• Local currency loses 61% to dollar at official market
• Bank, parallel market rates converge at N755
• I & E window rate falls by 29 per cent to N664 to dollar
• Apex bank stops RT200 FX programme
• Govt transactions to be executed using I&E window
• Stakeholders describe decision as courageous
• Decision could mean free-fall of local currency, analysts fear
The Central Bank of Nigeria (CBN) may have embraced the painful, but realistic path to foreign exchange rate convergence, adopting a clean float at the interbank market.
The option, a liberalist move that supports the interplay of demand and supply to determine the equilibrium rate, saw the apex bank pulling the trigger on the naira at the bank rate, which plunged from about N466 a dollar traded on Tuesday to about between 750/$ and 755/$ yesterday.
At the investor’s and Exporters’ (I & E) window, the naira also depreciated significantly by 29 per cent to N664.04/$, suggesting a broader adjustment of the rates.
Earlier in the week, naira traded at N765/$ band at the alternative market. Dusting off the historical volatility, the currency had traded at a narrow range around N735/$ since December 2022 until recent weeks when the dollar edged higher.
The CBN last night confirmed the collapse of all exchange rates in the Investors and Exporters’ (I &E) window directing all eligible transactions to access FX at the window.
The statement signed by the Director of Financial Markets, Angela Sere-Ejembi, also informed that the RT200 FX Programme ceases to exist effective June 30, 2023.
According to the bank, all government transactions would be executed using the average rates of the previous day’s trading at the I $E.
Most banks had earlier communicated the changes to their customers and were quoting above N700/$ for buying and selling rates.
The 61 per cent deep dive, which has not happened in recent memory, has eliminated the spread between the official and parallel markets, which hit a multi-decade high of 100 per cent in the run-up to political party nominations for the last general elections.
Then, the local currency traded against the greenback at around N450/$ while the black market, trading against heightened speculation, headed to about N900/$.
Interestingly, the usual tension at the parallel market eased at Lagos and Abuja, yesterday, with naira trading between N750 and 755 to a dollar. The Guardian also learnt that demand has dropped significantly.
There are fears, however, that de-pegging could mean a more damning depreciation if the situation is not properly managed. The suspended CBN governor, Godwin Emefiele, had taken a stand against pure float, saying the economy will not survive it at its current state.
Existing dollar-denominated instrument debt instruments would be serviced at much-higher rates, while FX-priced services is expected to adjust. Perhaps, the effect on general prices could be minimal as imported goods, as reported by The Guardian previously, are priced at the black market exchange rate.
At the close of last year, Nigeria’s total national external debt stock stood at $4.69 billion. A higher exchange rate will see the government, at both federal and state levels, requiring more volume of naira to service the debt. But the high cost of debt service could be cancelled out as the government would also get more naira revenues from its FX earnings.
With the development, however, the differential between bank and parallel market rates would narrow to zero for the first time since 2015 when both markets were trading at about N195 to a dollar.
Experts are looking up to the apex bank to kick-start the process of increasing FX supply to raise liquidity levels and enable foreign investors with trapped earnings to access dollars to repatriate their funds.
The aviation industry bookmarks everything that has gone wrong with a subtle capital control regime adopted by the CBN to survive the ravaging pressure. At the cusp of losing major foreign operators last year, the CBN released $120 million to the aggrieved airlines to repatriate the outstanding, comprising mostly of sales.
But the value has long ballooned to $818.2 million or 36 per cent of the global figure as per data provided by the International Air Transport Association (IATA).
The value of foreign investors’ capital trapped in the capital market as a result of FX illiquidity is in the realm of speculation. But David Adonri, a stockbroker, said the amount reflects the steady decline of foreign participation.
Amid the FX liquidity crisis, foreign participation in the local bourse fell from 54 per cent in 2014 to less than 17 per cent last year.
Telecommunication infrastructure investments have been hobbled by the challenge. According to a source, as of December 2022, the FX demand by the sector was in millions of dollars, “but I am not sure the CBN released up to 40 per cent of the amount needed.”
The source disclosed that a major delay affecting one of the Fifth-Generation (5G) network licensees from deploying and expanding services is lack of FX.
“I remembered the licensee requested some $35 million to procure some equipment late last year into earlier 2023, I am not sure that has been granted as of today.
This is even though the sector, earlier in the year, was added to the priority list by the CBN,” the source said.
Manufacturers, at 2021, put the outstanding FX demand at $2 billion. Over time, some requests have remained in queues for as many as 12 months, pushing most users, including multinationals, to the alternative market. The challenge, according to Dr. Muda Yusuf, the chief executive officer of the Centre for Promotion of Private Enterprise (CPPE), in a chat with The Guardian, weakens local capacity utilisation and fuel unemployment.
Yusuf, a strong advocate of rate harmonisation, estimated the total loss to FX arbitrage from 2020 to 2022 at N8 trillion. Beneficiaries of much of what many have described as unnecessary subsidy foreign students who stay back in Britain, Canada and other countries after their studies.
The CBN had restricted access to FX for the importation of a basket of items totaling 41 but later expanded to 43. Other demand-side management approaches, including the suspension of weekly funding of Bureau de Change (BDCs) were taken but the bleeding continued with naira falling from around N200/$ to also N900/$ last year.
But experts have seen yesterday’s de-pegging as the beginning of the return of sanity if the process is followed through.
President Bola Tinubu, during his inauguration, urged the CBN to work towards achieving rate harmonisation as a necessary option for growing a competitive economy. The President aligned with calls by the World Bank, International Monetary Fund (IMF) and leading local economists for pro-market reform of the market.
Historically, the wide market spread has fueled round-tripping and other manipulation with a former CBN governor revealing that some high-network Nigerians sit at home and make billions off the system.
In a statement, CPPE wrote: “The liberalisation of the foreign exchange market would unlock the huge potential for investment, jobs and capital flows.
Investors’ confidence would be positively impacted. Meanwhile, it should be clarified that this is not a devaluation policy, but a pricing mechanism that reflects the demand and supply fundamentals in the foreign exchange market.
“It is a framework that allows for flexible rate adjustments as and when necessary. It is a model that is predictable, equitable, transparent and sustainable. It is a policy regime that would reduce uncertainty and inspire the confidence of investors. It would minimize discretion and arbitrage in the foreign exchange allocation mechanism.”
The statement signed by Yusuf, argued that rate unification does not imply that rates would be the same in all segments of the market, adding that the “objective is to ensure that the differentials are very minimal, possibly between 5-10 per cent”.
A unified exchange rate regime offers the following benefits for the economy: it enhances liquidity in the foreign exchange market; it reduces uncertainty in the foreign exchange market and therefore enhances the confidence of investors; it is more transparent as mechanism for forex allocation, it minimises discretion in the allocation of forex and reduces corruption vulnerabilities”.
Also speaking, CEO of Moniepoint, a fintech company, Tosin Eniolorunda, hailed the decision, saying: “It is a clear step in the right direction for our economy, ensuring investor confidence continues to grow. Today’s decision is good for business, jobs and growth. It will help Nigeria’s brilliant entrepreneurs to do business globally and attract foreign investment. It will also help reduce inflation, leaving more money in people’s pockets.”
A fund manager at Stanbic IBTC Pension Managers Ltd, Chidi Uzo, also described the decision as a “bold step in the right direction”.
“However this should go in tandem with the lifting of capital restrictions for investors waiting on the sidelines to repatriate their funds. We expect foreign investor participation to be swayed by the extent to which capital is allowed to flow freely.
“Overall, the effective harmonisation of Nigeria’s multiple exchange rates by allowing market forces to determine the fair value of the naira should immediately reverse the multi-year widening spreads between the official exchange rate and the parallel market exchange rates,” he said.
Meanwhile, stakeholders said the floating of the foreign exchange is a good thing for the energy sector.
Admitting that immediate shocks in prices are imminent, they argued that the development would bring transparency and global competitiveness to the sector and in turn attract investors.
Economist at the University of Ibadan, Prof Adeola Adenikinju, said the development would enable investors and market players to make investment decisions based on some level of certainty.
“All these measures would have short-term adjustment costs. However, in the medium to long term, the economy would be better for it,” he said.
A leading expert/scholar in Electricity Law, Prof. Yemi Oke, lauded the decision, stressing that it would introduce a level playing field.
According to him, with the downstream sector already deregulated, the new move would enable every marketer to bring their product and compete while investors would have the confidence to come to the power sector.
Oke said the multiplier effect would boost the economy, job creation and ensure the sustainability of the energy sector, as investors would be willing to come into the sector. He noted that the development would also create clarity and certainty around investment and project funding in the sector, as multiple exchange rates won’t favour the sector.
“It will make the economy very attractive and globally competitive. So it is a good thing,” Oke stated.
Adonri described the decision as a giant stride in deregulating the economy, coming at the heels of subsidy removal. He pointed out that the structural rigidities in the economy and pressure points are gradually being eliminated
According to him, the decision would enable the true value of the Naira to be market-driven and determined at any point in time.
Adonri also added that the action would ultimately enhance the allocative efficiency of hard currency resources, eliminate rent-seeking, curb the scarcity of forex and ultimately boost federal government revenue.
Chief Executive Officer of Wyoming Capital and Partners, Tajudeen Olayinka said the government is introducing an adjustment program that will make the economy attain internal equilibrium, while at the same time putting up policies and measures that will make the economy restore external equilibrium.
“Fuel subsidy is gone. Foreign exchange subsidy is gone. Desirable capital inflow is expected. Capital Market will remain a major source of funding long term capital requirements by firms and governments, as cost of capital in the economy moderates to a much lower level and capital formation increases to a new level that could create decent jobs and drive down inflation.”
He stressed the need for the government to first and foremost eliminate the already known source(s) of exchange rate divergence, to be able to encourage a convergence of rates across markets.
However, he noted that all economic agents will initially experience short-run adjustment pains but noted that the new government is currently taking good steps in the right direction. He also expressed optimism that these policies would boost stock market liquidity and spur a resurgence of IPO in the capital market.
An industry player, who pleaded anonymity, said the decision would impact negatively on the sector and economy. The source noted that retail collections would become an issue once tariffs are changed.
“This means more misery for Nigerians. This single policy will further impoverish the masses. Inflation will skyrocket and funny enough the dollars will still not be available. This same trick was used during IBB days in 1985 when the dollar was N3 and the rest they say is history now.
“No country has ever floated her currency and benefits from such action. The list of countries that tried and failed is too big to even start naming them. The currencies of Ghana, Egypt and Turkey have all been devalued by over 50 per cent in the last year all in the name of ‘floating’. This is a one-way journey into a bottomless pit of self-destruction if you have your assets in naira,” the source said.