Weeks after the Central Bank of Nigeria (CBN) announced a new change to the way the country’s foreign exchange market will work, which means that foreign currencies are now being bought and sold at rates determined by the market, there have been reactions and expectations on the impact of the policy.
In the past, there were multiple exchange rates for the currency. The International Monetary Fund (IMF) has repeatedly called on Nigeria to end this. The huge gap between the official and unofficial rates caused severe shortages of foreign exchange by discouraging supply.
In general, according to pundits, the existence of multiple exchange rates signals a dysfunctional economy as it erodes investor confidence because capital does not flow in and foreign exchange becomes scarcer.
But all that has changed, according to the apex bank. It disclosed in a statement recently that the recent policy changes introduced in the country’s foreign exchange (FX) market were meant to promote transparency, liquidity, and price discovery in the market in order to improve supply, discourage speculation, enhance customer confidence, as well as ensure overall stability in the FX market.
CBN director, Corporate Communications Department, Dr. Isa Abdulmumin, in a statement issued after an extraordinary Bankers’ Committee meeting held recently, explained that all visible and invisible transactions, including medicals, school fees, Business Travel Allowance (BTA), Personal Travel Allowance (PTA), airline, and other remittances, were eligible for the Investors’ and Exporters’ (I & E) window.
As a result, Abdulmumin said banks shall ensure expeditious processing of all eligible invisible transactions on behalf of their customers using the applicable rate at the I & E window.
Abdulmumin further explained that ordinary domiciliary account holders shall have unfettered and unrestricted access to funds in their accounts. He said Deposit Monet Banks (DMBs) shall provide returns to the CBN, including the “purpose” for such transactions.
The CBN director added that cash deposits into domiciliary accounts would not be restricted, subject to DMBs conducting proper Know-Your-Customer (KYC), due diligence, and adhering to the spirit and letter of extant Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) laws and other relevant rules and regulations.
Abdulmumin also said the apex bank would prioritise orderly settlement of any committed FX forward transactions as they fell due in order to boost market confidence. He added that the central bank would normalise its Cash Reserve Ratio (CRR) maintenance processes and ensure equity in its implementation across the banking industry.
What To Expect
According to a Professor of Economics & Business, Allegheny College, Stephen Onyeiwu, this is not the first time Nigeria will be liberalising the foreign exchange market. The first was in 1986; further efforts followed in 1995, 1999 and 2016. All were marred by various impediments.
He said, ‘‘As an economist, I have observed the various reactions of Nigerians to this policy. It’s too soon to decipher the full consequences, but it is possible to highlight some of what can be expected. I believe that the new policy could have several positive results. It should reduce Nigeria’s bloated parallel market for foreign exchange, discourage rent-seeking, foster a stable macroeconomic environment, attract foreign investment, boost exports, stabilise the exchange rate and prevent the dollarisation of the economy. These would all improve the investment climate and spur economic growth.
‘‘Nigeria’s black market for foreign exchange is not like any other in the world. It handles most of the foreign exchange transactions in the country. Allowing market forces to determine the exchange rate will eventually bring the parallel and official rates together. Evidence of this will be a decrease in the huge number of black market currency dealers at airports, hotels and major streets. But some black-market activity will remain, not least for money laundering and other illicit financial transactions.’’
He also said that the large spread between the parallel and official rates has fuelled rent-seeking behaviours in Nigeria. There are people whose main preoccupation is to mop up foreign exchange at the official rate and then flip the currency at the black market rate.
He explained that if the new policy is put into practice effectively, these speculators will have to engage in more productive activities.
Another economist, Paul Ugochukwu, said that the new policy will foster exchange rate stability and predictability. He believes that the new policy will discourage the hoarding of foreign currencies which may also increase supply and stabilise the exchange rate.
He said, ‘‘This is good for the economy. What matters for economic growth and development is not the exchange rate itself but whether it is likely to change rapidly.’’
Other Stakeholders’ Views
Open Access Data Centres (OADC), the connectivity and Data Centre infrastructure arm of West Indian Ocean Cable Company (WIOCC) has said that the impact of the new forex policy has been felt in their business operations in Nigeria.
Slawomir Cieslinski, general manager, WIOCC Nigeria, speaking about business operations in the country said the new forex policy has impacted their business operation positively.
“The release of the foreign exchange impacted our businesses a lot. We had some problems in the past when we tried to buy some equipment from our Nigerian vendors and they had to cut in the naira for equipment. We have to evaluate the offers, so we were getting offers from abroad and when you get them from abroad and doing the evaluation, you have to compare apple to apple and you have to convert it to dollars. When you convert to dollars, you have to use the CBN rate which is the official rate.
“This was disqualifying Nigerian vendors because after converting naira to dollar, they are two times more expensive than the competitors from abroad,” he said
He disclosed that the forex policy has had a positive impact on their business while also impacting them in other areas.
Also, a fiscal policy partner and Africa Tax Leader at PwC, Taiwo Oyedele, has listed some implications of foreign exchange unification.
Oyedele disclosed this on his official Twitter handle. He noted that on a positive note, the governments’ revenue would rise in naira terms resulting in a higher tax, revenue to GDP ratio.
He stated that there would be a possible reduction in budget deficit and some cost savings. “With the Nigerian Naira now exchanging in the official forex market at market determined rates, a significant market distortion has been removed. Expectedly, this will come with both positive and negative implications. The government’s revenue will increase in naira terms, resulting in a higher tax/revenue to GDP ratio. Corporate tax collection may however decline as many businesses crystallize forex losses due to the higher exchange rate; Possible reduction in budget deficit if government’s forex revenue exceeds foreign currency obligations, an increase in budget deficit will arise if otherwise; Possible impact on the pump price of petrol which could inch closer to the current pump price of diesel; There should be some cost savings as government discontinues with the various FXinterventions, e.g. Naira4Dollar, RT200 etc which cost tens of billions of naira; The country will attract FX inflows, especially from portfolio investors, FDI and exporters proceeds.
“Impact on diaspora remittances would be marginal; The capital market will benefit as it is likely to appreciate further as foreign investors take position; there should be negligible impact on the general prices of goods and services as products already factored in parallel market rates to a large extent. Overall, this is a positive move.
“However, the government needs to manage the dynamics to restore confidence. The backlog of forex demands needs to be addressed and government should be ready to supply forex to stabilise the exchange rate in the short term,”he wrote.
The Manufacturers Association of Nigeria (MAN) and corporate treasurers under the aegis of the Association of Corporate Treasurers of Nigeria (ACTN) have said that the new forex policy will facilitate market efficiency and return the confidence of investors in the nation’s economy.
The director general, MAN, Segun Ajayi-Kadir, said he is optimistic that the policy will increase market efficiency and help return investors’ confidence in the economy.
He also submitted that foreign exchange scarcity has been a hindrance to the manufacturing sector as while getting the forex at the official rate has been quite difficult, members who struggle to get it through alternative means do so at an exorbitant and uncompetitive rate.
“Forex scarcity will decelerate as currency arbitrage activities will drop, Nigeria’s export will be more competitive in the international market due to the depreciation of the naira, there will be increased exports and a rise in capital inflow,” he said.
In the same vein, president, ACTN, Yinka Ogunnubi, said: “We believe that this policy change by CBN would bring about “Market Efficiency” leading to a more market-market determined exchange rate reflecting the true value of the currency based on demand and supply. We also believe it will boost “investor confidence”, due to the increase in transparency and predictability of offers, potentially attracting more foreign investments.
The hacirman of Skyway Aviation Handling Company (SAHCO) PLC, Dr Taiwo Afolabi has said that private investors would benefit more from the forex unification policy. According to him, apart from Nigeria, nowhere else in the world are there two exchange rates in the market.
“Once it is unified, you will find out that for us to go to foreign countries to buy our equipment, it will give us a kind of reduction in duties and the cost of whatever that we are going to buy will reduce. The opportunity to go to the same common market with others will also be there. So, it gives us joy with what the new government is doing to support us and all investors. I believe this will allow other investors to come in as soon as things are changing and getting better.
Also, the president of Aviation Round Table (ART), Elder Gabriel Olowo has expressed confidence in the unification policy declaring that the ability of the government to sustain it would aid economic growth.
According to him, the forex unification would also resolve the blocked funds challenge, which the foreign airlines have been battling with in the past 18 months in the country.
According to a UK firm, AUD Group, UK, what determines the stability and effectiveness of a country’s exchange rate policy is the state of the economy and the quality of the country’s economic policies. The naira, according to them, can only become more stable only when the country attracts investors and tourists, diversifies the economy and exports more non-oil products.