With the drive towards unified exchange rate now fully set in motion, stakeholders hold the view and very strongly too that the development offers lots of promises for local businesses, foreign direct investment and other positives, reports Ibrahim Apekhade Yusuf
Six years ago, precisely in 2017, the Central Bank of Nigeria (CBN) introduced the unified exchange rate which allows both the Investors’ & Exporters’ FX Window (“I&E FX Window”) to operate the market trading segment to be made at exchange rates determined based on prevailing market circumstances, thus ensuring efficient and effective price discovery in the Nigerian FX market. However, the CBN memo signed by Dr. Alvan E. Ikoku, Director, Financial Market Department, has been executed in breach for the most part.
But things are obviously looking up thanks to the collapse of all segments of foreign exchange markets into the Investors and Exporters (I&E) forex window.
The CBN had last Wednesday announced the new policy regime, a development that spurred some positive developments in the capital and money markets.
It may be recalled that President Bola Ahmed Tinubu had during his inauguration promised to encourage foreign direct investment into the country. This will bring liquidity to the market by making sure that the market determines the rate.
President Tinubu during his inaugural speech vowed to unify the exchange rates to bring about stability in the Forex market.
What does the policy entail?
Forex traders- commercial banks and forex dealers- would be allowed to trade the Naira freely without a cap on the rate, thus forex traders at the Investors and Export (I&E) window were only allowed to buy and sell Forex only at N1 difference.
A dealer confirmed there were no restrictions at the market on Wednesday morning.
The dealer stated that as of 12 noon on Wednesday, the Naira was already exchanging at N750 to the dollar.
However, the final rate will be determined at the close of trading by 4 pm.
The trader hinted that the free-floating of the Naira may not be unconnected with a recent statement credited to.
An elated Chief Wale Edun, Special Adviser on Monetary Policy, who enthused that the exchange rate will soon be unified, had informed Bloomberg a few days ago that “there are other sorts of things that need to be put in place” before full exchange rate unification.
He added: “It’s quite imminent, no date has been set, but as I said, I think it’s already moved, there’s already movement in that direction but it’s very difficult to put the date on it and I don’t think it would be long at all.”
Thumbs up for new policy regime
The policy has been hailed as one of the best initiatives by President Tinubu even from multilateral institutions like the International Monetary Fund (IMF).
The body had on Friday given its imprimatur of support to the CBN’s exchange rate unification policy.
The IMF said it stands by and supports the implementation of the policy.
In a statement, IMF Resident Representative, Nigeria, Ari Aisen, said: “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.”
With the policy, all applications for medicals, school fees, Business Travel Allowance/Personal Travel Allowance, and SMEs would continue to be processed through the I&E window.
A circular to authorised dealers signed by CBN Director, Financial Markets, Angela Sere-Ejembi, said all exchange rate segmentation is abolished with immediate effect.
She said the operational changes to the foreign exchange market also include the re-introduction of the “Willing Buyer, Willing Seller” model at the I&E Window.
“Operations in this window shall be guided by the extant circular on the establishment of the window, dated 21 April 2017 and referenced FMD/DIR/CIR/GEN/08/007. All eligible transactions are permitted to access foreign exchange at this window,” she said.
In a monitored television magazine programme on Wednesday, Dr. Andrew Nevin, Advisory Partner and Chief Economist at PwC West Africa, said the new policy regime was well-thought out.
Nevin, who spoke at NewsDay, on Arise TV, recalled that over the years, one of his major admonitions has always been the need to adopt a uniformed exchange rate as against a disparate rate.
Read Also: ‘Unifying exchange rate requires courage’
The economic and financial expert who has lived in Nigeria for over 15 years and actively played the role of a thought-leader said, “For a very long time since 2016 or 2017 I said that once we have multiple exchange rates, no one is going to invest in Nigeria, and there will be insufficient growth and all. What we said eight years ago came to pass. If you could look at the past administration the highest growth rate was 1.05 percent and the population growth 2.6 percent.”
Thankfully, he said, “So, a unified exchange rate is a necessary condition to get investment into the country. We are a country of 205 million people. We have millions of people travelling out of the country every year, with hundreds of thousands of SMEs struggling and not able to survive the hard economic crunch. So it was not a palatable experience at all. “On the whole, we feel this is a necessary step towards real economic transformation for the country,” he stressed.
Reacting in a statement issued on Wednesday, the Director, Centre for the Promotion of Private Enterprise, Dr. Muda Yusuf, applauded the bold step by the President Tinubu administration to officially float the naira and allow market forces to determine the exchange rate.
He stated that the unification of the naira exchange rate would unlock the huge potential for investment, jobs, and capital flows.
The earlier reported that the Central Bank of Nigeria reportedly directed Deposit Money Banks to remove the rate cap on the naira at the Investor’s and Exporters’ (I&E) Window of the foreign exchange market, to allow for a free float of the national currency against the dollar and other global currencies.
The development means buyers and sellers of foreign currency in the official FX market can now quote rates they find comfort in the FX market, as against previous practice where the Central Bank of Nigeria dictated rates.
The financial expert said the new framework will allow for flexible rate adjustments making the market predictable, equitable, transparent, and sustainable.
He also added that the policy would reduce uncertainty and inspire the confidence of investors minimising discretion and arbitrage in foreign exchange allocation mechanisms.
The statement read, “The Centre for the Promotion of Private Enterprise welcomes the bold step taken by the Tinubu administration towards the unification of the naira exchange rate.
“A unified exchange rate regime enhances liquidity and reduces uncertainty in the foreign exchange market. It would boost government revenue by a minimum of N4 trillion through additional remittance of exchange rate surplus to the federation account by the CBN and allow the use of naira cards for limited international transactions.
“It would facilitate the mopping up of naira liquidity in the economy in the short to medium term. This would positively impact the inflation outlook.
According to Yusuf, a unified exchange rate regime offers other benefits for the economy, such as it enhances liquidity in the foreign exchange market, reduces uncertainty, enhances the confidence of investors, and shows more transparency as a mechanism for forex allocation.
The use of naira cards for limited international transactions would be restored in the short to medium term.
It would facilitate the mopping up of naira liquidity in the economy in the short to medium term. This would impact positively on the inflation outlook.
It would deepen the autonomous foreign exchange market through the liberalisation of inflows from export proceeds, Diaspora remittances, multinational oil companies, diplomatic missions, among others, said Yusuf.
“The CPPE also expects the new policy to deepen the autonomous foreign exchange market through the liberalisation of inflows from Export Proceeds, Diaspora Remittances, Multinational oil companies, diplomatic missions, etc.,” the statement concluded.
While highlighting the major implications of Naira exchange rate unification Taiwo Oyedele, Head of Tax and Corporate Advisory Services at PwC Nigeria, said 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.
Specifically, he said the major impacts will include a significant rise in government debt in naira terms by about N12 trillion to N90 trillion, that is external debt of $42bn will increase by the difference between the old and new rates.
Besides, he said, the debt to GDP ratio will increase by about 5 percent just as there will be a corresponding increase in debt service cost with respect to foreign debt service.
According to him, 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 crystallise forex losses due to the higher exchange rate.
He also said the possibility of reduction in budget deficit if government’s forex revenue exceeds foreign currency obligations, an increase in budget deficit will arise if otherwise just as it may 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 FX interventions like Naira4Dollar, RT200, and others which cost tens of billions of naira,” he said, adding that, “The country will attract FX inflows especially from portfolio investors, foreign direct investment, 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, he said this is a positive move. “However, the government needs to manage the dynamics to restore confidence. The backlog of forex demands need to be addressed and the government should be ready to supply forex to stabilise the exchange rate in the short term.”
Also relax capital control and administrative bottlenecks including unbanning the list of items prohibited for fx (and complement with higher import duties), remove the need for certificate of capital importation etc to prevent the parallel market rate from simply moving further away from the official market rate.
Pressed further, he canvassed the need to stop the demand for certain taxes and levies in foreign currency, it creates unnecessary FX demand without adding to supply.
“The aggregate demand for FX across markets should reduce as round-tripping incentives are removed, for instance people who fake foreign travels just to get FX at discounted rates. Also, Nigeria’s sovereign credit rating should improve if this is complemented with the right fiscal and monetary policies thereby attracting more FX inflows and lowering the cost of borrowing.”
Uche Uwaleke, professor of capital market at the Nasarawa State University Keffi, said, “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.
“In this regard, a sudden free float of the naira is not advised given that the economic fundamentals required to support a naira float are still very weak especially in relation to sources of forex.
“It’s rather 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.”
He said the 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.
“In consideration of this therefore, I would advise that the unification of exchange rates should not be a one step process but should be implemented over a period of time however short it may be,” Uwaleke said.
According to him empirical evidence suggests that reforms are more successful when they are sequenced and implemented in phases. This is against the backdrop of the oil subsidy removal which, taken together, can result in galloping inflation and rising poverty level.
“So, while fiscal and monetary policy reforms are welcome, absolute care should be taken to strike the right balance and minimize their unintended consequences.”
