…Market-driven currency regime excites financial experts

The Central Bank of Nigeria (CBN) yesterday unified all exchange rates within the economy into the Investors and Exporters (I&E) window.
In a circular to authorised dealers signed by CBN Director, Financial Markets, Angela Sere-Ejembi, the regulator said all exchange rate segmentation is “abolished with immediate effect”.

The CBN said all segments of the foreign exchange market are now collapsed into the I&E window.

It added that applications for medicals, school fees, Business Travel Allowance/Personal Travel Allowance and SMEs would continue to be processed through the I&E window.

Experts spoken to by our correspondence welcomed the development, saying it will remove corruption, increase Forex inflow and boost economic development.

The apex bank action is in line with the directive by President Bola Ahmed Tinubu in his inauguration day speech, which was yet to be carried out by suspended CBN Governor Godwin Emefiele before he was edged out of office last week.

Emefiele is currently under probe for his conduct during his nine years in office.

Under Emefiele, the CBN resisted the pressure from World Bank and the International Monetary Fund (IMF) that the naira should be floated to determine its real value and eliminate the corruption embedded in the multiple exchange rates regime.

In the circular, the CBN also said that the operational changes to the foreign exchange market 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,” it stated.

According to the circular, all operational rates 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 decimal places.

“Proscription of trading limits on oversold FX positions with permission to hedge short positions with OTC 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).

“Re-introduction of Order Book to ensure transparency of orders and seamless execution of trades.

“The operational hours of trades shall be from 9 am to 4 pm, Nigeria time,” the circular said.

Also, there is a cessation of the RT200 Rebate Scheme and the Naira4Dollar Remittance Scheme, with effect from 30 June 2023.

Market-driven naira value excites financial experts

The Finance and economic experts, who welcomed the floating of the Naira are the President, the Association of Capital Market Academics, Prof. Uche Uwaleke; Chief Executive Officer, Centre for the Promotion of Private Enterprise [CPPE], Mr Muda Yusuf; Fiscal Policy Partner and Africa Tax Leader, PwC, Taiwo Oyedele; Chief Economist, PwC Nigeria, Andrew Neven; Managing Director, Arthur Steven Asset Management, Mr Olatunde Amolegbe; and President, Association of Bureaux De Change Operators of Nigeria (ABCON), Alhaji Aminu Gwadabe.

Others are Senior Credit Research Analyst, REDD Intelligence, Mark Bohlund; former Executive Director, Keystone Bank, Richard Obire; Director General, Manufacturers Association of Nigeria (MAN), Mr Segun Ajayi-Kadiri; Financial analysts, Renaissance Capital, Charles Robertson; and Managing Director, SD & D Capital Management Limited, Mr Gbolade Idakolo.

Uwaleke, who said that the unification of exchange rates would lead to “ a more transparent forex market,” however, advised the CBN to implement the policy ”in a way that it would not cause massive distortions in the general price level.”

He said: “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. 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 levels. So, while fiscal and monetary policy reforms are welcome, absolute care should be taken to strike the right balance and minimise their unintended consequences.”

Yusuf said the policy would facilitate the mopping up of naira liquidity in the economy in the short to medium term.

That, according to him, will impact positively on inflation outlook and deepen the autonomous foreign exchange market through the liberalisation of inflows from export proceeds, diaspora remittances, multinational oil companies, diplomatic missions, etc.

He added that “the erstwhile foreign exchange policy regime was for all practical purposes, a fixed exchange rate regime that created distortions and negative outcomes.”

Yusuf said the distortions included “widening the gap between the official, other multiple windows and parallel market exchange rates, collapse of liquidity in the foreign exchange market and high demand for forex .”

He added: “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.”

The expert advised the CBN to ”position itself for periodic intervention in the forex market, as and when necessary.”

Oyedele said the decision was a positive move that should bring more benefits than pains to the economy.

He outlined that with the market-driven rate, the aggregate demand for forex across markets should reduce as round-tripping incentive is removed, noting that avenues for corruption such as people who fake foreign travels just to get forex at discounted rates would be.

“Also, Nigeria’s sovereign credit rating should improve if this is complemented with the right fiscal and monetary policies thereby attracting more forex inflows and lowering the cost of borrowing,” Oyedele said.

In a 10-point impact analysis, Oyedele explained that while the decision expectedly would have some negative implications, the overall impact would be positive for the economy, government revenue and the capital market.

Neven expressed support for the policy as it would remove uncertainties and ensure transparency in the forex market.

“We had stated in a report to the CBN that as long as we don’t have a unified exchange rate, and there is a lack of transparency, nobody will invest in Nigeria. We will continue to have insufficient investment and growth and consequently remain poor. What we said years ago came to pass.

”During the (Muhammadu) Buhari Administration, the average growth rate was 1.5 per cent and the population growth was 2.7 per cent. So, it is a necessary condition to get enough investment into the country when we have a unified exchange rate.

“A situation where you have multiple exchange rates, where you don’t know how to have access to foreign exchange or at what price, simply is unworkable. Any system where you have to go to the CBN in order to access foreign exchange or get approval simply isn’t going to work. That is what has been proved over the last decade.

“I think the reaction to President Tinubu’s inauguration statement was very positive, and this latest statement is very positive. We view these as a necessary step toward economic recovery in Nigeria. We’re very much in favour of the unification of the exchange rate,” Neven said.

Ajayi-Kadiri said it was a “positive development and an indication of a far-sighted strategic choice”.

He said the policy, among other range of fiscal measures to promote domestic manufacturing, was borne out of a deep reflection on the current inclement manufacturing environment and the need to stop the drift into inglorious de-industrialization of the Nigerian economy.

The MAN chief, however, said in addition to pursuing the unification of the exchange rate, the CBN should be prevailed upon to take effective action to give priority to the allocations of forex to the productive sector, particularly to manufacturers to import raw materials, spares, and machinery that are not locally available.

Also, Amolegbe said the market-driven rate was another painful reform that needed to be done noting that the multiple exchange rate regime was not doing the economy any good.

“Not only did the former multiple exchange rate system discourage the inflow of much-needed foreign investments, but it also encouraged massive corruption. Harmonizing the rates should lead to better price discovery and hopefully lead to more transparent commerce. That is why the markets responded to it positively,” Amolegbe, a former president of the Chartered Institute of Stockbrokers (CIS) said.

Gwadabe said the removal of the rate cap would allow a true market clearance rate which has been the agitation of several stakeholders in the economy.

He said the move will harness and increase various sources of supply of dollars into the economy like foreign portfolio investment, foreign direct investment, diaspora remittances, and export proceeds, among others.

“The new directive, in my opinion, is to checkmate various illegal economic behaviours like rent-seeking, currency substitution, forex holding positions and frivolous demand in the market,” Gwadabe said.

Obire said eradicating multiple exchange rates would bring about increased dollar supply, and exchange rate stability.

Also, Bohlund said the unification would help the federal government to better balance its books as it is still highly dependent on dollar-linked oil revenue while spending is in naira.

While Robertson said that “Nigeria has become investable again, adding that attracting foreign money is wise when local savings are in short supply.”

Idakolo said the floating of the naira would lead to a free market system that allows market forces to determine the rate.

“This would allow availability to determine the rate and eliminate hoarding,” Idakolo said.

He added that the development “would also encourage foreign direct investment into the economy as restrictions limiting free flow has been lifted. In the long run, as the economy becomes stronger, the naira would begin to appreciate against the Dollar and the economic activities would now determine the strength of our currency going forward.”