Vibrant commodities exchanges will play a vital role in advancing Nigeria’s economic diversification goals. Chris Ugwu writes
The need for vibrant commodities exchanges have become necessary as agriculture, which is supposed to be the mainstay of Nigerian economy has suffered from years of neglect, inconsistency, poorly conceived government policies and the lack of basic infrastructures.
In the 1960s, the agricultural sector was the most important in terms of contributions to domestic production, employment and foreign exchange earnings. The situation remained almost the same three decades later with the exception that it is no longer the principal foreign exchange earner, a role now being played by oil and gas.
The sector remained stagnant during the oil boom decade of the 1970s, and this accounted largely for the declining share of its contributions.
According to National Bureau of Statistics (NBS), the trend in the share of agriculture in the Gross Domestic Product (GDP) shows a substantial variation and long-term decline from 60 per cent in the early 1960s through 48.8 per cent in the 1970s and 22.2 per cent in the 1980s.
Unstable and often inappropriate economic policies (of pricing, trade and exchange rate), the relative neglect of the sector and the negative impact of oil boom were also important factors responsible for the decline in agriculture’s contributions.
However, currently, the reverse is almost becoming the case as the decline in crude oil prices is currently affecting the economy and the government is looking for a way to boost non-oil revenue in the country.
This is the more compelling reason why there is need to boost non-oil revenues, one of which is reviving the country’s commodity exchange to encourage agriculture and also offer investors opportunities not only in the equity side but across the various asset classes.
It is believed that for the government to fully realise the huge potential of other sectors, functional commodities exchanges are necessary. Aside from the proposed Lagos Commodity and Futures Exchange, (LCFE), there are two major commodities exchanges in the country – Nigerian Commodities Exchange and Afex Commodities Exchange – which are promoting the trading of commodities. But given the important role they will play in the diversification programme, more still needed to be done to ensure they function very well.
Since capital market is reflective of the economy, Securities and Exchange Commission (SEC) has said that in order to complement the government in the area of agriculture, there is need to strengthen commodity exchange to enable the farmers have value for their products.
In a bid to boost agriculture and promote commodity exchange in Nigeria, the SEC said it was set to roll out various initiatives to provide an enabling environment for commodities trading in the country.
This is in support of the policy thrust of the Federal Government to encourage investments in the agricultural and solid minerals sectors in a bid to ensure economic diversification and deepen capacity across the agricultural value chain.
Director General of SEC, Mounir Gwarzo, said this while delivering a Keynote address at a training seminar organised by Africa Exchange Holdings (AFEX) on Commodity Trading and Risk Management in Abuja recently.
He said the 10-year capital market master plan, which the market is currently implementing is the blueprint for the growth and development of the market over the next decade and acknowledges commodities exchanges as critical for enabling investment diversification, risk management, price discovery and transactional efficiency. He expressed strong belief that to boost Nigeria’s competitiveness, a thriving commodities trading ecosystem must be developed.
The DG said: “We believe this can be achieved by implementing the following strategic initiatives: Build a supporting and functional ecosystem for commodities trading.
“Others are: Build Centre of Excellence in areas of comparative advantage such as for oil & gas, cocoa, etc. Develop efficient commodities exchanges and trading platforms, sponsor legislation to ensure Nigeria’s crude oil sales are traded on local exchanges and build capacity in commodities trading at the SEC and among market operators”.
He said that as Nigeria pursues policies aimed at diversifying the economy, creating jobs and hastening socioeconomic development, it is becoming increasingly clear that Commodities Exchanges can play a crucial role in actualising the lofty objectives as a detailed empirical study by the United Nation’s Conference on Trade and Development (UNCTAD) analysed the impact of commodities exchanges on development in emerging markets.
Gwarzo said countries that were part of the study are also emerging countries with the most vibrant commodities markets such as India, Brazil, China, Malaysia and South Africa. Among the many insights in the study’s report is the fact that commodities exchanges play a central role in facilitating economic development especially by helping farmers to enhance their marketing and risk management capacity (such as reducing their exposure to price and other production risks).
Nigeria he said, ranks number one in global export rankings for commodities such as kolanut, shea nuts and shea butter, cassava, and yams and also feature in top exporters for other commodities such as cocoa, rubber, oil palm, cashew and sesame seed.
Recent stakeholders’ efforts
The Association of Stockbroking Houses of Nigeria (ASHON) recently signed a Memorandum of Understanding (MoU) with The Nigerian Stock Exchange (NSE) as it strengthened preparation for seamless take-off of the proposed Lagos Commodity and Futures Exchange, (LCFE).
The MoU, which was signed in Lagos by ASHON’s Chairman, Mr. Patrick Ezeagu and The Exchange’s Chief Executive Officer, Mr Oscar Onyema, is aimed at creating professional and technical relationship between the two institutions for enhanced trading on commodities and futures.
Speaking after the signing ceremony, ASHON’S Chairman, Mr. Patrick Ezeagu, said that the MoU signed would enable LCFE access the superior technological capacity of the NSE as the oldest Stock Exchange in Nigeria.
According to him, LCFE would hit the ground running once it is able to perfect the registration process with the apex regulatory body – The SEC.
Commenting on the strategic objective of signing the MoU with the NSE, Ezeagu said the strategic objective of LCFE was to have a technical partner that has the technical competence to enable it commence trading immediately after the regulatory approval without setting up a new platform.
“What we have done is to tap on the existing capacity that is already at the Nigerian Stock Exchange so with that we cannot get it wrong.” he said.
Corroborating him, Onyema said that the NSE was willing and well positioned to support capital market development and provide necessary expertise to other emerging exchanges around the continent.
He stated: “The Association of Stockbroking Houses of Nigeria has championed the establishment of the Lagos Commodity and Futures Exchange and this MoU that we signed today is an MoU that positioned the Nigerian Stock Exchange to provide technology and other technical support to the Lagos Commodity Exchange.
“As you know, we do have a service that we use to provide such support for other emerging exchanges around the continent, given the expertise that we have developed over the years and so the significance is that we are supporting market development and we are providing expertise to make it easier and more cost effective for an exchange such as the Lagos Commodity exchange to hit the ground running,” he said.
Acting Chief Executive Officer of the proposed LCFE, Mr Akin Akeredolu-Ale, also reiterated the strategic position of the NSE in providing technical and technological support for the LCFE.
Managing Director, Crane Securities Limited, Mr. Mike Eze, described the efforts of government and regulators as a welcome development. He said: “As an investor, your chances of risks are very less if you choose to invest in commodities trading.”
Explaining the importance of commodity exchange, aside helping to deepen the activities of the capital market with the introduction of new products, Eze said that it will increase the earnings of the producers by reducing the effects or price volatility, provide a basis for risk management and serve as mechanism for effective pricing.
“The benefits of a commodity exchange include market price discovery as well as access to information concerning commodities traded on the commodities Exchanges, which are available to brokers in advance of trading i.e. quality, location and time of delivery, thus facilitating pricing, among others.”
A robust commodity exchange is particularly critical now, given the increasing emphasis on agriculture, which is expected to enhance non-oil revenue in the country.