‘Why Nigeria must adopt floating exchange model to meet forex obligations’

The Nigerian government must urgently adopt a floating exchange rate model that can converge all six different rates in the market to tackle the lack of forex liquidity in the system.

The Chief Executive Officer, Dairy Hills Limited, Kelvin Emmanuel, who stated this in Abuja, explained that the unfolding scenario should show the Central Bank of Nigeria (CBN) that despite its best efforts, companies that are into export, divert their Nigeria Export Proceed (NXP) proceeds to foreign accounts for the purposes of purchasing raw materials, capital equipment, as well as settling profit repatriation for funds trapped in the local currency.

According to Emmanuel, the memo International Air Transport Association (IATA) sent to the Nigerian government following the decision of Emirates airlines should be a warning on the impending capital flight of other multinational companies doing business in Nigeria.

He said it has become imperative to adopt a floating exchange model that can converge all six different rates in the market.

He argued that the implementation of multiple rate windows by the Central Bank of Nigeria (CBN) has deepened the confusion within the market and empowered the unofficial market window to thrive.

He further held that one of the most common misconceptions some people in the Nigerian government have about programmes designed to attract foreign direct investment, both speculative and non-speculative, is the idea that offering tax breaks and duty waivers can substitute for the lack of a forward guidance from the Central Bank on the exchange rate.

He stated that the multiple forex windows caused the face-off between foreign airlines and the government.

His explanation: “Nigeria today has six different rates, with the parallel market being the most reliable as most buyers are only able to find liquidity at the black-market window.”

“Emirate Airlines announcing that from Sept 1, 2022, it will ground operations totally from Nigeria following its inability to repatriate up to $85 million at the official rate, and the inability of airlines to repatriate up to $450m in ticket sales to the head treasury operations, is a very clear signal that the Central Bank is rationing its foreign exchange, the airlines have refused to go to the parallel market that has a N240 difference from the official market, and that will lead to an erosion of value by up to 58%.”

He maintained that one of the most important factors that institutional investors pay attention to in making decisions on whether to bring in long-term patient capital into an economy is not only the market structure and all the metrics that come with the total addressable market but the yield curve that shows them the ratio of the external risk of devaluation and inflation to their internal rate of return.

“That curve is a better predictor of whether it is a worthwhile venture to deploy capital or not, considering that the I&E window at the NAFEX markets is non-functional as a result of the lack of a yield curve from the lack of liquidity of market makers who due to an absence of forward guidance, are unable to calculate their risk exposure,” he said.

An Economist, Samuel Olaoluwa said the recent scenario is a worry saying, “how can an economy as big as Nigeria is fumbling with its foreign exchange regime? It is very clear now that the multiple exchange rate is meant to keep the ‘black market’ afloat.

“Importation into the country is no longer attractive because of the forex problem. Why is diesel the costliest fuel in the country? It is because the dollar used in importing it is sourced through the unofficial market. The unofficial and official markets have a differential of almost N250 per dollar. There is no economy in the world that I know of that operates such a disjointed system. I hope the CBN will be able to justify its decision to stick to these multiple windows even when we can all see that it is not working.”