The flexible foreign exchange rate policy recently adopted by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) could be a step in the right direction if it is transparently managed and freed from undue influence and control. The liberalisation policy is one of the outcomes of the two-day meeting of the apex bank’s highest decision-making organ in Abuja.
One of the immediate implications of this decision announced by the CBN Governor, Godwin Emefiele, is that the former forex policy, which placed the Naira at a fixed rate against other major foreign currencies such as the United States Dollar, the British Pound and the Euro, will give way to the forces of demand and supply. The market will henceforth determine the true value of the Naira and its exchange rate at both the interbank and parallel windows.
This is a major policy shift, which experts expect to bring about a convergence of the two market rates. The gap between the two had widened considerably, thereby creating arbitrage for the privileged few who got forex allocation at the official window only to sell it at the parallel market at astounding profit margins.
However, in spite of the new plan, the CBN Governor said that a small window will be retained at the subsisting official window for the funding of critical transactions to boost industrial development as well as drive government’s diversification plan. In other words, a certain amount of forex will still be sold at the official interbank window for the funding of very important industrial activities. The CBN had pegged the naira at N197 – N199 per dollar since March 2015. But last Monday, the Naira crashed to N285 to the Dollar at the interbank market. The continuing fall in the value of the Naira contributed to the contraction of the economy in the First Quarter (Q1) of 2016 to an all-time low of 0.36 percent.
According to the latest figures from the National Bureau of Statistics (NBS), this negative growth represents a drop of 2.47 percentage points in output from the 2.11 percent recorded in the last quarter of 2015, and 4.32 percentage point lower than the 3.96 percentage recorded in the corresponding period of 2014.
Under the flexible forex plan, Bureau De Change (BDC) operators who have been agitating for sourcing of their forex at the official window will continue sourcing their requirements at the autonomous market.
Although it may be too early in the day to fully assess the impact of this new policy on foreign exchange rates, it could signal better days ahead. It should, at least in the interim, address the high rate of disparity and attract inflows. It will also likely help to correct some of the existing structural imbalances in the two markets.
The policy could also involve the introduction of a dual-rate system, with the naira trading at a market-dictated level, while the Central Bank continues to make foreign currency available to some importers at a discounted rate. At the moment, some investors are reportedly steering clear of Nigeria. This is said to be slowing down economic growth, as the NBS figures have shown.
We urge the CBN to closely supervise the implementation of this policy to avoid a backlash. The foreign exchange crisis is said to be pushing some local manufacturers into the export market, as they struggle to earn forex that they need to import raw materials. Reports also show that even manufacturers that are in the export business are now registering more products for export, as dollar earnings become more attractive as the value of the naira continues to depreciate.
The new forex policy may, indeed, have come at the right time, considering the multiple challenges that the economy is facing. These challenges have made it imperative for the CBN to steer the economy away from imminent recession. The fear of a recession has become quite real since the nation has recorded two consecutive quarters of negative growth.
We urge the CBN to initiate more far-reaching monetary policies that will check soaring inflation which now stands at 13.7 percent, and institute other measures that can shore up the value of the naira against the major foreign currencies. The growth of the economy depends on the CBN’s ability to develop sound monetary policies that can effectively address the challenges facing the country. But the government should also design fiscal measures that can complement the CBN’s initiatives.
Some of the current problems such as the delay in the passage and implementation of the 2016 Budget, energy shortages and the hike in electricity tariffs and fuel price, are compounding economic woes in the country. What is urgently needed now is better synergy between the monetary and fiscal authorities, to stimulate economic growth. Above all, greater transparency and accountability are required in the management of our forex rates if Nigeria is to achieve the desired objectives. Nothing less is expected from the CBN.