Economic analysts have for a long time been calling for the unification of the multiple foreign exchange rates in the country, claiming that it has given room for arbitrage. So, President Bola Tinubu’s announcement of plans to unify the country’s forex rates during his inaugural speech sent the financial market into a frenzy. OLUWAKEMI ABIMBOLA writes on how the market received the eventual devaluation of the naira on Wednesday by Central Bank of Nigeria
In his inaugural speech, President Bola Tinubu promised, on May 29, a unified foreign exchange rate regime and an end to the country’s multiple forex rates era, which has been a pain point to investors, resulting in a consistent drop in the foreign capital inflow over the years.
President Tinubu said that a unified exchange rate would redirect funds into meaningful investments that power the real economy.
He said, “Monetary policy needs thorough house cleaning. The Central Bank must work towards a unified exchange rate. This will direct funds away from arbitrage into meaningful investment in the plant, equipment and jobs that power the real economy.”
The suspended Governor of the CBN, Godwin Emefiele, introduced a multiple exchange rates regime into the country’s forex market, with different rates adopted by different segments of the economy. They include the Nigerian Autonomous Foreign Exchange Rate Fixing also called I&E forex window, International Air Transport Association rate; Interbank Exchange Rate and Bureaux De Change rate. There is also the autonomous forex rate also called the parallel market rate.
There was a wide gap between the official market rates, which are regulated by the central bank and the parallel market rates, which people exploit to collect arbitrage. This resulted in dollar shortage in the country, as foreign investors refrained from bringing dollars into the country because of the challenge of repatriating their funds.
The CBN also was depleting the country’s external reserves to defend the naira, which investors believed was overvalued.
So, President Tinubu’s promise of a unified forex rate regime elicited excitement in the country’s financial market, as the naira strengthened against the dollar at the parallel market and the I & E window, by 0.91 per cent and 0.002 per cent to close at $/N763 and $/N464.50, respectively.
The President’s forex rates unification promises also attracted a positive sentiment at the Nigerian Exchange, as investors gained N1.51tn a day after Tinubu was inaugurated as the country’s 16th president.
True to Tinubu’s promise, on Wednesday, June 14, the CBN directed Deposit Money Banks to remove the rate cap on the naira at the official Investors’ and Exporters’ Window of the foreign exchange market, to allow for a free float of the national currency against the dollar and other global currencies.
In a statement signed by the CBN’s Director of Financial Markets, Dr Angela Sere-Ejembi, the apex bank confirmed that it had collapsed all foreign exchange segments into the I&E window.
It read, “The Central Bank of Nigeria wishes to inform all authorised dealers and the general public of the following immediate changes to operations in the Nigerian Foreign Exchange Market: Abolishment of segmentation. All segments are now collapsed into the Investors and Exporters window. Applications for medicals, school fees, BTA/PTA, and SMEs would continue to be processed through deposit money banks.”
The local bourse, Nigerian Exchange Limited, responded positively to the floating of the Naira as it sustained its upward trend, which has been spurred by the well-received suspension of Emefiele. Consequently, the year-to-date gain of the NGX ASI ballooned to 17.04 per cent.
At the currency market, the naira closed at N664.04/dollar at the I&E Window on Wednesday, according to FMDQ data.
Stakeholders in the capital market have in recent weeks expressed optimism that the drop in foreign capital flight will be reversed. Their hope is hinged on the government being able to resolve the forex challenges as well as improve macroeconomic conditions.
The Director General of the Securities and Exchange Commission, Lamido Yuguda, at the last meeting of the Nigerian Capital Market Committee said, “This is a situation that is not permanent, we expect the foreign exchange situation in their country to substantially improve. There are a lot of economic developments in the country today that are laying the foundation for a much more vibrant foreign exchange in the country.”
The Group Chief Executive Officer, Nigerian Exchange Group, Oscar Onyema, at the International Court of Arbitration Africa Conference on International Arbitration in Lagos, said the comments of the president on preparedness to unify exchange rates would encourage foreign investors.
He said, “All these comments are the right noise for money. Money goes to the least resistant places where it can get the best risk-adjusted returns and without unnecessary hassles because there is competition across the globe.
“On what we have seen in the last eight years, there has been an outflow of foreign portfolio investments predominantly but with these policy changes, you can begin to understand why we are very optimistic that these flows will come back and with it, attract additional flows.”
Meanwhile, the President of the World Bank Group, David Malpass, in a piece titled ‘Parallel Exchange Rates: The World Bank’s Approach to Helping People in Developing Countries’, published on the bank’s website, warned that Nigeria’s parallel exchange rate was harmful as it worsened future debt service payments and increases the risk of debt distress.
The World Bank chief noted that parallel exchange rates were expensive and can drive corruption.
“They benefit the group that has access to foreign exchange at the subsidized rate, paid for by everyone else (which may include the World Bank Group and its stakeholders). Hence, there is also a strong correlation, if not causation, between the existence of parallel rates and corruption,” he said.
Malpass also noted Nigeria was among nations that have made that little progress in addressing the issue. Others are Argentina and Ethiopia.
He further warned that parallel exchange rate markets adversely affect the impact of the bank’s projects while leading to more foreign debt.
Reacting to President Tinubu’s policy direction regarding the unification of the exchange rates, stakeholders believe it was a step in the right direction.
Some, however, raised concerns about its implementation.
For the Chief Executive Officer/Managing Director of Parthian Partners Limited, Oluseye Olusoga, the forex rate unification process was a challenging one due to the rising cost of living but a task that must be done.
He said, “Unifying exchange rates is a difficult task that must be done and would require a lot of courage to achieve. An attempt to unify the exchange rates in Nigeria would imply some level of official devaluation. However, it would also bring additional benefits. Once the rates are converged, there will be better free flow of money and reduced arbitrage concerns.”
Olusoga added that rather than a gradual approach, the process should be market driven through Nigeria increasing its daily oil production for exports and diversifying into sectors such as mining to generate foreign exchange.
Also, analyst with CRW Stockbrokers, Mrs Hadassah Isaac, told The PUNCH that investors had received the forex reform positively.
According to her, the unification of the forex rates had given all investors a level ground to access dollars.
“The market is very happy because of the President’s announcements. We have seen the private sector celebrating the devaluation of the naira. It is a positive move.
“But our major concern is the sustainability of the policy. Do we have enough liquidity in the system to take care of the demand?” she stated.
According to her, the challenge would be funding of the forex market, giving investors access to forex whenever they need it.
“How will the system be funded? Will people bring out the dollars they have been hoarding,” she wondered. According to Isaac, the naira will be further devalued and if it is devalued, people who are holding dollars will be better off.
She also expressed concern about how the government would be able to alleviate the impact on the currency devaluation on Nigerians.
“I just prayed that the policy does not blow up in their hands,” she mentioned.
Recall that the President of the African Development Bank Group, Akinwumi Adesina, at the inauguration lecture for the new president of Nigeria opined that the problem of Nigeria wasn’t diversification, claiming that the economy of Nigeria was one of the most diversified in Africa, with the oil sector accounting for only 15 per cent of the GDP, and 85 per cent is in the other sectors.
He said, “Nigeria’s challenge is not diversification. Nigeria’s challenge is revenue concentration. This is because the oil sector accounts for 75.4 per cent of export revenue and 50 per cent of all government revenue. The solution, therefore, is to unlock the bottlenecks that are hampering 85 per cent of the economy. These include low productivity, very poor infrastructure and logistics, epileptic power supply, and inadequate access to finance for small and medium size enterprises.
“Nigeria must also shift away from the import substitution approach to export-focused industrialisation. Nations do not thrive through import substitution; they thrive from export-bound industrialisation.”
With the shift proposed by Olusoga, he believed that the central bank can act as a regular market participant, trading excess dollar supply to meet demand instead of defending the naira as it currently does. He maintained that the laws of supply and demand would help stabilise the market.
In its latest report, Arthur Stevens Asset Management Ltd said that the President’s comments on improving the ability of foreign investors to repatriate their funds were great for the capital market and the economy generally.
“The statement made by the President on repatriation of investment and profit will encourage foreign investors in terms of foreign direct investment and foreign portfolio investment which has the capacity to make the Naira appreciate against the dollar and other foreign currency. This is because one of the factors contributing to consistent depreciation of Naira is the scarcity of dollars.
