Analysing Nigeria’s forex policy from cost, benefits’ perspectives
As the real exchange value of the naira against other currencies continues to stoke public discourse on daily basis, the naira remains precarious against other currencies especially the dollar, many stakeholders say notwithstanding their noblest intentions, the fiscal and monetary authoritie’s may have to do more to ensure right exchange rate for the nation currency. Udo Onyeka reports
It is no longer news that the Federal Government has been reluctant to devalue the naira. Perhaps what may be new is how and when the nation’s currency would regain its lost value among other currencies of the world. President Muhammadu Buhari, while briefing senior journalists last week on the ac¬tivities of his government in the last one year, said he has been under tremendous pressure to devalue the naira. Buhari had continued to say that he needed to be educated on why the naira would be devalued. “My argument has been that those who devalue their currencies have developed economies, where there is local production and they export the excess. They have good infra¬structure. So they devalue their currencies to sell their products out¬side their shores, and employ their people. People just take the money out of the country. How many factories have we built? So I refused to devalue the Naira.
“Now you need N350 to get a dol¬lar! I challenged Nigerian econo¬mists to tell me what benefits Nige¬ria has earned from the devaluation so far. How many factories have we built by killing the naira? I have to reluctantly give up because the so-called Nigerian economists come and talk things to me, and when I raise issues they talk over my head instead of inside my head. For us to lose over N300 (every year we’re losing the value of the currency by N100), what for? Let them tell me how many factories they’ve built. I find myself in a very difficult state because the economists cannot tell me why we should continue to de¬value our Naira. People say import, and we find out that we are just im¬porting food! We’re now planning to stop importation of rice, wheat, maize in three years’ time. “On the value of the naira, I’m still agonising over it, that the naira should be reduced to such a dis-graceful level over the last 30 years. I need to be educated on this. But I’m not ruling this country alone.
I’m under pressure and we’ll see how we can accommodate the econ¬omists”, he said. Lagos Chamber of Commerce and Industry said the decision of the Central Bank of Nigeria, CBN, to adopt a flexible exchange rate regime was desirable in the light of prevailing economic realities, adding that there is however, a need for clarity on what the apex describes as a special window for critical transactions for which preferential rates will apply.
“We would like to caution against possible abuse and distortions that such a window could create. On the immediate, relaxing the impediments that will allow liquidity to flow into the autonomous forex market is desirable”, LCCI said The sharp decline in global oil prices which has cut revenue from sales worth 70 percent of government income and the resultant fall in the country’s foreign exchange earnings, had posed a serious threat to the new administration of President Muhammadu Buhari which came into being on May 29, 2015. Till few days ago the government and Central Bank of Nigeria, CBN, has not been able to overcome or mitigate undesirable outcome of policies put in place to revamp the economy.
Penultimate week, the National Bureau of Statistics, NBS, announced that the Nigerian economy shrank by 0.36 percent in the first quarter of this year, with unemployment increasing to 12.1 percent and Inflation rising to 13.7 percent in April. But in what some experts said was a right move the CBN on Tuesday agreed to introduce greater flexibility in the foreign exchange market. President Buhari has refused to devalue the naira, despite a growing gulf between the official exchange rate of 197/199 to the dollar and black market rates of up to N350. The difference has led to a shortage of foreign exchange, negatively affecting businesses and fuel importers unable to buy supplies, causing scarcity of the products that hit the nation since December 2015.
The CBN’s Monetary Policy Committee, MPC, which met Monday and Tuesday, said the nation would adopt “a flexible foreign exchange rate policy”, but details on abandoning the currency peg have been made available, with the ape bank promising more information in “coming days”. According to an economist from Exotix Partners in London, Alan Cameron, “a two- or three-tiered” foreign exchange system, keeping the official rate for “critical transactions”. “I think Nigeria has clearly taken quite a hit after a year of Buhari’s policies where he hasn’t been willing to have any flexibility at all. “I think the market will view this positively, I think investors could take a new look at Nigeria but we need specific details about how the new system is going to work.”
Analysts questioned the wisdom of announcing a major shift in policy without spelling out how to implement it. “Any real liberalisation would be accompanied by some tightening, as a stabilisation measure, at least in the short term,” said, chief Africa economist at Standard Chartered in London, Razia Khan. But many saw the changes coming, Vice President Yemi Osinbajo few days before the MPC meeting hinted at change this month, saying a more flexible approach was needed to spur growth. Also Minister of State for Petroluem, Emmauel Kachikwu comment on Monday that government would use a lower rate of N285 per dollar for petrol imports rather than the pegged official rate of N197 shown that changes were imminent. Emefiele admitted the economy was also likely to contract in the second quarter, falling into official recession, but blamed delays in implementing this budget for much of the decline. MPC benchmark interest rate remains at 12 percent while also maintaining the CBN’s existing Cash Reserve Ratios, CRR, for banks at 22.5 percent.
Nigeria’s foreign exchange reserves fell 2.7 percent to $26.56bn by May 20 from a month earlier, central bank data showed, many say the flexibility expected could include a revamp of exchange rate policy. A plunge in oil prices has eaten into the foreign reserves of the country, forcing the CBN to introduce currency controls, which has frustrated businesses and caused the economy to contract. Nigeria’s dollar reserves were down 10.7 percent from a year ago when they stood at $29.77bn. But in fairness to Buhari government and the CBN, the resistance to devaluation, stemmed from the fact that previous devaluation never achieved much and could not impact positively on the wellbeing of Nigerians.
The International Monetary Fund, IMF, commended CBN for shutting down the bi-weekly forex window and other policy responses to the instabilities, but noted that concerns still persist over lower oil prices. IMF however was later to call devaluation. Group Managing Director of Afrinvest West Africa Limited, Ike Chioke, had advised the apex bank to devalue because foreign exchange illiquidity and low earnings are putting the country in a position of uncertainty, which will not allow the foreign investors to bring in their money.
In a similar vein an economist and Managing Director of Financial Derivatives Limited, Bismarck Rewane, said devaluation makes more naira available for governments at various levels, as well as the availability of the dollar and the actual value of the local unit. Some stakeholders had noted that the CBN in managing monetary issues.
They advised that the apex bank should put in place policies that would encourage inflow of forex without necessarily creating a tolerance for money laundering, adding that, significant disruptions, distortions and dislocations have been created in the business environment by the CBN as a consequence of the following policy measures: restrictions on the use of export proceeds, denial of access to foreign exchange market for 41 broad categories of products, prohibition of cash lodgements into domiciliary accounts and tight exchange controls and administrative allocation of foreign exchange are typically characterised by lack of transparency.
But Vice-President of the Nigerian Association of Chambers of Industry Mines and Agriculture, NACCIMA, Mr. Dele Oye, said the CBN made the right decision, stating that considering the crisis which the nation’s economy currently faces not only the government but also the private citizens in the country must significantly adjust their consumption patterns. “It is time for segments of our society to make sacrifices. A fixation on a luxurious consumption pattern will not do the country any good.
The fact is that the revenue is just not there. Oil prices have been down by over 50 per cent continuously for almost one year and from the prevailing global projection, it is not likely to improve any time soon. Director General, Lagos Chamber of Commerce and Industry, LCCI, Mr. Muda Yusuf had said the CBN decision on forex would help to consolidate on the nation’s advancement in local rice, poultry, vegetable oil, sugar, tomato and textile production among others. The increasing pressure on the naira is caused by high demand for the dollar by importers and speculators, foreign exchange dealers said. The local currency had weakened to over N350 at the parallel market in recent time as importers scrambled for the dollar to meet overseas obligations.
Before the last MPC meeting penultimate Tuesday,the CBN has left its official rate unchanged at N197 to the dollar on its interbank window. “Most individuals who sell (dollars) to us are no longer willing, but demand is piling up,” the acting President, Association of Bureau De Change Operators, Aminu Gwadabe, had said. According to many analysts there more negatives than positives that are coming out of the policies of the federal government “If we look at the outcomes we have had in the past four months, they are quite drastic on the negative side. Gross Domestic Product, GDP, is declining; underemployment and unemployment are increasing, and the general level of economic activities is weak.
The capital market is also declining. Coming from the position we were after the elections, when there were local and international goodwill and we had the opportunity to leverage on all that, unfortunately, foreign investment has stayed flat from the level we had in the first quarter,” said Chief Executive Officer ,CEO, of RTC Advisory Services Limited, Opeyemi Agbaje. According to the public policy analyst, the above situation can only be blamed on the absence of an economic direction. “Goodwill, on its own, is insufficient; it needs to leverage on the right policies,” he said. Manufacturers, a vital component of any thriving economy, have equally on several occasions faulted policies of the CBN which they say are not in agreement with the fiscal policies of the Federal Government.
“The CBN governor, I’m sure, has reasons for what he is doing. I know he carries the interest of the country at heart, but maybe the way he is going about it is faulty,” President of the Manufacturers Association of Nigeria, MAN, Frank Jacobs, had said before the new forex policy. BC