Planned unification of exchange rate platforms to further drive down Naira value
Nigerians to pay more for petrol •Black market emerges in I&E window
By Babajide Komolafe
THE federal, states and local governments are set to earn additional N212 billion revenue this year from the planned unification of the exchange rate platforms, which will further drive down the value of the national currency to as low as N400 per dollar.
Meanwhile, the acute dollar scarcity in the economy has triggered the emergence of black-market arrangement in the Investors and Exporters (I&E) window of the foreign exchange market, where the dollar is traded at N400 per dollar, in direct deals between foreign exchange suppliers and end users.
Officially, the dollar traded between N385 per dollar and N386.5 per dollar last week in the I&E window.
Experts however warned that further devaluation of the naira and unification of the foreign exchange markets despite its many benefits also portends serious negative effects, including higher pump price of petrol and further increase in prices of goods and services nationwide.
Increased oil revenue
In the revised Budget 2020 approved by the National Assembly, the Federal Government projected oil revenue of N1.91 trillion into the federation account, based on oil price benchmark of $28 per barrel, 1.8 million barrels per day production and exchange rate of N360 per dollar.
However, with expectations of further devaluation of the Naira by 11.1 percent, to N400 per dollar from N360 per dollar in the official market, as expected by foreign exchange participants, the projected oil revenue may increase by N212 billion to N2.12 trillion.
This follows a Ministry of Finance document, which indicated government intention to unify the exchange rates and hence further devalue the naira in order to generate more naira flows from foreign exchange earnings.
“While the CBN continues to make strenuous efforts to stabilize the exchange rate, it is generally expected that the naira will suffer further devaluation,” the Ministry said in a document titled, “Addendum to the 2020-2022 Medium Term Expenditure Framework and Fiscal Strategy Paper.”
“The uncertainty and general decline in global economic activities caused by the COVID-19 pandemic have further dimmed the prospect of reversing the downward trend in foreign portfolio investments (FPIs) in the Nigerian Treasury Bills (NTBs), also adversely impacted by the Covid-19 inspired flight to safety, represent the second biggest source of dollar inflow into the country after crude oil”, the ministry added.
Corroborating this expectation, Bismarck Rewane, Chief Executive Officer, Financial Derivatives Company, averred that scrapping multiple exchange rates and adoption of an efficient exchange rate adjustment mechanism is inevitable.
Speaking to Vanguard, Rewane, also a member of the Presidential Economic Advisory Team, said: “Inevitably the exchange rate must find its true value, the market value.” Alluding to expectations of a uniform exchange rate of N400 per dollar, he said: “What the CBN is trying to do, I believe is a managed floating exchange rate, not a free-floating exchange rate. In trying to do that they have converged all the way from N306 to N360. I think ultimately, when the I&E window becomes more efficient and well supplied, the exchange rate in the window, will become the uniform exchange rate.
“But one can say that the parallel market exchange rate at N455 per dollar has exaggerated the real value (of the naira) while the I&E window rate of N386.5 per dollar is fairly near equilibrium.”
Stressing the need for exchange rate mechanism that stabilizes the Naira around its true value, Rewane said: “I would not worry what the rate is at this point, what I will worry about is the mechanism for making sure that the currency is aligned with the fundamentals, and secondly, which is more important, is that there is a mechanism to ensure it stays aligned and not out of equilibrium.
CBN biding time
“That is what I think the CBN should be doing. But it is not easy to do that because we are in a pandemic, we are in an emergency and therefore it is a bit challenging, they have to align the strategic with the tactical. What they are doing now is tactical and what is required is much more strategic. But when there is a form of crisis you forget the strategic and deal with the tactical. It is like a victim in an accident, you treat him, you stabilize him first.
So, what I think is happening and I don’t know, is that CBN wants to stabilize things before making the decision.”
Volatile forex market
Foreign exchange operators who spoke to Vanguard confirmed the expectations of an imminent currency adjustment to N400 per dollar. This they said triggered the volatility in the official foreign exchange market on Wednesday, with the official exchange rate rising sharply to N380 per dollar during the day before it retreated and closed the day at N361 per dollar.
Explaining the dynamics behind the volatility, a senior bank treasurer, who spoke to Vanguard on condition of anonymity, said: “The CBN knows that where we are now is not sustainable but the risk of devaluation is also what they are looking at. So, there is a bit of confusion somehow but I think they may not have choice than to let go of this currency to touch N400 per dollar.”
Exporters sell at N400/$ in I&E black market
Vanguard investigations also revealed the emergence of a black market or ‘under-the-table’ dealings in the I&E window where the dollar is trading for N400 .
This, according to market sources is happening between bank customers, foreign exchange suppliers (mostly exporters) and end-users (investors and manufacturers), who in response to the acute dollar scarcity in the economy and expectations of devaluation to N400 per dollar, deal directly with each other.
Confirming this development to Vanguard, an I&E window source said: “The dollar has already touched N400 per dollar in the I&E — that is from customer to customer. But it is N385 to N386 officially. This is because customers are dealing among themselves at up to N400 per dollar.
“Instead of customers selling to banks now, they sell to each other first. For example, If a customer brings dollars now to the market, he is expected to sell it to a bank. The customer can sell to Bank A but he will say, ‘Bank A you must sell to this my customer otherwise I give it to another bank.’
“Now what is my own as a bank? I am allowed to make up to N1.5 as commission. If I don’t agree to that customer, he will take the dollars to another bank that will agree. So all I will do to make my N1.5 commission is tell that customer that I can’t sell the dollars at more than N386 per dollar. Now, because the selling customer has already negotiated N400 per dollar directly with the buying customer, the customers, after formal transactions with the bank will meet to exchange the balance.”
Pros, cons of exchange rate unification
Professor of Uche Uwaleke however advised the Federal Government and CBN to approach the unification of exchange rates with caution due to likely negative impact on the economy in spite of the obvious benefits.
Speaking to Vanguard, he said: “It is important to bear in mind that any further adjusting of the official Exchange rate by the CBN to align with the rate in the Autonomous Foreign Exchange Market has both merits and demerits”.
Outlining how exchange rate unification would benefit the country, the Professor of Finance and Capital Market, Nasarawa State University, said:
“It translates to increased naira inflows into the Federation account, implying that the three tiers of government will have more money to distribute.
“Also, it eliminates opportunities for currency round-tripping and sharp practices associated with having multiple exchange rates thereby promotes transparency in the country’s forex market.
“By the same token, it will enable price discovery as the real value of the naira becomes established through demand and supply forces as not a few think that the naira is overvalued.
“Similarly, it will engender clarity in the country’s forex market with the potential to attract foreign investors.
“Furthermore, the associated fall in the value of the naira in the near term could encourage non-oil exports and discourage imports, thereby facilitating the government’s import substitution policy and improving the balance of payments.
“Moreover, the measure will be in line with the expectations of international financial institutions especially the IMF and the World Bank encouraging them to further support Nigeria’s economic recovery efforts.”
The flip side
He however averred that exchange rate unification can lead to higher inflation and interest rates as well as worsen decline in the nation’s external reserves.
Explaining, he said: “Abolishing the official exchange rate and leaving the fate of the naira entirely to market forces has grave implications for an economy having a single product, crude oil, as the principal source of foreign exchange.
“With oil revenue accounting for over 90 per cent of foreign exchange, the unification of exchange rates means that the dollar-denominated components of government spending will now be done at a higher exchange rate.
“So, it puts pressure on external reserves, depleting it in the process, worsens the burden of the country’s external debt service obligations, makes the 2020 budget unrealistic and unachievable, having been based on exchange rate of N360 per dollar and by extension the recently-approved Medium-Term Expenditure Framework.
“Besides, essential items that have enjoyed access to forex at the official subsidized rate such as petroleum products imports will have no choice but to use the single market for forex.
“The immediate implication is increased cost of importing petroleum products which will lead to a hike in the pump price of fuel, especially now that the downstream sector is being deregulated. It goes without saying that, in view of the import-dependent nature of the Nigerian economy, any upward adjustment of exchange rate will feed into higher inflation rates, at least in the short run, necessitating tight monetary policy by the CBN and high interest rate environment.”
Consequently, Professor Uwaleke, also a former Commissioner of Finance, Imo State, advised:
“It is important to ensure that while leveraging the up-sides of exchange rates’ unification, policy makers in Nigeria should ensure that the downside risks are mitigated. This, they can do by developing multiple sources of foreign exchange outside oil, especially via agriculture and solid minerals, while vigorously promoting the use of domestic products and services by supporting their availability at competitive prices.”