CBN’s currency adjustment raises hope of economic speedy recovery

BY EMEKA EJERE

The decision of the Central Bank of Nigeria (CBN) to collapse the multiple exchange rate policy that determined the value of the naira and adopt a single exchange rate window is expected to provide an effective tool for resource allocation devoid of abuse and manipulation. It will also be a lure to foreign investors who hitherto ran for safety in the face of a widespread round-tripping that marked the multiple exchange rate regime.

The CBN on March 20, 2020, pegged the exchange rate of the naira at N380 to the dollar at the Investors and Exporters (I&E) foreign exchange window in what is called an adjustment of the rate.

Some economic and financial experts including global financial institutions like the International Monetary Fund (IMF) and the World Bank have been very critical of the multiple exchange rate system which has been operational in Nigeria since the 2017 recession. The country has been operating this system, which pegged the official rate at about N306 per dollar, in a bid to reduce pressure on the naira.

Government businesses and some selected priority companies like importers of petroleum products usually benefitted from the supply of cheap foreign exchange. However, the CBN created an importer and exporter window in 2017 as a reaction to the economic recession in 2016, which further weakened the naira.

Last year, the IMF advised the Nigerian government to unify its exchange rates to achieve desired economic growth. IMF’s Divisional Chief, Research Department, Ms Oya Celason stated this during a press conference on the sidelines of the 2019 World Economic Outlook at the World Bank/IMF Annual Meetings in Washington D.C.

Celason said the slight upward revision of economic growth for Nigeria that year came mostly from strong agricultural production, but still not high enough to lift per capita growth.

On the comprehensive package of measures suggested after the outcome of the IMF team’s visit to Nigeria led by Amine Mati, Senior Resident Representative and Mission Chief for Nigeria, Celasun said IMF referred to stronger non-oil revenue mobilisation.

“For some time now, we have been emphasising the need for a comprehensive package to lift growth. One element of that will have to be stronger non-oil revenue mobilisation. Nigeria has one of the lowest rates of revenue in the world, which was hit hard by the drop in oil prices.

“That is essential for the country to be able to spend more on priorities, such as social safety net and infrastructure. Other areas are the need for tight monetary policy and a simpler unified exchange rate system. Foreign exchange restrictions have also been distorting public and private sector decisions and holding back investment.”

Similarly, in 2017, the IMF said Nigeria should lift its remaining foreign exchange restrictions and scrap its system of multiple exchange rates to revive the country’s recession-hit economy.

The global financial institution’s verdict came weeks after the budget ministry published its Economic Recovery and Growth Plan for 2017 to 2020 which called for a market-determined exchange rate. The plan, however, offered few concrete steps.

Also, the World Bank expressed reservations about several foreign-exchange rates in the Nigerian foreign exchange market. The Bretton Woods institution further explained that international experience has always shown that multiple exchange rates bring clear public subsidies that can distort the allocation of resources in the economy.

Nigeria as a country had at least five exchange rates which included the official one, a rate for pilgrims travelling to Saudi Arabia or Israel, one for school fees abroad and a retail rate set for licensed exchange bureau.

Two former CBN governors, Mallam Sanusi Lamido Sanusi and Prof. Chukwuma Soludo, had also faulted the multiple exchange rate policy at a time. Sanusi was quoted by Financial Times as saying that President Muhammadu Buhari risked exacerbating the country’s economic woes and undermining his government’s achievements on security and corruption by endorsing exchange rate policies that were doomed to fail.

He expressed disappointment to see Buhari’s strong security and anti-corruption efforts being overshadowed by a monetary policy regime with “very obvious drawbacks that far outweigh its dubious benefits.”

“These policies have been tried in different parts of the world and this country before, and they have just never worked. No matter what the stated intention behind them, they are wrong,” Sanusi had added.

Soludo on his part said that the apex bank needed to eliminate its multiple exchange rates to allow the economy to recover fully from recession. Speaking during an investors’ conference organized by Renaissance Capital in Lagos, Soludo said that if the multiple foreign exchange regime remained, Nigeria’s economic recovery would only be tepid.

“While we commend the CBN for taking some steps forward, they have only taken 10 steps forward after previously taking 100 steps backwards,” Soludo said. “The CBN needs to stop playing politics with the Forex rates and create a competitive real effective exchange rate for the economy. So far, the bank has been using a fire-fighting approach with all the windows it has been creating for SMEs, investors, BDCs, etc.”

The new FX rates

On Friday, March 20, the CBN through an official circular by the Director, Trade and Exchange Department of the CBN, Mr Ozoemena Nnaji, announced the new exchange rate. The circular was on the disbursement of the proceeds of the International Money Transfer Operator (IMTO).

The official said the new rate effectively established a convergence that collapsed the multiple exchange rate policy used in determining the value of the naira since June 2016. Under the new rate, the country will now have a single exchange rate for official transactions, bureau de change (BDC) operators as well as for importers and exporters of goods and services, amongst others.

The circular said henceforth dollars would be sold to banks at the exchange rate of N376 per dollar, while banks would sell to the CBN at N377 per dollar. Also, the rate CBN would sell to BDC operators would be about N378 per dollar, while BDCs to end-users would not sell at more than N380 per dollar. The maximum volume of sales for each market is put at $20,000 per BDC

Clamour for devaluation

The new rates, coming after weeks of agitation by some concerned economists and financial experts for the devaluation of the national currency, was seen by many as CBN finally yielding to the pressures. One of the strong advocates of devaluation policy has been the CBN former deputy governor in charge of Financial System Stability, Dr Kingsley Moghalu.

Speaking from the United States on a television programme last week, Moghalu said the devaluation of the Naira is not only necessary but long overdue for the Nigerian economy. He said Nigeria has not been able to derive any benefit from the previous devaluation of the Naira, because it was being pursued as a stand-alone policy and a reaction to events.

According to Moghalu, the time was ripe for devaluation to be used to reposition the Nigerian economy to be competitive and encourage exports of manufactured goods while discouraging importation.

“Devaluation must be accompanied by a number of policies, particularly those that promote giving subsidies to local manufacturers that export. CBN must stop the ban on foreign exchange allocation for the importation of goods and services. Rather, the CBN should use trade policies to increase tariffs on imported luxury items into the country,” he said.

No devaluation

But the CBN has always insisted devaluation of the naira was not one of the options it was considering, even in the face of the deteriorating economic conditions, amid the ravaging impact of the Coronavirus pandemic on the global economy.

The apex bank penultimate week denied any plan to devalue the naira, insisting that “the current economic circumstances and macroeconomic fundamentals do not support naira devaluation at this time.”

The CBN argued that the naira has been under pressure after crude oil prices fell below $30 per barrel at the international oil market as a result of the impact of the Coronavirus pandemic on the global economy.

On Saturday, March 21, the CBN governor, Mr Godwin Emefiele, denied the apex bank had any hand in the alleged devaluation of the naira. Emefiele, who spoke at an extraordinary bankers committee meeting comprising banks’ chief executive officers and CBN directors in Lagos, said:

“CBN has a responsibility to see to the adjustment in the national currency. What you have seen is an adjustment in the country’s currency (and not devaluation).”

The single exchange rate has been identified as a very effective tool for resource allocation. Analysts think that the multiple exchange rate can be subject to abuse and manipulation, possibly aiding corruption.

Uche Uwaleke, a Prof of Finance and Capital Market at the Nasarawa State University, said the devaluation of the nation’s currency by the Central Bank of Nigeria (CBN) will discourage round-tripping and ensure the return of foreign investors.

Uwaleke told the News Agency of Nigeria (NAN) in Lagos that the devaluation would have positive implications for financial markets. He stated that it would discourage round tripping and other sharp practices associated with multiple exchange rates in the country.

Prof. Uwaleke added that the development would encourage the return of foreign investors who left the nation’s financial market because of multiple exchange rates. He, however, noted that the development would have negative implications for inflation and the 2020 budget predicated on N305 per dollar.

However, Sheriffdeen Tella, Professor of Economics, Olabisi Onabanjo University, Ago-Iwoye, Ogun State, said the news of technical devaluation of the naira was not surprising but unfortunate.

“The pressure in the foreign exchange market we have witnessed in the last few weeks was not caused by the demand for foreign currency to buy inputs for production”, Tella said.

“It’s from people who are trying to hold foreign currency either for the speculative purpose for possible travels or to lodge same in their foreign accounts where BVN is not available to reveal their identities.

“So, devaluing the currency will encourage a further speculative attack on the naira. Having emptied the sovereign wealth fund (SWF) account and Excess crude account, the CBN should not have taken this panic measure now that the recession has not taken root in the economy.

“It was a wrong move that was not based on the causal factor of the foreign currency demand pressure.”