Nigeria and JP Morgan’s econometricks By Onuoha Ukeh

Expectedly, the announcement by JP Morgan to delist Nigeria from its Government Bond Index Emerging Market (GBI-EM) has caused a shockwave in the country’s economy. By the calculation of financial gurus, the country is likely to lose billions of dollars, as foreign investors may withdraw their equities. This is supposed to give the government and people of Nigeria some concern, but there is no cause for alarm.

JP Morgan had, on Tuesday, announced that it would remove Nigeria from its GBI-EM by the end of this month. According to it, for Nigeria not to be so delisted, the country has to “restore liquidity to its currency market” in a way that would allow foreign investors to conduct transactions with minimal stress. The bank’s grouse about Nigeria is the country’s currency control, which, in its thinking, is making transactions cumbersome.

JP Morgan had declared: “Nigeria will be removed from each of the six GBI-EM indices starting September 30th.
The weight change will be implemented linearly over a two-month period with half of the adjustment applied on September 30th, 2015, and the remaining on October 30th, 2015.”

One of the consequences of this is that Nigeria will not be eligible for re-inclusion into the GBI-EM indices for a minimum of 12 months. Said JP Morgan: “Nigeria’s index eligibility after this period is contingent upon a consistent track record of satisfying the index inclusion criteria.”

The natural question by those who are not economists, like me, would be: What is this JP Morgan Government Bond Index-Emerging Markets (GBI-EM) brouhaha? Well, my lay man’s understanding is that this is bond issued by a government, with a promise to pay periodic interest and to repay the face value on the maturity date. These bonds are usually in the country’s own currency, in Nigeria’s case, in Naira.

According to Wikipedia, “the terms on which a government can sell bonds depend on how creditworthy the market considers it to be. International credit rating agencies will provide ratings for the bonds, but market participants will make up their own minds about this.”

Nigeria, was, in 2013, listed among the 18 emerging market economies, who were part of the GBI-EM Broad index. It became the second country in Africa, after the South Africa, to join Mexico, Peru, Philippines, Poland, Romania, Russia, Thailand, Brazil, Chile, China, Colombia, Hungary, India, Indonesia, Malaysia, and Turkey.

Even as MJ Morgan barks, Nigeria is not catching cold. The country has, and justifiably so, called the bluff of the international finance institution. In a statement, coming immediately after JP Morgan’s announcement,  Ibrahim Mu’azu, Director, Corporate Communications, Central Bank of Nigeria (CBN), for and on behalf of the Federal Ministry of Finance, CBN, and Debt Management Office (DMO), had declared: “While we respect the right of the J.P. Morgan to make this decision, we would like to strongly disagree with the premise and conclusions upon which the decision rests.

“ It would be recalled that Nigeria was included in the index in October 2012, based on the existence of an active domestic market for FGN Bonds supported by a two-way Quote System, dedicated Market Makers and diverse investors. However, in January 2015, J.P. Morgan placed Nigeria on an Index Watch as a result of their concerns in the operations of our Foreign Exchange (FX) Market, namely: 1) lack of liquidity for transactions; 2) lack of transparency in the determination of the exchange rate; and 3) lack of a fully functional two-way FX Market.
“In our continuous bid to strengthen the Nigerian financial market and enhance our status as a preferred destination for investors, we took measures to improve the market. Despite the fact that oil prices have fallen by nearly 60 per cent in one year, which should expectedly reduce the amount of liquidity in the market, the CBN ensured that all genuine and effective demand were met, especially those from foreign investors. On transparency, the CBN mandated that all FX transactions were posted online in the Reuters Trading Platform so that all stakeholders can easily verify all transactions in the market. In addition, the Official FX Window at the CBN was closed to ensure a level-playing field in the pricing of foreign exchange.

“It is important to note that a functional two-way FX market already exists in Nigeria. However, given the high propensity for speculation, round tripping, and rent-seeking in the market, it became imperative that participants are not allowed to simply trade currencies but are only in the market to fulfil genuine customer demands to pay for eligible imports and other transactions. In the light of this, we introduced an order-based, two-way FX market, which has resulted in the stability of the exchange rate in the interbank market over the past seven months and largely eliminated speculators from the market.

“Despite these positive outcomes, the JP Morgan would prefer that we remove this rule; even though it is obvious that doing so would lead to an indeterminate depreciation of the Naira. With dwindling oil prices, we believe that an order-based two-way market best serves Nigeria’s interest at the moment.

“While we would continue to ensure that there is liquidity and transparency in the market, we would like to note that the market for FGN Bonds remains strong and active due primarily to the strength and diversity of the domestic investor base. For the avoidance of doubt, the Federal Government sees Nigeria and the interest of Nigerians as paramount. It will, therefore, only continue to take economic decisions that will impact positively in the lives of all Nigerians.”

From the foregoing, it’s obvious that the JP Morgan, being an American multinational banking and financial services holding company, is more interested in protecting foreign investors than Nigeria’s economy. However, the point must be made that there has to be an economy first before investments.  While nations need foreign investments to widen and make the economy robust, nobody loses sight of the survival of the economy. And no country would leave its economy open and perhaps, put it at risk.

I am persuaded that JP Morgan wants Nigeria to open its foreign exchange market and leave it the whims and caprices of market demand. The implication of this is that the exchange rate for the Naira against the dollar and other foreign currencies would be out of the roof. This would lead to the extreme devaluation of the Naira, with its dire consequences for the economy and Nigerians. At present, the naira exchanges between N197 and N200, in the official market, to the dollar, while in the black market, the exchange rate hovers between N216 and N220. This is the case because the CBN has  taken measures to curtail the unfair deals in the forex market, where round tripping and other sundry practices have contributed in weakening the Naira, while a few people smile home to the bank.

No matter what JP Morgan says or the fear of withdrawal of foreign equities, the action of the CBN to protect the forex market and by so doing, guard the economy, is a step in the right direction. If Nigeria succumbs to the blackmail of international financial institutions, the Naira will have a free fall and would not be worth more than the paper it’s printed. If we do this, nobody would be surprised that $1 may be exchanging for as much as between N270 and N320. Yes, there may be withdrawal of some foreign equities now, but this will be temporary. Foreign investors, who withdraw their equities today will return in the nearest future if the government reflates the economy.

I wonder why JP Morgan or any international finance agency would want Nigeria not to regulate the economy when there is nowhere in the world nations leave the economy open without safeguards. In the Americas, Europe and Asia, government applies tight regulations on businesses, especially as it concerns foreigners. This is done to protect the country’s economy. It’s only in Nigeria that foreigners come in and do what they like and get away with it. Here foreign companies and investors subject workers to slave policies, pay them peanuts, evade taxes and make enormous profit, which are taken away. It’s only in Nigeria where such nationals as Chinese, for instance, would bring in goods, as foreign importers and also open shops in Oshodi Market  and others to deal in retail business. This must stop.

I support the Federal Government’s insistence to protect the economy. The foreign exchange window should not be thrown open and left to crash the Naira. The CBN is right on target, for example, in the forex ban of commodities such as rice, toothpick, cement and other things we could product locally. Why would a serious country be importing toothpick and matches when the machinery for their production could be imported and such commodities produced in the country. In so doing, employment will be created.

JP Morgan’s delisting is not a trade or economic sanction. Its effect would be temporary. As the Muhammadu Buhari administration raises its cabinet and unfolds its economic policy thrust, and working diligently, confidence would be restored and I bet that foreign investors who may leave Nigeria because of the JP Morgan delisting would return. Nigeria has the potentiality to have robust economy. It takes planning and consistent policy for this to happen. It also takes diversification of the economy. With the dwindling price of oil, the time has come for Nigeria to diversify to other areas, like agriculture, industrialisation, tourism and solid minerals, among others. Towards this end, the government should work on electricity. If the problem of electricity is solved, the economy would certainly receive a great boost.

Nobody should worry about JP Morgan. Its threat, I strongly believe, is like the threat to the lion and tiger.

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