Godwin Emefiele, CBN Governor

By EMEKA EJERE

The Central Bank of Nigeria (CBN) on Tuesday (July 7), moved closer to unifying the naira exchange rate when it adjusted the rate at the official Secondary Market Intervention Sales (SMIS) to N380.5/$1. Data from FMDQ had shown an adjustment of the official exchange rate to N380.5/$ from N360.5/$ the previous day, indicating 5.5 per cent (N20) devaluation of the naira in the official market.

The N20 adjustment at the official SMIS window, analysts say, implies more money for states and the federal government at the monthly Federation Account Allocation Committee (FAAC) meetings, which will cushion the impact of the current lower oil prices.

The latest development comes about two weeks after the CBN governor, Mr. Godwin Emefiele, told some foreign investors that the desire of the central bank “is to achieve exchange rate unification” around the Nigerian Autonomous Foreign Exchange Market (NAFEX)/ I&E rate.

The multiple exchange rate regimes led to the emergence of different exchange rates in the three major segments of the foreign exchange market namely; the official market, the Investors and Exporters (I&E) window also known as NAFEX, and the parallel market.

 

 

The plan to unify the exchange rates was first muted this time by the minister of Finance three weeks ago in a document which stated that the government over the next 12 months would seek to unify the exchange rates to generate more naira from its foreign inflows and manage the rate in a sustainable manner.

In the letter of intent sent to the International Monetary Fund (IMF), the federal government stated it would work towards “full exchange rate unification and greater exchange rate flexibility” to help preserve foreign exchange reserves and avoid economic dislocation.

Emefiele, while speaking at an investors’ conference with the federal government of Nigeria organized by CitiBank, explained: “What we mean by exchange rate unification is moving towards the NAFEX. NAFEX is our dominant market for the purchase and sale of forex and it is a free market where everybody is free to sell their dollars and those who want to buy are free to buy dollars.

“That means that whether you are a business man, a bank, CBN, and you have dollars, you can bring it to the market to sell and if you want to buy dollars, you can come to the market.

“Like some of you must have seen, three years before 2019, we saw a relatively stable forex market because the NAFEX rate and even the rate at which the central bank transacts business outside the NAFEX were substantially close to each other. So, the CBN will continue to pursue unification around the NAFEX.”

The CBN governor dismissed activities in the parallel market as illegal business, which is not a true reflection of naira exchange against the dollar, adding that people patronizing the market are “doing deals that are not recognized by authorities”

With moves by the monetary authorities to unify the naira foreign exchange (forex) rates now gaining traction, economic analysts believe that the step may impact positively on the economy if the increased naira inflow into the federation account is judiciously utilized by the tiers of government.

Experts also believe that if efficiently managed, the policy step will make cost of doing business cheaper, attract more investments into the economy as investor confidence will become stronger and add impetus to the ongoing economic diversification of the government, amongst other potential benefits.

Commenting on the monetary policy stance, Professor of Finance and Capital Market at the Nasarawa State University, Keffi, Uche Uwaleke, 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.”

He further noted that “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.”

Prof. Uwaleke however cautioned that “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 90 per cent source of foreign exchange.”

An economist and former director general of the Abuja Chamber of Commerce and Industry (ACCI), Chijioke Okechukwu, said: “The rate adjustment is to be able to have a higher revenue base to fund the budge, as the more the devaluation, the higher the naira revenue for the country.”

However, prior to Emefiele’s comments, frontline economist and chief executive of Financial Derivatives Company Limited, Mr. Bismarck Rewane, in an interview with a leading national daily, projected that the official exchange rate would be unified with that of the I&E window.

Rewane, who stressed that the scrapping of multiple exchange rates and adopting an efficient exchange rate adjustment mechanism was inevitable, said: “What the CBN is trying to do, I believe is a managed floating exchange rate, not a free-floating exchange rate; and in trying to do that they have converged all the way from N306 to N360. I think ultimately what the I&E window rate will be, when that market becomes more efficient and well supplied, you will find that that will be the rate.

Step in the right direction

Meanwhile the Organised Private Sector (OPS), has commended the move by the CBN towards unifying the exchange rates, saying the development would allow the exchange rate to reflect the market fundamentals and avoid distortions in the economy.

The Lagos Chamber of Commerce and Industry (LCCI), the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA) and Nigeria Employers’ Consultative Association (NECA) hailed the adjustment, describing it as a positive development.

The director-general of the (LCCI), Dr. Muda Yusuf, described the unification of the rates as an important move to stem the looming liquidity crisis in the foreign exchange market.

Yusuf stated that multiple exchange rates were a major source of distortion in the foreign exchange market as the system complicated the management of the foreign exchange market and perpetuated a rent economy that created opportunities for arbitrage, which engendered resource misallocation.

He added that the recent adjustment of the SMIS rate from N360.5 to N380.5 is consistent with the objective of exchange rate unification, elimination of multiple rates in the foreign exchange market and the proposition in the Economic Sustainability Plan of the federal government.

“It is imperative for the exchange rate to reflect the market fundamentals in order to ensure sustainability and promote efficiency in allocation mechanism”, Yusuf said.

“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 heightening self-reliance and economic diversification.”

He added that the disadvantages of the multiple exchange rate system are the impediments it posed “to the attraction of investment as well as inhibiting the inflow of foreign exchange and creation of transparency issues in the allocation of foreign exchange.”

On his part, the director general of NACCIMA, Mr. Ayo Olukanni, said the adjustment, to attain convergence at the foreign exchange market was a step in the right direction. According to him, NACCIMA has always championed the merger of exchange rates in order to ensure predictability and proper planning in the economy.

“But the adjustment at this period will likely lead to inflation since private sector operators will most likely pass on the additional cost of sourcing foreign exchange to consumers. Therefore, steps should be taken to ensure stability in the foreign exchange regime to avoid unnecessary and continuous changes,” he stated.

The director-general of NECA, Dr. Timothy Olawale, does not agree any less with the exchange rate adjustment which he described as a welcome development but stated that the timing left much to be desired.

Olawale, in a press statement, said: “We are aware of the positive impact of unifying the exchange rate, as we are in full support of shunning multiple currency practices, which we believe have not demonstrated the true reflection of the naira in the market.

“Nevertheless, we are wary of the implication of the sudden unification of the exchange rate to the economy at this time. We believe this will be counterproductive, as the nation depends hugely on the importation of raw materials, equipment, fuels (most especially). We are sure this will imply a higher cost of all imported products, with increased potential for reintroduction of the subsidy regime.”