The flexible exchange rate policy may make Nigerians poorer- Experts

With the recent announcement by the Central Bank of Nigeria (CBN) to allow the Naira exchange rate to be market-driven, experts have concluded that though foreign investments might return to the country in future, the move is going to make Nigerian’s low income earners poorer. NIYI OLAOYE writes.

The Central Bank of Nigeria (CBN) on Wednesday released the highlights of the much awaited flexible foreign exchange market policy. The highlights, which are key notes and agreements reached by the CBN, were released on Wednesday; weeks after the Monetary Policy Committee (MPC) meeting announced that the policy would be introduced.

It would be recalled that on May 24, the apex bank said the policy would allow the bank retain a small portion of foreign exchange for critical transactions.  As a result of this clue, given by the CBN that it will allow the Naira exchange rate to be market-driven, financial experts in the country have therefore maintained that though the foreign investments might return to the country in future, but the move is setting the stage for a devaluation of the currency; there by making low income earners poorer.

Jurgen Hecker, Paris, France-based financial expert in an email noted, “The first implication is that Nigeria’s citizens will be officially poorer. I say officially because that was already the reality before this decision, except that the government and the central bank were hiding this fact, defending an unsustainable exchange rate with official reserves and capital controls.”

According to Hecker, the controls are now coming to an end, though the market must still wait for the details of the decision; stressing that it looks like it will be a transition towards a free-floating regime, but maybe the central bank will continue to intervene at a certain level, “which we don’t yet know.”

On the plus side, he said:“ The fixed-rate regime and the capital controls have been a real problem for foreign investment. So this decision could lead to foreign investment coming back into the country, which will help development in the medium to long term. Importers of goods and services will now also find it easier again to buy dollars to pay for those imports. Of course the official devaluation means that they will need to pay more Naira for the dollars that they need. And this will feed back into prices that Nigerian consumers have to pay for everything that is imported, which, as we know, is almost everything. And that is what I mean that Nigeria has become poorer,” the financial expert said.

Also, Robert Olatunde, Head of Research at Afrinvest West Africa Limited believes that what the CBN has taken the step that will free up the market from the initial control it had. He explained that licensing some primary market dealers, who would be allowed to play in the new foreign exchange (forex) market, will enable funds to flow in, even from other autonomous sources to supply forex to the market.

“Not just that, the CBN has also introduced the futures market which will ensure that those demand that are not due at the immediate time for 3,6 or 12 months can be offloaded through the futures market and that takes out the artificial demand that are not immediate. What is good is that the CBN has standardized it and they provide guarantee,” he stated.

However, he noted that the area of concern is that some of those items that have been banned from accessing forex from the CBN are still banned. “In our view, that may still create some form of market distortion but in any case what they have done now is just to bring in some respite into the market and we would expect that this new market which the CBN has guided will help address most of the concerns around the imbalance.

“At the immediate time, it may take some time before we see some adjustments but definitely we should see the reduction in the spread between the interbank and the official market and the parallel market,” said Olatunde.

Though the CBN said that it would allow a “market-driven” rate on the interbank market in what it called “a transition to a market-based system,” a herd of financial analysts believes that “periodically intervening in the market to buy or sell, is unlikely to appease those who have been calling for a fully flexible exchange rate, particularly since the announcement was not accompanied by a rise in the interest rate. High interest rate is thought necessary by many as a way of attracting foreign inflows. The apex bank did not mention a level at which the currency would be defended,

An economic analyst and Head, Investment Advisory, Sterling Capital, Mr. Sewa Wusu, also believes that the flexible exchange rate will remove arbitrage in the market. That, he added, does not mean that there won’t be black market but it will remove arbitrage opportunity. According to him, the true value of Naira exchange rate vis-à-vis the dollar will be determined on that market. And that is good enough because before now Nigerians did not know the true value of the naira.

His words: “What we were seeing was the parallel market or black market. Now it is the official standpoint by the CBN which is market-determined through the interbank window. Market driven means the forces of demand and supply will intervene. That will fizzle out arbitrage opportunity and allow rates to converge at that interbank window which is fair enough.

“What it means is that people can now see the true reflective rate of the naira and they can plan for their businesses based on that. Secondly the CBN also said that it will open up a futures market which will allow for proper planning. With that platform, most end users can originate deals for the futures and it will be flexible enough that they can know the exact rate at which dollar exchanges for Naira. It will help end users particularly those that do volumes to hedge their trade for the future and there will also be a platform that will also create demand and supply mechanism for the exchange rate.

“I think it is better instead of going to the black market which is not realistic in terms of exchange rate. It is a good one. What is also very important is that the foreign direct investments and foreign portfolio investments can also flow into the country.”

He, however, noted that on the supply side, CBN may not match the supply because foreign reserves are currently down.

“What this window will do is try to push supply into the market and that will somehow give support to the CBN intervention,” he stated.

The Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu, said the flexible market-determined exchange rate regime was long overdue, describing it as “a much-awaited decision.”

“We have been canvassing this for a very long time; we are happy that the CBN has finally adopted it,” he said.

The Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, who lauded the new exchange rate policy, said the development would eliminate the fears that foreign investors had been nursing about the Nigerian forex policy.

According to him, “from a policy maker’s perspective, you have to be patient. From the consumer perspective you want to insist and be sure that there is transparency and honesty. There is no need having a flexible forex policy that is prone to abuse. Though the new forex policy will not solve all our problems, it will lead to near-equilibrium in the demand and supply of forex.”

He explained that the CBN does not manufacture dollars but only distribute the dollars in a much more efficient manner, stressing that what happened before was a rationing. “We are going to go away from a much more market-driven mechanism,” Rewane said in a TV programme on Wednesday.

A flexible exchange rate, he said, may make the naira to depreciate initially, but it will find its equilibrium price against the dollar and other major currencies over time.

The FDC boss, however, warned the CBN against further creation of a separate forex market where the central bank could sell dollars at cheaper rates for some critical goods and services.

The Lagos Chamber of Commerce and Industry (LCCI) said the new regime will lead to improvement in the efficiency of foreign exchange allocation; reduction in the distortions that currently characterize the forex market and bring the economy closer to equilibrium; improvement of liquidity in the foreign exchange market; and reduction in the current trade arrears.

The Director-General, LCCI, Mr. Muda Yusuf, said it would also lead to reduction in the arrears of remittances, which had accumulated for the past 18 months; reduce uncertainty that investors had been grappling with over the last one year; and boost investor confidence as well as attract greater forex inflows to the economy.