Indication has emerged that the Central Bank of Nigeria (CBN) has given commercial banks and dealers in the forex market the green light to sell forex freely which is at a market-determined rate. This is coming on the heels of the Centre for the Promotion of Private Enterprise lauding the bold step taken by the Tinubu administration towards the unification of the Naira exchange rate. The liberalisation of the foreign exchange market would unlock the huge potentials for investment, jobs and capital flows. Investors’ confidence would be positively impacted. This is in line with the promise of President Bola Tinubu to unify the multiple exchange rate in the market.
However, official confirmation of the Central bank directive to banks will have to come later in the day when data from the FMDQ is available. It was also learnt that official confirmation will be issued by the central bank. Banking sources report trades are now going for as high as N750/$1. Meanwhile, in the black market, the exchange rate traded for as high as N773/$1 for “inflows” which represent dollars or other currencies sold over the wires. The move to allow market-determined forex rates is seen as a major step towards currency reforms in Nigeria, which has been plagued by a chronic shortage of foreign exchange and multiple exchange rates. According to analysts, a unified and flexible exchange rate regime will help boost investor confidence, increase foreign inflows, reduce import costs, and ease pressure on the naira.
The central bank has been under pressure from the International Monetary Fund (IMF) and other stakeholders to adopt a more transparent and market-based exchange rate policy. The IMF had recently approved a $3.4 billion emergency loan for Nigeria to cope with the impact of the Covid-19 pandemic and low oil prices. One of the conditions for the loan was that Nigeria should work towards unifying its exchange rates and eliminating restrictions on access to foreign exchange. The forex market in Nigeria consists of various segments, including the official window, where the central bank sells dollars to authorized dealers, the investors and exporters window (I&E), where foreign investors and exporters trade dollars, and the parallel market, where unofficial transactions take place.
The central bank has been trying to bridge the gap between these segments by adjusting its official rate periodically and injecting liquidity into the I&E window. However, the parallel market rate has remained significantly higher than the official rate, reflecting the strong demand for dollars and the scarcity of supply. The latest development suggests that the central bank may be ready to let go of its tight control over the forex market and allow market forces to determine the value of the Naira.
The Centre for the Promotion of Private Enterprise [CPPE] said it welcomes the bold step taken by the Tinubu administration towards the unification of the Naira exchange rate. The liberalisation of the foreign exchange market would unlock the huge potentials 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 which 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 minimise discretion and arbitrage in the foreign exchange allocation mechanism.
“Rate unification does not imply that rates will be exactly the same in all segments of the market. The objective is to ensure that the differentials are very minimal, possibly between 5-10%. 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; it reduces opportunities for round tripping and other sharp practices; it would increase disclosures with respect to export proceeds and compliance with non-oil export declarations, especially the non-oil export documentation; 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; 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 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 etc.
“The erstwhile foreign exchange policy regime on the other hand was, for all practical purposes, a fixed exchange rate regime. It created the following distortions and negative outcomes: Widening gap between the official, other multiple windows and parallel market exchange rates which created room forex round-tripping to flourish.
“Collapse of liquidity in the foreign exchange market resulting in acute forex scarcity; it fuelled demand for forex because of the incredible rent opportunities created by the huge parallel market premium; created a major disincentive for forex inflows into the economy, thus suppressing forex supply; mounting trade debts; increasing factory closure as many manufacturers are not able to access foreign exchange for raw materials and other inputs; many investors were not able to meet offshore obligations, creating credibility problems with their offshore suppliers; surging inflationary pressures and sharp drop in capital inflows
“Meanwhile, it is important to reiterate that this is not a devaluation policy, it is a normalisation of the foreign exchange policy regime and an adjustment of rate to reflect the fundamentals of demand and supply. It would be dynamic; and the Naira will appreciate or depreciate depending on the fundamentals. In the short term, we expect a depreciation of the currency in the official window because of the huge demand backlog. But as the market conditions normalises and moves towards equilibrium, the rate would moderate. We also expect the new policy regime to boost inflows and strengthen the supply side amidst elevated investors’ confidence. The component of forex demand driven by arbitrage, rent seekers, speculators and other economic parasites would also fizzle out, thus restoring stability to the forex market. However, the CBN should position itself for periodic intervention in the forex market, as and when necessary, to stabilise the exchange rate and prevent volatility. This should happen not by fixing rate, but by boosting supply to the extent that the reserves can support.
