By Victor ‘Tunde Oso
On Tuesday, the Central Bank of Nigeria, CBN, adjusted the value of the Naira to exchange to the dollar at N381, as part of the measures to unify the rate at the foreign exchange spot.
In March, the CBN had adjusted the official exchange rate to N360/$ from N307/$ and abolished the N325 and N330 concessionary rates.
Mr. Godwin Emefiele, the CBN Governor, had explained, recently, that the bank was making efforts towards a unification of the multiple exchange rates.
“What we mean by exchange rate unification is moving towards NAFEX,” he had said.
Only last week, the Economic Sustainability Committee, headed by Vice President Yemi Osinbajo, also proposed a unified exchange rate to increase FAAC payments to address the economic challenges of the COVID-19 pandemic.
Economic analysts, who spoke to Sunday Vanguard, opined that a cocktail of factors, which include pressure from World Bank and IMF, alarming depletion of foreign reserves as the Federal Government struggles to meet balance of trade obligations, and especially as the former multiple exchange rates regime created confusion, and deterred foreign investments, influenced the latest CBN policy.
Policy ’ll boost remittances to federation account –Yusuf, LCCI D-G
Dr. Muda Yusuf, the Director General of the Lagos Chamber of Commerce and Industry LCCI, said the rate adjustment would impact positively on the remittance to the federation account. It could also, according to him, marginally reduce the deficit in the budget.
To the LCCI boss, for the few firms that have been able to access forex at official rates, the adjustment would mean an added pressure on costs.
His words, “But rate adjustment is not a one directional phenomenon. If supply improves, the rate will appreciate. It is a dynamic thing”.
Yusuf explained that multiple exchange rates could be a major source of distortion in the foreign exchange market as they complicate the management of the forex market.
“The regime perpetuates a rent economy, creates opportunities for arbitrage, engenders resource misallocation, impedes the inflow of investment, inhibits the inflow of forex, and creates transparency issues in the allocation of forex.
“Multiplicity of rates is inimical to sustainable economic diversification and self-reliance as it penalizes domestic production and incentivizes imports”.
Yusuf maintained that it is imperative for the exchange rate to reflect the market fundamentals in order to ensure sustainability and promote efficiency in allocation mechanism.
“This is also critical for investors’ confidence. This should however be complemented with appropriate trade policy regime, fiscal policy measures and institutional strengthening to achieve the objective of heightened self-reliance and economic diversification”.
Complexity of exchange rate system prone to corruption – Ife, ECOWAS Chief Economic Strategist
Prof. Ken Ife, Chief Economic Strategist in ECOWAS Commission, said against the backdrop of the global coronavirus pandemic, which has more than halved oil revenue, raising pressure on the currencies of crude oil-dependent economies like Nigeria, the CBN had been forced to move, more so because the inefficiencies and complexity of Nigeria’s exchange rate system made it prone to corruption.
Ife, also the Co-Chair of European Union – Africa Business Task Force, noted that investors and the IMF have said the absence of a single rate creates confusion and deters foreign investment, adding that transition to a simpler, flexible rate is the right step in unpicking the trade-destroying policies that have held back growth in recent years.
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Ife explained: “Note that crude oil sector provides around 90% of Nigeria’s foreign exchange earnings and around 70% of its budgetary revenues, thereby helping to boost Nigeria’s monetary assets and providing the needed ammunition to stabilize the naira.
“The CBN stated that it would use all the monetary tools it had to rescue the Nigerian economy from the fallouts of the COVID-19 induced global economic strain and stabilize the naira with some concrete steps it had taken to tackle currency speculators.
“This however, is not without prejudice to what really obtains in the forex market”.
Fast depleting national reserves, reason for devaluation -Adetunmbi, Value Investing boss
To Mr. Seye Adetunmbi, Chief Responsibility Officer of Value Investing Limited, the action of the CBN becomes inevitable due to the reality of the pressure on foreign reserves towards meeting the federal balance of trade obligations.
“Many factors are responsible for the situation we find ourselves as a nation today. In the first instance Nigeria was far more productive in the 1980s when a dollar exchanged for less than 70 kobo than the prevailing situation in the present setting”, Adetunmbi said.
“Nigeria is no longer a net exporter of refined petroleum products as it used to be in the 1980s. As a matter of fact, the country has been importing all refined petroleum products we consume for years till now”.
Adetunmbi, who is the convener of Capital Market Roundtable in Nigeria, maintained that the solution to the foreign exchange challenges in Nigeria today is a collective responsibility. “The country needs a progressive and purpose-driven leadership to pilot the structured solution coupled with a strong political will”, he said
The Value Investing boss added that Nigeria needs to rejig the national policy on productivity drive.
“What are we producing now and what are we set or planning to produce that will be backed with measurable action?
“It becomes imperative to set out clear incentives for local resource-based manufacturing companies.
“This will be implemented with a combination of example setting and trade instruments.
“There is need for a deliberate national orientation structured to change the consumption culture of Nigerians.
“This is not just going to be about food but in all things, by consuming what Nigerians produce and shunning what we do not produce”.
World Bank, IMF influenced policy – Ogundadegbe, public policy analyst
Public policy analyst, Mr. Alex Ogundadegbe, said the devaluation of the naira to N381 to $1is long overdue, saying it came as a result on pressure on government by the IMF and World Bank to unify exchange rates in the market as a precondition to receiving loans from the international bodies.
Ogundadegbe explained that with the current economic realities, Nigeria can no longer manage to prop the Naira at the forex market by using income from the oil market to stabilize the currency.
“There has been a shift in product levels as well as price of oil from 2.3 million barrels a day (mbd) and $57/b to 1.9mbd and $28/b”, the analyst said.
“Oil prices might stay below pre-pandemic levels in 2020–21 because of slowed economic activity and a persistent supply glut”, he said.
He added that whichever way it goes, there will be pressure on the Naira henceforth and government might be pushed to allow the Naira to float to market forces.
“The implication is that goods imported will cost more because of the exchange rate and therefore become more expensive in the retail markets
“Nigeria has been unable to fulfill the conditions which would enable the value of the currency to rise at the exchange rate market.
“One of these major conditions is to level the balance of trade, which means Nigeria has to improve on her export of finished goods instead of relying solely on crude oil as an export commodity. The journey to improving the Naira could be long and difficult.”