Feelers from last week’s foreign investment road-show by Central Bank of Nigeria (CBN) indicated that Nigeria’s finances and the economy as a whole may be headed to its worst external sector positions.
The foreign investors have told the apex bank that they are not yet ready to return to Nigeria even though the local currency has been massively devalued in line with their demands. The implication is that Nigeria may have burnt its candle from both ends.
About five issues stick out in the discord between Nigeria’s monetary authorities and the foreign investment communities. They include: transparency in the currency market, liquidity of the market, the place of the parallel market, the external reserves and the political will for liberalisation. In spite of CBN’s modest efforts, the investor communities feel there are still grey areas in the new forex regime that portray the exchange rate dynamics as if they are not real. Probably this is the core of all other issues.
We would like to see CBN demonstrate full transparency in the forex market, not because of the foreign investors’ demands but because that is a basic requirement for any near-perfect, free enterprise market to function optimally. Even local investors would demand such, and we dare say that if anything is fishy in the implementation of the new forex regime, Nigerian financial system operators would decode such and take advantage of it to the detriment of the economy.
We expect the forex market to exhibit the nature of true markets which should respond to environmental dynamics. For instance, after “Brexit”, currency markets all over the world (including Nigeria’s own black market) reacted but the official market did not. The fact that the parallel market rate is still far higher indicates that something is wrong with the official market.
This brings up the issue of foreign investors’ using the parallel market as their reference benchmark rate to the discomfort of the CBN. As it is today in Nigeria, most businesses price their goods at the parallel market rate, and so do the foreign investors.
Also critical is the issue of liquidity supply. Up till date, the CBN remains the sole supplier of foreign exchange to the market. This does not reassure foreign investors that if they get involved at this stage their investments will be safe.
Therefore, avenues for the supply of forex must be diversified.
In addition to this, the Federal Government and the CBN must reassure both local and foreign investors that Nigeria is serious about allowing the principles of free enterprise to rule the forex market. Otherwise, we will be left to carry this alone, and our foreign exchange market woes will linger for longer.