From Uche Usim, Abuja
Last week, the Central Bank of Nigeria (CBN) Governor, Dr Yemi Cardoso, shortly after his confirmation by the Senate, winked at local and foreign investors to come to the country as a conducive operating environment awaits them.
He pledged to reset the apex bank, saying it would ride on its statutory functions to address identified distortions in the foreign exchange market and other systemic tremors, currently dissuading investors from coming in.
He said on his watch, the new management team at the Bank will do its best to demolish the impediments to liquidity as it has become a major headache for all.
While disclosing plans to formally unveil his agenda for the monetary and financial sector in the days ahead, Mr. Cardoso stressed the importance of credibility and transparency in implementing the Bank’s monetary policy. To achieve this, he said the Bank would focus on strengthening its data-gathering system to ensure that only verifiable data will be relied upon for evidence-based decisions. According to him, the CBN would also adhere to rules that are known, acceptable and transparent for the conduct of monetary policy.
Cardoso said his team has a short-term goal of addressing structural issues within the financial system that gave rise to the liquidity challenge in the first instance.
He assured that the relationship between the monetary and fiscal authorities would be cemented as there would continue to be consensus between both authorities to harmonise their positions on the interest rate and inflation. He, however, said the Bank would remain open to different views in its push for greater transparency.
The CBN Governor revealed that the Bank would only provide strategic policy support to critical sectors of the economy while allowing experts to take charge of such critical sectors, given that the expertise lies within other relevant agencies.
Cardoso assured that the relationship between the monetary and fiscal authorities would be cemented as there would continue to be consensus between both authorities to harmonise their positions on the interest rate and inflation. He, however, said the Bank would remain open to different views in its push for greater transparency.
He said the Bank would only provide strategic policy support to critical sectors of the economy while allowing experts to take charge of such critical sectors, given that the expertise lies within other relevant agencies.
Nonetheless, the journey to rejigging the FX market actually commenced on June 14 when the apex bank junked the naira subsidy regime and floated it instead.
Experts applauded the development as there was the need to determine the true value of the naira instead of giving it a false value.
The CBN also announced a unified foreign exchange (FX) rate; thus channeling every request for FX to the Investors & Exporters (I&E) window.
The financial markets reacted immediately with naira tumbling from N471 per dollar the previous day to N755 on the day the announcement was made.
Today, naira has crossed the thousand naira threshold, in what analysts described as frightening and a death knell on Nigerians.
Nigeria operates four foreign exchange (FX) markets: the Interbank FX market, the Investors and Exporters (I&E) window, Bureau De Change (BDC) window and the Small and Medium Enterprises (SME) window.
But with the new arrangement, all the four have collapsed into the I&E Window, as market forces of demand and supply, not CBN’s interventions, will henceforth determine the true value of the naira.
This move is in tandem with President Bola Ahmed Tinubu’s plan to urgently remodel the nation’s monetary policy structure and carry out some “house cleaning”.
However, the debate of defending or floating the naira has been a long one among finance experts.
Former President Muhammadu Buhari, in his eight-year tenure, fought to defend the naira.
However, it became glaringly unsustainable after the global oil crisis of 2016 jolted Nigeria and to insulate the naira from a wide-margin devaluation, multiple exchange rates were introduced, which does not sit well with President Tinubu.
The new president believes that a unified interest rate will attract offshore and local investors, especially as the country struggles to fund many developmental projects, including the national development plan of N340 trillion, out of which the federal government will only provide a capital of N50 trillion (15 per cent of the facility).
With the rate unification, as announced by the Director, Financial Markets of the CBN, Dr Angela Sere-Ejembi, applications for medicals, school fees, BTA/PTA, and SMEs would continue to be processed through deposit money banks at the prevailing market rate.
There has also been the re-introduction of the “Willing Buyer, Willing Seller” model at the 1&E Window where an entity with demand for FX seeks out another entity with FX to sell at a mutually-agreed price through an authorised dealer. Operations in this window shall be guided by the extant circular on the establishment of the window, dated 21 April 2017.
Here, all eligible transactions are permitted to access foreign exchange at this window.
Under the new arrangement, the operational rate for all government-related transactions would be the weighted average rate of the preceding day’s executed transactions at the I&E window, calculated to two decimal places. Simply put, it is a summation of volume of FX traded multiplied by the various rates at which the deals are consummated, divided byt otal volume of trade.
Again, the CBN says deposits into domiciliary accounts will not be restricted, and customers “shall have unfettered and unrestricted access to funds in their accounts”.
Other new rules include; proscription of trading limits on oversold FX positions with permission to hedge short positions with OTC futures. “Limits on overbought position shall be zero. Re-introduction of order-based two-way quotes, with bid-ask spread of N1. All transactions shall be cleared by a Central Counter Party (CCP).
Reintroduction of Order Book to ensure transparency of orders and seamless execution of trades.
There is also a cessation of RT200 Rebate Scheme and the Naira4Dollar Remittance Scheme, with effect from 30 June 2023.
Analysts note that the success of these policies will also depend on addressing current economic problems such as inflation among other fiscal reforms. There are worries that adding the naira adjustment pains to the recent subsidy removal will be too hard for citizens to take in. However, the International Monetary Fund (IMF) has welcomed Nigeria’s unified market-reflective exchange rate regime.
The IMF Resident Representative in Nigeria, Ari Aisen, in a statement on Friday, noted that the Fund would give the country every support necessary to succeed.
The IMF said the development is consistent with its long-standing recommendation which will bolster the country’s economy.
The Centre for the Promotion of Private Enterprise (CPPE) has set a 10-point agenda for the new CBN management.
The Director General of CPPE, Dr Muda Yusuf, revealed that the most urgent task is restoring confidence in the foreign exchange market.
Others are; deepening the financial system; efficiency of the financial system; capital requirements for banks; ways and means financing of fiscal deficit; naira redesign policy; concentration risk in banking sector; stakeholder engagement; corporate governance and tenure and cost of funds in the banking system.
As regards sanitizing the foreign exchange market, Dr Yusuf said: “There is a serious confidence crisis in the foreign exchange market fueling an unprecedented speculative onslaught on the naira.
“The economy is grappling with severe adverse effects of depreciating exchange rate, soaring energy costs, ravaging inflationary pressures, huge backlog of foreign exchange obligations that need to be cleared and debt service obligations that need to be redeemed.
On ways and means of financing the fiscal deficit, he said it must be kept within statutory limits to avoid the damaging impacts of high-powered money on the macroeconomic environment. With regards to the naira redesign policy, Dr Yusuf said it should be suspended indefinitely. “It should not be a priority at this time. There was really no compelling argument to undertake the naira redesign in the first place.
“However, the momentum for the cashless economy should be sustained without resorting to the crude methodology of cash confiscation adopted by the previous dispensation in the CBN. The approach was very disruptive and inflicted unbearable hardships on businesses and the citizens”.
He also spoke about the tenure of funds in the country’s banking system, saying it is extremely short.
“Over 85% of deposits in the banking system are less than one year tenure. This maturity structure of funds cannot support economic growth. What it means is that long term investment cannot be supported by our banking system.
“Doing so will result in serious mismatch of tenure which could pose a risk to the banks’ stability. In 2021, the banking industry recorded a negative asset -liability mismatch of N45.6 trillion, according to the NDIC. This is not healthy for the banking system and the economy”, he said.
Also commenting on exchange rate unification, Prof Uche Uwaleke, Nigeria’s first professor of the capital markets, called for caution, even as he said that the unification of exchange rates makes for a more transparent forex market.
“I think that the CBN should implement that in a way that does not cause massive distortions in the general price level.
“In this regard, a sudden free float of the naira is not advised given that the economic fundamentals required to support a naira float are still very weak especially in relation to sources of forex.
“It’s rather early to bank on sustainable capital inflows from foreign direct investments due in part to insecurity and the overall unconducive environment of doing business in Nigeria.
“This sudden naira devaluation may draw foreign portfolio investments which is part of the reason the stock market is surging.
“But we also know that portfolio investments are hot money and do not represent a sustainable source of forex inflows.
“In consideration of this therefore, I would advise that the unification of exchange rates should not be a one step process but should be implemented over a period of time however short it may be.
“Empirical evidence suggests that reforms are more successful when they are sequenced and implemented in phases. This is against the backdrop of the oil subsidy removal which, taken together, can result in galloping inflation and rising poverty level.
“So, while fiscal and monetary policy reforms are welcome, absolute care should be taken to strike the right balance and minimize their unintended consequences”.