The Naira yesterday lost almost half of its value in the official market as the exchange rate in the Investors and Exporters, I&E window rose to N664.04 per dollar from N471.67 per dollar on Tuesday, as the Central Bank of Nigeria, CBN announced measures to liberalise the market including the elimination of multiple exchange rates, and freedom for banks to buy and sell foreign exchange at any rate based on a willing buyer and willing seller arrangement.
Announcing the new measures in a statement titled, “Operational Changes to the Foreign Exchange Market”, Director, Financial Markets, Dr. Angela Sere-Ejembi, said: “The Central Bank of Nigeria (CBN) wishes to inform all authorized dealers and the general public of the following immediate changes to operations in the Nigerian Foreign Exchange (FX) Market:
“Abolishment of segmentation. All segments are now collapsed into the Investors and Exporters (I&E) window. Applications for medicals, school fees, BTA/PTA, and SMEs would continue to be processed through deposit money banks.
“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.
“The operational rate for all government-related transactions shall be the weighted average rate of the preceding day’s executed transactions at the I&E window, calculated to two (2) decimal places.
“Proscription of trading limits on oversold FX positions with permission to hedge short positions with Over-The Counter-futures. Limits on overbought positions shall be zero.
“Re-introduction of order-based two-way quotes, with bid-ask spread of N1. All transactions shall be cleared by a Central Counter Party (CCP).
“Reintroduction of Order Book to ensure transparency of orders and seamless execution of trades. The operational hours of trades shall be from 9am to 4pm, Nigeria time. Cessation of RT200 Rebate Scheme and the Naira4Dollar Remittance Scheme, with effect from 30 June 2023.
“Further guidance on these matters shall be communicated in due course. All market participants and the general public are kindly enjoined to abide by these rules.”
Data from the FMDQ showed that the I&E window exchange rate closed yesterday at N664.04 per dollar, up from N471.67 per dollar on Tuesday.
On the contrary, the naira appreciated by N13 in the parallel market as the exchange rate in the market dropped to N755 per dollar, from N768 per dollar on Tuesday.
It’ll eliminate multiple exchange rates —Analysts
Analysts, who spoke to Vanguard, said that means that the CBN has floated the naira, and the exchange rate will now be market determined based on the demand and supply situation.
This development, analysts added, will lead to the elimination of multiple exchange rates, arbitrage, round tripping and other malpractice as well as enhance foreign exchange inflow into the country, and improve government revenue by about N4 trillion.
They, however, pointed out that the development will lead to a further rise in the prices of goods and services, increase government debt by about N12 trillion to N90 trillion, while increasing the cost of servicing the nation’s debt, and also elevate the debt to GDP ratio.
Enhanced forex inflow
Commenting, investment banker and the Co-founder, of Comercio Partners, Nnamdi Nwizu, said the immediate impact of the directive is enhanced foreign exchange inflow into the economy and further rise in the inflation rate, as the I&E window exchange rate rises aggressively as already seen yesterday.
He said: “First, we are going to see the I&E rate go up aggressively from N475. I expect over the next few days, it should settle maybe at around N730/$. Above N700 anyway.
“With that, what they have tried to do is to create liquidity in the FX market because when the I & E exchange rate goes up, you will start to see foreign investors who are more comfortable coming into the country, because a lot of them have said the naira is overpriced. If that starts to happen you will start to see inflows coming back in, you will start to see the naira eventually start to appreciate.
“It depends on where we settle, we may settle at N600/$ levels. And if that liquidity flows, that will also help the parallel market exchange rate come down.
“But that might also lead to a bit of inflation because there are two things. One, we need to find out what price was used for petrol. So we might see an increase in petrol prices, because if they used, let’s say, N475/$ or N500/$, and it goes to N700/$, you will have higher petrol prices if they used N700/$ and it goes to N730/$ or N740/$ you will have higher petrol prices but eventually, like I said, depending on the rate they used, if the inflow start coming, you will start to have more liquidity, you will see Naira appreciate back down, it may settle around N600/$.
“But at the same time all those who used to buy a mix of parallel market and official rate to get a blend, now that means there is no official rate at around N470/$, everybody will now have to buy at a higher rate, which might lead to higher prices of goods.”
Boost to govt revenue by N4trn
In his reaction, Dr Muda Yusuf, Chief Executive Officer, the Centre for the Promotion of Private Enterprise (CPPE), said that the liberalization of the foreign exchange (forex) market would unlock huge potential for investment and boost government revenue by N4 trillion through additional remittance of exchange rate surplus to the federation account by CBN.
His words: “The liberalization of the foreign exchange (forex) 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 forex 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 minimize discretion and arbitrage in the forex 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 forex market; reduces uncertainty in the market and therefore enhances the confidence of investors; more transparent as a mechanism for forex allocation; minimizes discretion in the allocation of forex and reduces corruption vulnerabilities; and reduces opportunities for round tripping and other sharp practices.
Other benefits, he listed, are: “It would increase disclosures with respect to export proceeds and compliance with non-oil export declarations, especially the non-oil export documentation; boost government revenue by a minimum of N4 trillion through additional remittance of exchange rate surplus to the federation account by CBN; use of naira cards for limited international transactions would be restored in the short to medium term; would facilitate the mopping up of naira liquidity in the economy in the short to medium term. This would impact positively on inflation outlook; and deepen the autonomous forex market through the liberalization of inflows from Export Proceeds, Diaspora Remittances, Multinational oil companies, diplomatic missions etc.
“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 normalize and move 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, CBN should position itself for periodic intervention in the forex market, as and when necessary, to stabilize 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.”
Investors can repatriate funds without hindrances
Sola Obadimu, Director General, Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), said the move is a welcome development, provided investors are allowed to repatriate their funds without further hindrances
Obadimu said: “This is probably better than what we had before. Now, investors can look at the prevailing value of the Naira as reflected by the banking system and decide whether the operating environment is good enough for them.
“Importers through the official channels can also get their proceeds back at the obtainable rate rather than a lower Naira conversion rate.
“But consequent to this, investors should also be able to repatriate their funds without further hindrances. We are liberating the system and allowing market forces to rule. Whatever we were doing before wasn’t quite working for us.”
Retaining FX restrictions on 43 items counter-productive
While commending the CBN for the move, Ayo Teriba, CEO of Economic Associates, described the decision to retain the forex restriction on 43 items as counterproductive.
He said that continuing to exclude some items from the eligible list would create room for parallel market transactions, saying that the practice would frustrate the unification exercise.
“It is in line with the expectation of Nigerians and expresses the policy direction of the new government, which has said that forex rates would be unified. The only question mark in the circular is that CBN directed that the banks should fund only items in the list of eligible transactions. This means that we are still saddled with the 43 items.
“If you are liberalizing, you cannot exclude some items from accessing forex. Exchange rate is not robbery. As long as the buyer pays the Naira equivalent for the forex that they want to buy, you cannot continue to exclude them. If you want to liberalise, you cannot continue to talk about eligible items and threaten sanctions about funding those items. That is the kind of directive that creates a parallel market.
“So, you cannot say you are unifying the market and you are excluding some legitimate transactions. It means you are not ready to unify rates. If you are unifying rates, you must supply to all legitimate transactions. If you exclude some transactions, they will be taken to some other market, where you do not have control,” he said.
On the benefits, he said that the savings from unified exchange rates would improve the government’s fiscal situation, discourage people with frivolous demands in the I&E windows and end the regime of round-tripping.
“If there are no two rates, it will shut the door to people that make frivolous demands in the I&E Window; the government will get its revenue, it will reduce demand and, therefore, strengthen the exchange rate.
“Thirdly, it will also increase supply because as the CBN subsidizes some people at the expense of the government, some suppliers are forced to surrender their forex at that unfavourable rate. If multiple exchange rates are scrapped, the government makes money; the suppliers also make money and have more incentives to increase supply,” he said.
“Therefore, if you look at the decreased demand impact and add the increased supply impact to it, then the unified exchange rates will be closer to the old official exchange rate or the first administratively determined exchange rates and the market rate will appreciate,” he added.
Govt debt to rise further
On his part, Taiwo Oyedele, Africa Tax Leader, PricewaterhouseCoopers PwC, said while the development is a positive one that can lead to improvement in the sovereign rating of the country, he added that it will lead to rise in government debt and cost of servicing the debt.
He said: “The major impacts will include: a significant rise in government debt in naira terms by about N12 trillion to N90 trillion i.e. external debt of $42 billion will increase by the difference between the old and new rates.
“As a result of the above, the debt to GDP ratio will increase by about 5%, There will be a corresponding increase in debt service cost with respect to foreign debt service.
“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.
“Possible reduction in budget deficit if government’s forex revenue exceeds foreign currency obligations, an increase in budget deficit will arise if otherwise”.
Oyedele however sounded a note of caution, saying: “Government needs to manage the dynamics to restore confidence. The backlog of forex demands needs 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 a certificate of capital importation etc to prevent the parallel market rate from simply moving further away from the official market rate.
“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.”
Implementation should cause massive distortions
Also sounding a note of caution, Prof Uche Uwaleke, President, Association of Capital Market Academics of Nigeria, ACMAN, said: “Let me say upfront that 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. This 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.”
Speaking on the development, Managing Director/CEO of Leadway Pensure PFA, Mr. Lanre Idris stated: “The FX market is now free to trade on a willing seller and buyer basis without a capped price.
“The value of the naira will be determined on a demand and supply level and allowed to be able to find its true value. The free float is expected to attract future inflows on FPI flows as investors can inflow and repatriate the funds at a rate determined by the market.
“We expect more clarity by the time the official notice is released to the market.”
Maritime operators comment
Former Minister of State for Interior and Chairman Integrated Oil and Gas Limited, Captain Emmanuel Ihenacho said that the Naira has to find its correct level as these adjustments are necessary.
Ihenacho stated that the unification of the rates was going to happen sooner than later adding that a country cannot have two-tier rates for its currency.
He said: “The point is that all the goods in the Nigerian economy, be it petroleum, food, vehicles or anything must find their correct level and the only way they can find their correct level is using the same unit of monetary measurement, so it is the correct thing to do.”
Speaking to Vanguard on the development, President of the National Association of Stevedoring Operators, NASO, said that a unified forex market will make the Naira appreciate against the Dollar with time.
He said: “The President has said that he will abolish a black market and have a single forex market because it was grossly abused as it encouraged round-tripping, encouraged insider abuse. So if we can have one unified forex market, I can see the prospects of the Naira appreciating very well against the Dollar in the very near future because everybody will be buying from the same market.
“I think it is a good development that everybody will be buying from the same market now and we will be conversant with what the money is used for as it will be available to everybody. Nobody will be buying from one end and then be selling at another end at an exorbitant cost.
“What we have before now was trading in currency and not the actual trade and this will boost operations in the maritime industry because maritime is part of the macro-economy in Nigeria, we buy things too, we buy equipment, there is no way a unified Forex market will not rub off on us because we have the ability to plan and more money will come government too.
On the contrary, the Secretary in Council of the Nigerian Port Consultative Council, Mr. Patrick Ezedimbu said that the fall of the Naira will have a negative impact on the trading as the high cost of Dollar will mean spending more Naira to buy Dollar.
Capital market operators comment
Unification can end arbitrage, forex scarcity—ADONRI
David Adonri, who is Vice Executive Chairman at HIGHCAP Securities Limited, said: “The directive from CBN to the banks to sell dollars, at any rate, signifies full liberalisation of the forex market. It will lead to the generation of market-determined rates. It can end arbitrage and forex scarcity.”
Mallam Garba Kurfi said: “The unification of the exchange rate is a good development that will enable foreign investors to come into the country and the capital market will benefit from it. Although if not well managed it could boomerang and lead to a general rise in prices.”
Also commenting, Marvellous Adiele, Senior Associate, Parthian Partners, said: “The CBN floating the Naira/USD rate means that the exchange rate is now determined by market forces of supply and demand rather than being fixed by the central bank.
“This will enhance market efficiency by reflecting the true supply and demand dynamics of the currency. There will be a more accurate valuation of the Naira, reducing the likelihood of distortions caused by artificial exchange rate controls.
“The Nigerian exports and imports market could be more competitive. A depreciation of the Naira against the dollar can potentially boost Nigeria’s export revenues; however, imports may become more expensive, leading to increased costs for businesses and consumers.
“This could help foreign investors grow their confidence in the economy as they will be able to assess the risks associated with currency fluctuations. However, excessive volatility or uncertainty in the exchange rate can discourage foreign investment.
“Overall, it is important for the central bank to carefully manage the transition to a floating exchange rate regime to mitigate potential risks and ensure stability in the forex market and the economy.”
Victor Chiazor, Head of Research and Investment at Fidelity Securities Limited, said: “If the unification of the exchange rates takes effect, it will be another step in the right direction by the current administration. The multiple exchange rate regimes has weakened the credibility of the FX market and hindered Forex inflows into the Nigerian economy from both foreign and domestic participants. This unification will for one end the activities of those that constantly benefit from arbitraging the FX and allow for the free trade of FX at market-determined price which will be driven by demand and supply.
“However, we remain worried about the country’s ability to meet the current FX demands and believe that this will drive the exchange rate higher leading to higher inflationary pressures. We would have expected this unification to be effected immediately when the government ends the importation of premium motor spirit which currently gulps about 30% of the country’s foreign exchange. This would have improved the FX liquidity position as it will complement the higher inflows from FDI’s, FPI’s and Diaspora remittances and halt a possible panic in the system.”
VANGUARD
