THUR, APRIL 11 2019-theG&BJournal- No one appears to have told the foreign exchange traders that Nigeria is contemplating unification after several decades of enforcing multiple exchange rates. At least a dozen Bureau de Change executives, a couple of parallel market operators and currency watchers are unaware or are simply amused by the thought of it. But the preference for a unified FX rates is growing.
‘’If this happened at the NAFEX rate, we suspect it would improve the budget deficit (due to 20% more naira for oil exports or eurobond issues) and that could then be used to compensate for a potential rise in electricity and fuel prices (both initially set at stronger naira rates than the current official rates), ’’ Renaissance Capital Global Chief Economist Charles Robertson said in the ‘’Thoughts from a Renaissance man.’’
There are still some sceptics. ‘’They (the authorities) don’t and won’t have the political will to do that,’’ one bank executive told theG&BJournal last weekend in Lagos.
But the probability of it happening is buzzing among some analysts who are very close to the Federal Government (FG) and have inklings into what President Mohammed Buhari will do to the currency after May 29 when he is sworn in for the second term.
Apart from Buhari’s second term in office, the emergence of a new Central Bank of Nigeria (CBN) governor is the other event the RenCap Man thinks will allow a re-evaluation of where Nigeria is today and whether the multiple exchange rate system has served its purpose.
The response the Federal Government gave to the recommendation of the International Monetary Fund (IMF) in its Article IV report on Nigeria published recently recommending unifying the multiple currency rates around the Investors and Exporters FX foreign exchange rate (I&E) also raises the prospect of a possible policy shift. The FG told the IMF “we remain optimistic all exchange rates could soon be unified around the market driven I&E FX rate.”
Grounds for concern have existed in practically every forex policy pursued by the Central Bank of Nigeria (CBN) since the market was first liberalised in 1995 with the introduction of an Autonomous Foreign Exchange Market (AFEM) for the sale of foreign exchange to end-users by the CBN through selected authorised dealers at market determined exchange rate.
There is even less visibility now that those concerns will vanish in the near term but the crescendo around the unification of the FX rates has been consistent since the beginning of 2000 when the country was fed with a deluge of rates. For the moment the country remains in anticipation.
The question is whether something fundamental would help change the narrative. Right now investors have less confidence around CBN monetary policy and it does not matter if the CBN moves to unify the rates after the president is sworn-in as long as it moves quickly.
Markets are already questioning the country’s status as the biggest economy in Africa and whether the capacity and appetite to attract FDI is there. The World Bank have revised growth projection and warned on the country’s growing challenges. The complications surrounding the multiple FX rates aggravates the risks the country face and creates confusion for investors.
According to Robertson, multiple official rates does carry cost.
‘’Apart from Venezuela (and that hasn’t gone well) we struggle to think of emerging or frontier markets with multiple exchange rates – except for Nigeria. What Nigeria’s history – and the history of other emerging markets tell us – is that 1) these systems don’t last, and 2) the longer a country waits to get rid of them, the harder it becomes,’’ he said.
Multiple official rates deters foreign direct investment- (Ghana got 10 times more foreign direct investment per capita, than Nigeria, in 2018 and even Ethiopia, with a less literate population and half the electricity (per capita) that Nigeria has, received three times more FDI per capita in 2018), according to Robertson.
They are also often correlated with corruption. ‘’Placing the decision over allocation of dollars at different exchange rates in the hands of unelected officials often leads to the enrichment of those officials.’’
The RenCap Man gave an insight to what could happen to the outlook for Nigeria in the 2020s if there is no shift in the FX regime.
‘’The gap between an official fixed rate and a market-based exchange rate rises due to inflation. Eventually, stresses build up that lead to a shocking devaluation of the fixed rate, high inflation and considerable pain for the poorest in society,’’ he said.
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