The decision of the Central Bank of Nigeria to float the country’s currency has come under scrutiny with economic and financial experts proffering divergent views as to the appropriateness or otherwise of the policy. FESTUS OKOROMADU writes.
Following the pronouncement of President Bola Tinubu, on May 29, 2023, that his administration will collapse the gap between the official foreign exchange market and the parallel market (black market), the Central Bank of Nigeria immediately swung into action to align with the aspirations of the new government to urgently transform the ailing economy of Africa’s most populous nation.
Consequently, the apex bank, penultimate Wednesday, announced the collapse of the foreign exchange windows to only the Investors and Exporters (I&E) rate, thus allowing for a free float of the Naira.
Prior to the announcement, Nigeria had been operating a duo exchange market rate regime, a system presumed to have been inimical to economic growth as it was difficult to secure foreign currency for genuine economic activities at the official rate.
Though the policy is supposed to have come as a succour for the financial system, it seems to be generating lots of debate from both local and international fronts.
For instance, global investment banking group, Goldman Sachs, raised questions about the refusal of the CBN to address the issues of foreign exchange restrictions to over 41 items, arguing that the restrictions apply to current accounts (imports) or capital account transactions.
While acknowledging the latest monetary policy step of the CBN on the foreign exchange market as a welcome development, Goldman Sachs agreed that the success of the policy (unifying the official and parallel market exchange rates) is likely to depend mainly on easing these restrictions.
“We foresee economic uncertainties and exchange rate volatility due to the difficulty in predicting future exchange rate movements and planning accordingly. Also, floating exchange rates make economies more susceptible to external shocks”
Goldman Sachs further stated that this was critical as there is still an outstanding Forex backlog to be cleared, which is estimated at around $12 billion. It also called for clarity on the policy preferences of the monetary authorities with respect to the Forex regime.
A statement from Goldman Sachs reads in part: “Following the suspension of the former CBN Governor Godwin Emefiele, the new administration has not yet made an appointment of a new governor. Thus, it remains uncertain whether the CBN will re-peg the currency at a new (weaker) level or might move in the direction of introducing some currency flexibility.”
The investment bank cautioned that introducing currency flexibility and/or easing restrictions on access to FX will come with higher interest rates.
It will be recalled that in June 2015, the CBN introduced foreign exchange restrictions for 41 items. This was designed to reduce Nigeria’s import dependency and support efforts to attain domestic production and boost manufacturing/industrialization.
Similarly, the Manufacturers Association of Nigeria has expressed some reservations over the policy, saying it foresees economic uncertainty and exchange rate volatility due to the challenges in predicting exchange rate movements as well as increase in import cost on the short-run.
Segun Ajayi-Kadir, Director General, MAN, said floating exchange rates make the economy more susceptible to external shocks.
Ajayi-Kadir argued that several economies practicing the floating exchange rates policy always produce mixed outcomes. He, however, expects a deceleration of foreign exchange scarcity as currency arbitrage activities would drop with the implementation of the new policy.
“We expect increased import costs and currency depreciation may reduce import flows, which is bad for manufacturers that depend on raw materials not locally available. Also, we foresee economic uncertainties and exchange rate volatility due to the difficulty in predicting future exchange rate movements and planning accordingly. Also, floating exchange rates make economies more susceptible to external shocks,” he stated.
He, however, acknowledged that floating the Naira is one of the best decisions towards resolving the crisis bedeviling the country’s forex market.
“We are hopeful that the floating of the Naira will restore sanity in Nigeria’s foreign market and advise our members to see this new development as a long-awaited opportunity to soften the lingering challenges of the forex crisis. With a floating system, we are optimistic that the official and parallel market rates will eventually converge and will create headroom for investors to seamlessly have access at a competitive rate,” the MAN boss noted.
Also contributing to the debate, the Trade Union Congress of Nigeria cautioned the CBN against the activities of speculators who could undermine the implementation of the policy.
Addressing journalists at the 111th Session of the International Labour Conference, ILC, in Geneva, Switzerland, TUC President, Festus Osifo, applauded President Tinubu for the political will on the unification of forex market, stressing that the steps taken by the Federal Government would help in rejuvenating the nations’ economy.
“We have been advocating against the issue of multiple exchange rates because it’s actually killing our economy.
In the last eight years, it is a single item that has affected our monetary and fiscal policy as a country. It has affected us on all ends,” he said.
Osifo, however, warned that the CBN must strive to block speculators from having a field day for the policy to succeed.
His said: “If by unifying the forex on a single day the exchange rate of naira to dollar jumps to N750 in the bank, then it becomes necessary for the government to set some machineries in motion, else in a few days, speculators will hijack it and push it to N900.”
Also speaking with our correspondent on the development, a financial expert, Uche Uwaleke, commended the CBN for the policy but cautioned against the implementation strategy.
Uwaleke, a Professor of Capital Market at Nasarawa State University, Keffi, noted that the economic fundamentals required to support a Naira float are still very weak, especially in relation to sources of forex.
“Let me say upfront that I support the unification of exchange rates which makes for a more transparent forex market but I think that the CBN should implement that in a way that does not cause massive distortions in the general price level,” he warned.
Uwaleke further argued that it was rather too early to bank on sustainable capital inflows from foreign direct investments due, in part, to insecurity and the overall unconducive environment of doing business in Nigeria.
“This sudden Naira devaluation may draw foreign portfolio investments, which is part of the reason the stock market is surging but we also know that portfolio investments are hot money and do not represent a sustainable source of forex inflows,” he said.
On his part, Director General, Centre for the Promotion of Private Enterprise, Muda Yusuf, said the unification policy would boost the government’s revenue by a minimum of N4 trillion.
Reacting to the new monetary policy on the exchange rate, Yusuf said, the CBN announcement is in line with President Tinubu’s promise in his inaugural speech to harmonise the official and parallel exchange rate.
He noted that revenues would accrue to the Federal Government via additional remittance of exchange rate surplus.
Yusuf emphasized the fact that the policy is not a devaluation of the local currency but a pricing mechanism that reflects the demand and supply fundamentals in the forex market.
“It is a framework that allows for flexible rate adjustment as and when necessary. It is a model that is predictable, equitable, transparent and sustainable,” he stated.
Yusuf noted that the policy regime would reduce uncertainty and inspire investors’ confidence while minimizing discretion and arbitrage in the forex market.
“Rate unification does not imply that rates will be the same in all segments of the market. The objective is to ensure that the differentials are very minimal, possibly between 5-10%,” he added.
On the economic benefits, he said, it will enhance liquidity in the forex market and transparency in forex allocation. He added that with reduction of uncertainty, investors’ confidence would increase.
“The policy will reduce the opportunities for round-tripping and other sharp practices. It would increase disclosures concerning exports proceeds and compliance with non-oil export declarations, especially the non-oil export documentation, he stated.
However, financial experts at Proshare Nigeria seem to disagree with Yusuf that the currency unification policy is not devaluation.
“In assessing the potential impact of these initiatives, we are home in on the likely implications for the primary drivers of foreign currency inflows in Nigeria: exports, FPI, and FDI. On the export front, we expect the naira unification, which also implies an effective devaluation to us, to increase the naira equivalent of Nigeria’s export proceeds,” they opined.
“The weaker currency will also increase the attractiveness of Nigeria’s export goods in international markets, cascading to greater demand from consuming nations barring responses from competitor countries to retain market share. We, however, note that there is likely to be an offsetting impact from the cost of imports,” Proshare stated.
Boniface Chizea, a business management consultant, is doubtful about the ability of the government to push the policy through.
According to Chizea, in the past, attempts have been made by governments to float the exchange rate in response to the prodding by International Monetary Fund with the appreciation of the sheer difficulties with demand management; but as the consequences begin to unfold, the authorities did not have the political will to persevere and stay the course.
“This is so because nobody wants to be accused of unleashing hardship on the citizens as inflationary pressures pile up. And therefore, like it or not, as the rates fall and the Naira appears to be going into a free fall and the touted benefits are slow at materialising, panic sets in and we beat a retreat and reverse the process,” he said.
Stakeholders hope that the anticipated massive inflow in foreign exchange with related Direct Foreign Investments will materialise to cushion the inflationary effect of sudden price increases.
They said that other related issues that will impact the economy will be tackled, particularly insecurity which has negatively impacted the agriculture supply chain.
“I have heard the President allude to the fact that he will be open to collaboration with the international community for the urgent need to end banditry, kidnappings and other organised foreign militant agents contesting Nigeria geographical territory and most certainly, that is the way forward.
“Similarly, we must not underestimate the negative consequences of lack of reliable infrastructure such as power on the fortunes of the economy. In the case of power availability, it is a welcome development that power supply is now on the concurrent list. Therefore, sub national entities can now generate, transmit and distribute power.
This is a welcome development expected to be impactful in this regard,” Chizea added.
Meanwhile both the Capital and Money Market have reacted to the new policy initiative with short term price appreciation.
For instance, while the capital market, precisely the Nigeria Exchange Limited appreciated by N991.81 billion on Wednesday, the gains were overturned on Thursday as investors lost N430.10bn as NGXASI declined by 1.32%.
The NGX All-Share Index, on Wednesday advanced by 3.13% to close at 59,985.10 basis points against the 3.99% gain recorded previously to close at 58,163.55 basis points at the end of the last trading session.
However, on Thursday, the NGX All-Share Index declined by 1.32 percent to close at 59,195.21 basis points against the 3.13 percent gain recorded previously to close at 59,985.10 basis points at the end of the last trading session.
Similarly, the Naira on Thursday lost against the dollar at the I&E window, exchanging N702.19 to the dollar. The local currency depreciated by 5.75 percent compared with N664.04 it exchanged on Wednesday.
The naira traded at N663.04/$ at the close of business on Friday.
This means that the currency appreciated by about 5.9 per cent within 24 hours from the N702.19/dollar recorded at the close of business on Thursday.
“The weaker currency will also increase the attractiveness of Nigeria’s export goods in international markets, cascading to greater demand from consuming nations barring responses from competitor countries to retain market share”
According to data from the FMDQ Securities Exchange, the naira hit N664.04/$ at the close of trading at the I&E Window on Wednesday and N702.19/$ on Thursday after the CBN directed Deposit Money Banks to remove the rate cap on the naira at the official Investors’ and Exporters’ Windows of the foreign exchange market.
The CBN’s decision to float the currency was hailed by the organised private sector and economists who said the move would unify the country’s multiple exchange rates and boost the FX market.
The development means buyers and sellers of foreign currency in the official FX markets are now allowed to quote rates they find comfortable in the FX market, as against the previous practice where rates were dictated by the CBN.
While the official rate appreciated, there was depreciation on the parallel market, which opened at N750/$ and closed at N760/$ on Friday.
However, in a recent projection, the global investment bank Morgan Stanley, stated that the naira is expected to appreciate at the parallel market rate.
The bank stated this in a publication titled Nigeria Sovereign Credit Strategy ‘No Longer Pumped’.
The report suggests that as more flows are redirected through formal banking channels, the unit will experience appreciation in the near term, leading to a convergence between the I&E rate and the parallel market rate.
Also, JP Morgan, in a commentary, said that the official naira exchange rate to the US dollar would steady in the months ahead.
The bank views the recent policy announcements as positive surprises, supporting a constructive view on Nigeria’s sovereign credit.
However, the multinational financial services firm expects the local currency to jump to at least the rate on the black market following initial pressure from a monetary policy reset.
In a statement on Friday, the Resident Representative for Nigeria of the International Monetary Fund, Ari Aisen, expressed the organisation’s support for the unified exchange rate.
He also assured of the IMF’s support in implementing foreign exchange reforms in the country.
The statement read, “The Fund greatly welcomes the authorities’ decision to introduce a unified market-reflective exchange rate regime in line with our long-standing recommendations. We stand ready to support the new administration in its implementation of FX reforms.”
It was further learnt that despite unifying exchange rates, the CBN has said that the status quo remains on the 43 non-eligible items banned from the forex market introduced under the suspended governor, Godwin Emefiele.
According to the information contained in a Q&A document published on the bank’s website, the items are not permitted to be funded from the I&E window.
The stated, “The status quo remains on the 43 non-eligible items. The items are not permitted to be funded from the I & E window.”
Nigerians imported not less than nine items worth N18.12tn from the forex ban list of the CBN between 2016 and 2022.
According to an analysis of Nigerian Foreign Trade reports of the National Bureau of Statistics from 2016 to 2022, items such as crude palm oil, vegetable products, animal products, meat, vegetable fats and oil, steel products, rubber, plastic, clothes, and textiles were imported from various countries.
Despite the unavailability of forex for banned items by CBN, Nigerians imported five items worth N543bn in the first quarter of 2023.
Experts submitted that interesting days lay ahead for economic analysts, market operations, business enterprises and the Nigerian citizens as the government of President Tinubu and his economic team fight to revive the dwindling economy.
