Meanwhile, the lingering foreign exchange crisis has been blamed for the worsening balance sheet records of the nation’s banking industry and the mass sacking of the sector’s workers.

Specifically, the development that has affected all the deposit-taking institutions in the country, has significantly declined the “fee income” and “non-interest/commission” lines of the majority, as failed forex transactions due to scarcity reduce their respective earnings’ capacity.

Already, two banks have taken the lead in reducing their workforces, currently in excess of 1,400, with others ready to openly or secretly follow suit.

Analysts said the challenges of the forex transactions on banks had been the combination of non-loan facility in foreign currency denomination, increased Non-Performing Loans (NPLs) of those granted in foreign currencies and volatility in oil prices that triggered defaults and increase in impairment provisions, all arising from the scarcity.

Analyses of five banks’ full year and first quarter reports showed that there was 154 per cent increase in impairment charges on the average, which is associated with loans in foreign exchange-related businesses in oil and gas sector.

The same five banks covered up dwindled earnings position from interest income assets and investments, as they lost nine per cent in non-interest and other incomes on the average, which is related to lost opportunities in foreign exchange transactions.

As at January 1, 2016, a stockpile of forex demand brought forward has reached over $5 billion and according to a regulatory source, the same volume of demand has remained unfulfilled till now.

“This volume of demand entails transactions in-waiting for the banking industry, which would open up opportunities for fee income and non-interest earnings, but seem to have eluded the sector, as each quarterly reports show declining profit levels across board,” the source said.

The Executive Director, Finance, at BGL Capital, Femi Ademola, said that forex challenge was contributory to the declined profits in the industry and primarily for some banks through exposures to the oil and gas sector.

“There have been recorded NPLs in many of these banks, particularly to the oil and gas sector. Some of these loans are either directly in foreign currency or in naira, but predicated on earnings in foreign currency (precisely dollar). When a loan is structured on a $45 per barrel and sold at $30 or $40 a barrel, there is bound to be default. Definitely, the profit levels will show it,” he noted.

The Central Bank of Nigeria (CBN) has said that due to the unending oil price uncertainty, which started since June 2014, the country’s forex earnings have been on a gradual decline to less than $1billion monthly, while about $5 billion demand is on hand.

A source at the CBN told The Guardian that in this type of crisis, the only option is to eliminate assessed non-essentials and ration the scarce commodity among the list of priorities, “because you cannot give what you don’t have.”

While CBN has promoted a set of import substitution strategies with its development financing to cushion the forex pressure, banks that are already trapped in the business, with others being dependent on it as a business model, are yet to adjust.

But analysts, both foreign and local, have been accusing CBN of worsening the crisis with its policies, while pushing for the devaluation of the currency, which the bank has strongly opposed.

A research analyst and currency expert at FXTM, Lukman Otunuga, said that while a devaluation of the naira appeared a double-edged sword that may likely solve part of the problem and punish the economy and the common man on the other hand, subsisting policies of the government may be aggravating the matter.

“For an extended period, global markets have observed the Central Bank of Nigeria’s questionable policy measures, which have simply starved the nation of dollars and consequently slowed foreign investment,” he said.