By Chinwendu Obienyi
At the outset of President Bola Tinubu’s administration last year, the Central Bank of Nigeria (CBN) announced the unification of the exchange rate to adopt an imperfect free float exchange rate based on the market forces principle.
The decision was greeted with mixed feelings in the finance sector. Some experts insisted the move was hurtful and the other divide said it was fruitful.
The policy sprang from the statement made by President Tinubu in his inaugural speech on May 29, 2023, where he said that the monetary policy needed thorough house cleaning and insisted that the CBN must work towards a unified exchange which in turn will direct funds away from arbitrage into meaningful investment in plant, equipment and jobs that will power the real economy.
Reacting to the President’s speech, the apex bank swung into action by lifting restrictions at the official window to allow banks trade freely (as it collapsed all segments of the foreign exchange market into the Investors’ and Exporters’ window).
Owing to this action, the value of the naira depreciated at the official window from N474/$1 traded before the announcement to N664.04/$1 at the official window while it gained N5 at the parallel market to close at N755/$1 from N760/$1.
Since then, there has been an undoubted impact (pros and cons) of the policy on the economy.
For example, the Central Bank under the leadership of Olayemi Cardoso has simply gone about making the market transparent to attract investors who had previously fled the FX market owing to the multiple exchange rates which were in existence under former President Muhammadu Buhari.
From rolling out a number of initiatives such as the suspension of the ban placed on 41 items to the recapitalisation directive to banks, multiplicity of several circulars and clearance of the FX backlogs, the bank’s reforms have boosted portfolio investors’ confidence.
Prof Ndubuisi Ekekwe, Founder of Tekedia Capital, in a recent tweet on his official X handle, said it was premature for the naira to be floated because the country does not have economic life rafts to buoy it when global tempest arises.
“As I noted 12 months ago that floating naira will destroy the naira and the economy, Nigeria has to return to the old model (fixed exchange rate) because the naira is not matured to be floated as we do not have a lot of economic life jackets to help it in the international currency seas.
“We can pick N1,000/$ as the official exchange and go with it! If the president makes that speech today, the paralysis will calm down. The biggest challenge today is not that the naira is exchanging at N1,500 or N1,400 to $1, the issue is that the volatility will make it impossible for companies to plan and investors to invest. The exchange rate stresses the traders and speculators, but for investors, volatility kills their plans.
“So, pegging naira will deal with that volatility at least for contracts to be worked out in boardrooms”, he said.
However, speaking during the last Monetary Policy Committee (MPC) meeting last month, the CBN Governor, Yemi Cardoso, noted that investors were responding positively to the bank’s transparent reforms, adding that the country has experienced a continuous and renewed interest of investors.
“We have had consistent dialogue with investors and try to make the market more transparent in which I can tell you that they are responding positively to the transparency initiatives we have rolled out. The distortions that we all know about which had resulted in multiplicity of different circulars to address the issue has helped in no small measure. We even had to give priority to clearing the FX backlogs to ensure we give more confidence to investors who want to invest”, he explained.
He added that the recent Fitch ratings gives more confidence to the fact that the apex bank’s transparency initiatives are indeed working while noting that foreign direct investments (FDIs) can come in if managed consistently.
Similarly, the performance of the country’s non-oil export sector has indicated massive potential for growth and economic diversification.
According to the Nigerian Export Promotion Council (NEPC), Nigeria attracted the sum of $4.5 billion from non-oil exports in 2023.
Furthermore, the Council stated that the volume of non-oil exports continued to increase over the years with 6.68 million metric tons of exportable products last year, thereby reaffirming the widely held assertion that the sector holds the key to economic revitalisation.
The move to introduce a unified market reflective exchange rate regime, according to the International Monetary Fund (IMF), is commendable as this has translated to a stable macroeconomic environment.
“Directors welcomed the removal of foreign exchange market distortions and encouraged the authorities to continue improving the functioning of the FX market, including by adopting a well‑designed FX intervention framework”, the IMF said.
However, the harmonization of the FX rates have resulted in an increase in the cost of imports, leading to higher inflation (currently at 33 per cent).
Also, the transition has led to significant adjustment costs for businesses and consumers who have been accustomed to the previous system with companies also needing to renegotiate contracts and adjust pricing strategies.
For example, food inflation, according to the National Bureau of Statistics (NBS), is currently standing at 40 per cent, owing to sustained rise in the price of staple food items in the market.
Worse still, the country is more susceptible to external shocks such as fluctuations in global oil prices or geopolitical events, potentially leading to volatility in the exchange rate.
Head, Financial Institutions Ratings at Augusto&Co, Ayokunke Olubunmi, explained that there is going to be a situation in which the market would suffer volatility.
According to him, though the harmonization policy was a good one, the main challenge remains that Nigeria does not have an adequate supply of FX.
“The reason is that the price does not reflect the fundamental price of naira. It is good that the CBN did not peg it but floated it. Recall that in 2016 there was a forex policy that was designed but was not implemented. But if this is implemented as planned you would see a lot of forex that was outside the market come back inside. Also, those that were hoarding dollars would drop.
“Firstly, you would see that demand would drop but also those that want to legitimately buy would have access to it” he said, adding that a lot of exporters who have their monies outside the country would be encouraged to bring back their funds.
“It might take some time for the market to stabilise, but it is a good policy. The official rate would go up but the parallel rate would also drop.”
Also speaking, the Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, welcomed the bold step taken by the Tinubu administration 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.
The policy regime, he stressed, 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.
“Improved export competitiveness and better management of imports could positively affect Nigeria’s balance of payments, reducing the current account deficit”, He explained.
For many analysts, the harmonization of FX rates by the CBN is a critical policy measure with the potential to significantly transform Nigeria’s economic landscape. While it comes with certain risks and challenges, the long-term benefits of increased transparency, improved investor confidence, and economic efficiency could outweigh the initial costs and disruptions. Effective implementation and supportive policies especially from the fiscal authorities will be crucial to maximizing the benefits of this reform.