Before the COVID-19 pandemic triggered the collapse of oil prices, Nigeria’s foreign reserves had been on a downward trajectory for months, falling from a high of $45.18 billion in June 2019 to $38.59 billion in December 2019. This was even projected to fall further to between $34.3 billion and $29.9 billion by the end of December 2020.
A CBN report blamed the drop in external reserves on worsening current account balance, decline in oil price, and risk aversion on the part of investors which affects capital inflows.
All these had put pressure on the local currency leading to its devaluation twice last year. Subsequently, the CBN has taken a number of steps to protect the local currency one of which is the banning of some products from the list of items that can access forex from the official window. The apex bank as part of effort to shore up not just the foreign reserve but also to ensure the stability of the local currency moved to encourage the inflow of diaspora remittances into Nigeria through the naira for dollar scheme, a move which was actually aimed at boosting forex supply. Before then, the nation had faced the challenge of shortage of foreign exchange.
Nigeria was the 7th largest recipient of remittances in 2018 behind India, China, Mexico, Philippines, France and Egypt. More importantly, the new policy is also to reduce the premium between the parallel market and the IEFX rates (currently at N71). It will also reduce the cost burden of remitting funds to Nigeria by Nigerians in the Diaspora.
As the monetary authority and lender of last resort, it is pertinent to point out that the CBN has continued to intervene in the forex market in recent years as part of efforts to boost liquidity and stabilise the exchange rate but at the expense of the foreign reserves.
The CBN governor, Godwin Emefiele, at the Monetary Policy Committee meeting in March, said the depletion in forex reserves was driven by forex sales to the Bureaux de Change and the investors’ and exporters’ forex window, as well as dwindling oil receipts.
Nigeria operates a multiple exchange rates system which is said to be injurious to the economy as it creates room for round tripping.
Last year, the International Monetary Fund (IMF) advised that a unified and more flexible exchange rate would be an important shock absorber, with the CBN forex interventions limited to smoothening large fluctuations in the exchange rate. The multiple exchange rates in the country have created arbitrage opportunities, with the sale of forex to the BDCs by the CBN oiling the wheels.
There is no gain saying it that Nigeria, depending hugely on imported products, wastes so much of her scarce foreign exchange on goods that it actually can produce locally.
That gives credence to the insistence of the CBN that it will not sell forex for importation of items produced in Nigeria, noting that it was time to return the Nigerian economy to the period when the manufacturing and agricultural sectors formed the base of the economy. As a matter of fact, two other items, sugar and wheat, are about to be delisted from official foreign exchange window. Emefiele himself gave indication to this effect after visiting the Dangote Sugar factory in Nasarawa state recently.
We agree that official intervention is effective when used selectively and directed to short-run objectives. Describing Nigeria as the only country in the world where the central bank sells dollars directly to the BDCs, Emefiele said it was not surprising that since the CBN began to sell forex to the BDCs, the number of operators had risen from a mere 74 in 2005 to 2,786 as of January 2016. According to him, the CBN receives close to 150 new applications for the BDC licences every month.
Citing rent-seeking on the part of some BDC operators who are only interested in widening margins and profits from the forex market, the CBN stopped forex sales to the BDCs in 2016. Although the apex bank has since lifted the ban, we can confirm that the rent-seekers are still very much with us. These must not be allowed to continue to have a field day.
With unemployment rising to over 33 per cent and inflation hitting 18.17 per cent, Nigerians are facing one of the most difficult times in history. We are, therefore, of the view that there is an urgent need for policy measures that will help to attract investment and capital into the country in order to boost forex reserves and the economy.
More than anything else, efforts should be geared towards boosting forex inflows by scaling up non-oil exports. This requires sector specific policy initiatives to attract investors and develop the non-oil sector.
Overall, this newspaper appreciates the challenges facing the CBN in its effort to manage the nation’s foreign exchange market and urges it to find ways to introduce greater transparency. It has been, in our opinion, a delicate balancing act considering the powerful interests at play.