By Chinwendu Obienyi
When President Bola Tinubu on May 29, 2023, signaled his intention to fast-track reforms in the economy, not many Nigerians knew it would take the current turn.
This was due to so many inaugural speeches and assurances made by past administrations which only took time but did not even reach implementation stages.
Amid statements made about removing fuel subsidy, Tinubu moved to the Central Bank of Nigeria (CBN), noting that the monetary policy required “thorough house-cleaning” with the hope that a unified exchange rate would redirect funds into meaningful investments that will power the real economy.
The President swung into action as the price of fuel swiftly rose to N500/litre and Folashodun Shonubi, a Deputy Governor in charge of operations at the apex bank, was brought in acting capacity to head the CBN.
Until his elevation to post of a governor, Shonubi had demonstrated his capacity as a capable deputy to Emefiele in charge of operations at the apex bank.
He also represented Emefiele as a member of the board of the Federal Inland Revenue Service – a role he held since December 2019.
Indeed, the 61-year-old central banker has had a stellar career in Nigerian banking and engineering sectors with a combined experience of over three decades.
Shonubi holds three degrees, including two master’s degrees – in business administration and mechanical engineering – from the University of Lagos.
He began his career in engineering, but pivoted to focus on the financial industry in the mid-1980s. He had a three-year stint at Citibank Nigeria Limited in the ’90s, holding the position of head of treasury operations and also worked at a number of Nigerian commercial banks including First City Monument Bank (FCMB), Ecobank Nigeria Plc and Union Bank of Nigeria Limited. Between 2012-2018, he was head of the Nigeria Inter-Bank Settlement System Plc – which regulates infrastructure for inter-bank payments – from where he joined the CBN.
Reforms
Reports recently filtered in that the CBN gave commercial banks and dealers in the FX market the green-light to sell FX freely at a market-determined rate.
The bank finally announced the unification of all segments of the foreign exchange (FX) market – replacing the old regime of multiple exchange rate “windows” for different purposes with, in effect, a market rate.
Like a wildfire, Shonubi’s appointment alongside the raft of changes under the Tinubu-led administration began to have impacts on the market.
First, Nigeria’s eurobonds became bullish as investors and analysts viewed Shonubi’s appointment in interim capacity as a reset towards a more traditional economic path under President Bola Tinubu.
Nigerian stocks crossed the 60,000 mark since 2008 with investors also netting N5.3 trillion in the month of June.
The stock market continued its rally with total capitalisation climbing 3.26 per cent to reach N33.197 trillion as at June 30, 2023, demonstrating increased value of listed companies on the stock exchange.
Similarly, the number of deals executed on June 14, 2023 showed a 15 per cent increase compared to the previous trading period, with volume of trade rising by 9.28 per cent to show increased market participation and increased liquidity.
Furthermore, MSCI Inc announced that it will extend its consultation on the potential reclassification of the Nigeria Indexes from the frontier to standalone market status.
The index had in 2022, threatened to downgrade Nigeria’s indexes as a result of the CBN’s capital control measures that made it difficult for foreign investors to repatriate foreign currency offshore.
According to the index, since the onset of these issues in March 2020, there have been constraints in US dollar liquidity in the market, leading to constant capital repatriation concerns and a gap between the parallel and official exchange rates for the Naira.
“The feedback from market participants obtained as part of the consultation suggests that the limited accessibility of the Nigerian equity market, resulting from a lack of liquidity on the FX market, would warrant its removal from the MSCI Frontier Markets Index”, it said.
It however announced that it will decide to adopt the “wait and see” method to gauge how the new development in the foreign exchange market will play out for foreign investors with interest in Nigerian assets.
Other industry reforms under Shonubi
The CBN also announced that going forward, domiciliary account holders are permitted to utilize cash deposits not exceeding $10,000 per day or its equivalent via telegraphic transfer.
The CBN Director, Corporate Communications, Department, Dr. Isa Abdulmumin, in a statement issued after an extraordinary Bankers’ Committee meeting also said all visible and invisible transactions including medicals, school fees, BTA/PTA, airline and other remittances are eligible for the Investors’ and Exporters’ (I&E) window.
He said Deposit Money Banks (DMBs) shall ensure expeditious processing of all eligible invisible transactions on behalf of their customers using the applicable rate at the I&E window.
The central bank director pointed out that the meeting had discussed the policy implementation and implications for the banking public. It also directed all International Transfer Money Operators (IMTOs) to pay out proceeds using the Investors and Exporters’ (I&E) window FX rate as the anchor rate on the day of the transaction.
This was even as the apex bank approved the addition of five additional IMTOs to facilitate diaspora remittances. The directive was contained in a circular dated July 10, 2023, and signed by the Director, Trade and Exchange Department, CBN, O.S. Nnaji.
The circular which was addressed to Deposit Money Banks (DMBs), IMTOs and the general public, stated that, “Further to the circular referenced TED/FEM/FPC/GEN/01/011 dated November 30, 2020, IMTOs are required to pay out the proceeds using the Investor & Exporter’s window rate as the anchor rate on the day of the transaction.
It said that with immediate effect, Naira will now be a payout option for receipts of proceeds of IMTOs.
The circular said, “Accordingly, all recipients of diaspora remittances through the CBN-approved IMTOs on the attached list shall henceforth have the option of receiving naira payment in addition to USD and eNaira as payout options. This regulation takes effect immediately. Please note and ensure compliance”.
To boost long term financing, the Central Bank of Nigeria (CBN) announced a reduction in the Cash Reserve Requirement (CRR) of merchant banks to 10 per cent from the current 32.5 per cent and which is set to take effect by August 1, 2023.
Furthermore, the CBN stated that the bank will take on strategies to address the demand pressure on the country’s exchange rate. At the just-concluded Monetary Policy Committee (MPC) meeting, Shonubi, while recognizing the current situation around the Naira, said “The market needs to find its level. There is pent-up demand which the market cannot cater to. Once we clear this demand, the volatility will normalise. We have started intervening, and we will continue to intervene until the market gets to our level.”
Shonubi further reaffirmed the apex bank’s commitment to gradually phase out the old N200, N500, and N1,000 naira notes while issuing new currencies. Providing updates on the demonetisation policy during the meeting, he clarified that the old notes would gradually be replaced over time.
“When a currency is printed and sent out, it is expected to go through a number of cycles and be replaced over time. That’s what we’re doing. We are slowly and over time replacing the old notes with new ones.”
The CBN’s approach is focused on maintaining an optimal level of currency circulation, ensuring a seamless replacement process without causing disruptions to the financial system”, he explained.
He further emphasised that the transition from old to new notes would be carried out without fanfare, allowing Nigerians to witness the gradual shift in the currency landscape.
Experts’ react
Reacting to the impact of the policies from the apex bank, the Managing Director, Financial Derivatives Company (FDC) Limited, Bismarck Rewane, noted that the free float of the Naira is the beginning of a process, adding that there are foundational and structural problems in the Nigerian economy.
Rewane said Nigerians are still in shock with the policies being implemented swiftly, adding that institutional reform is much more important than policy change.
He said, “There is a demand structure and then a supply structure. Because the supply was short and the price was manipulated downward, there was a gap and so what you have done is to move the price up so that excess demand will shrink and that automatically translates into an optimisation of supply. But again, that does not increase the supply of FX and so when people begin to take the seriousness of a policy, then they will bring in money gradually.
We are seeing the right things, doing some of the right things and eventually we will get to a point where our words, deeds, thoughts will all be aligned. Therefore, you will not need to tell everybody, the money will come in and that will give the supply” he explained.
Rewane who also doubles as an economic analyst, however urged the Tinubu led government to keep making right policy announcements, make personal changes, work with the right team and then eke out institutional reforms which will outlast various administrations.
He also called for a more structured interest rate as savings is a function of interest rate.
For his part, the Chief Executive Officer, Sofunix Investment and Communications, Sola Oni, stated that the policies under the CBN had been long-awaited policies as it is consistent with the manifesto of President Bola Tinubu.
He said, “A unified exchange rate will bring about a realistic exchange rate. It is a measure of price discovery. It will narrow the wide gap between the official and parallel market rate. This shall enhance market efficiency, stabilise the balance of payment and protect the economy from the risk of imported inflation among others.”
Oni pointed out that the stock market was already responding to the new policy of exchange rate unification as reflected in the rally on NGX in the last couple of days, while expressing confidence that the CBN is working hard to address the supply side of forex to avert a situation of uncontrollable exchange rate at this juncture.
Also reacting, the Chief Executive of Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, welcomed the bold step taken by the apex bank towards the unification of the naira exchange rate.
According to him, “the liberalisation of the foreign exchange market would unlock the huge potential for investment, jobs and capital flows. Investor confidence would be positively impacted.
According to him, the policy regime would reduce uncertainty and inspire the confidence of investors; as well as minimise discretion and arbitrage in the foreign exchange allocation mechanism.
“Rate unification does not imply that rates will be exactly the same in all segments of the market. The objective is to ensure that the differentials are very minimal, possibly between 5-10 per cent,” he stated.