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Economists debate CBN’s shortcut to FX convergence

By Geoff Iyatse (Assistant Business Editor)
10 March 2021   |   3:44 am
The Central Bank of Nigeria (CBN) may have jettisoned the planned exchange rate convergence for quick fixes in the bid to stabilise the foreign exchange (forex) market...

Say naira for dollar promo is ridiculous
• Policy will create billions of inappropriate money
• Measure will worsen inflation
• Ask FG to unify rates, fix imbalances to achieve stability

The Central Bank of Nigeria (CBN) may have jettisoned the planned exchange rate convergence for quick fixes in the bid to stabilise the foreign exchange (forex) market.

This is coming about nine months after the Governor of the CBN, Godwin Emefiele, said the bank would continue to pursue FX rate unification programme around the Nigerian Autonomous Foreign Exchange Rate (NAFEX).

A source privy to the challenge in executing the exchange rate convergence told The Guardian yesterday the plan “is as good as dead” as the apex bank lacks the willpower to push through its plan.

Last year, The Guardian reported that the regulator faced overwhelming political pressure to end the multiple exchange rate regime, which experts said was partly responsible for the dwindling capital inflows.

In 2020, capital importation tumbled by 60 per cent, falling from $24 billion the preceding year to $9.7 billion.

Experts have warned that except the divergent exchange rates are harmonised, Nigeria will continue to remain uncompetitive in the global investment market as a huge differential between the official and parallel market rate remains very high at about N80 per dollar (about 20 per cent).

The apex bank has continued to fund the NAFEX, which is expected to lead the currency market liberalisation. The intervention restricts the official rates’ tendency to close up the wide gap with the parallel market, where naira currently trades at N483/$.

Each attempt by the exchange rate to exceed the N400/$ psychological level at NAFEX is muted by CBN’s intervention, forcing the true value of the dollar to retreat to what many experts have described as false price.

On the last trading day of December, the dollar gained value with the rate jumping to $410/$. Experts hailed the movement as a possible inclination towards the much-desired convergence. But at the turn of 2021, the apex bank intervened, forcing the dollar to retreat.

Since then, the bank has maintained its footprint on the NAFEX window, restricting the value of the naira to N390/$ and N415/$ band. On several occasions, CBN has intervened in the market to weaken a resurging dollar.

The official market can only close up with the black market if the unseen hand is allowed to run its course, said market operators. They also charged the CBN to pull the rug to allow forces of demand and supply to determine the appropriate value at the window to begin to have official rate foreign investors will consider as a fair deal.

But the Director-General of the Lagos Chamber of Commerce and Industry, Dr. Muda Yusuf, yesterday, said the official rate is gradually adjusting to close up the nagging differential, which is responsible for round-tripping and other profiteering practices. He said this at the ongoing 15th conference of the Institute of Chartered Accountants of Nigeria (ICAN), Western Zone.

The parallel market is widely considered as the closest to the free-market but, in principle, investors can only sell at NAFEX, where they often take a discount of as much as N80 per dollar.

As the unification programme falters, throwing the forex market into a web of instability and intrigues, the Central Bank has embarked on rather desperate options to save the naira from further fall.

On Monday, as the external reserve plummeted to $34.7 billion (the lowest in recent times), worsening the pressure on the naira, the Central Bank kicked-off what it called ‘CBN Naira 4 Dollar Scheme’, an initiative that would give recipients of remittances an extra N5 for each dollar received.

But experts have balked at the ability of the initiative to save the day with some describing it as an absurd, shallow and cosmetic approach to addressing a challenge that requires more creative thinking.

In a chat, a development economist, Dr. Chiwuike Uba, said the new policy could not increase the inflow of foreign currencies, which remittances are but a component.

“What we need now is a policy to improve our productivity and export capacity. Improving forex inflows from exports is a more sustainable approach to forex exchange stability. The CBN needs to allow the convergence of the multiple exchange rate regime by adopting a floating (flexible) exchange rate. The currently managed floating option has created more market frictions and distortions. The exchange rate market needs some certainty to jump-start and drive investments (domestic and foreign direct investments),” Uba noted.

The Vice-Chairman of Highcap Securities, David Adonri, described the forex promo as a panic measure, adding that it “portrays a frightening picture of the parlous state of the naira and, by implication, the economy. He said he could not understand the purpose of the promo, considering that the market is currently rallying.

“This unusual event is capable of eroding confidence in the naira, which can lead to further depreciation. It is not a sustainable strategy for boosting the supply of foreign currency,” he warned while suspecting that the expanded monetary policy adopted to get the economy out of recession could have been fighting back, triggering the new measure to shore up FX.

“Nigeria’s Forex market is one of the most primitive in the world. It operates with multiple exchange rates, most of which are administratively fixed. This leaves the market at the mercy of corruption, shady deals, rent-seeking, and allocation inefficiencies. The administrative misallocation of forex by the CBN prevents the financial economy from maximally impacting production that can boost exports.

“Clarion calls by stakeholders for CBN to streamline trading in forex to recognised exchanges, where exchange rate can be uniform and market-determined, has persistently fallen on deaf ears. The market mechanism will unify the rates and eliminate rent-seeking. It will facilitate allocative efficiency in the application of forex and lead to conservation of funds,” the financial expert said.

Adonri said the naira for dollar promo could increase remittance inflow in the short-run but remained unsustainable. He also said retaining investment is as important as attracting fresh investment and that the country has not done much on the former.

Efforts, he stressed, must be taken to restructure the economy to force a dynamic equilibrium without panic measures.

Prof Godwin Owoh, an applied economist, said it was most unfortunate the CBN could descend so low in its approach to addressing serious monetary issues. Owoh said the promo would worsen the inflation rate and add to the volume of money in circulation.

“Unfortunately, the money is not appropriated. It means the country will print the money, unearned money to distribute in the name of the promo. Does the CBN have the power to create money at will without recourse to existing laws,” Owoh asked.

Fitch and the International Monetary Fund (IMF) warned that the rising government’s overdrafts with the CBN were a major distortion in the economy. Interestingly, the CBN has not put a timeframe on the promo; hence it could run as long as it deems it necessary in its FX management template.

As noted by Owoh, the N5 for a dollar promo could increase the money supply in tens of billions of naira in a year. In 2019, over N17.5 billion was officially remitted to the country. If the same amount were wired to Nigeria between now and the end of the year, an unappropriated N87.5 billion would be created.

But Dr. Yusuf, who said the management approach of the apex bank had worsened the crisis in the currency market, said the fact that attention has shifted from the fixation on the demand to the supply-side was good news. He, however, said exporters equally need the kind of incentive extended to the remittance market to boost liquidity at the Investors and Exporters’ (I & E) window.

Yusuf, an economist, lamented that the FX crisis “is a major challenge limiting the productivity of the manufacturing sector,” disclosing that manufacturers sometimes apply for $100,000 for input or equipment purchase only to be given N10, 000.

MEANWHILE, remittance incentive has become a major competitive frontier for money deposit banks (MDBs), which have commenced aggressive marketing to outsmart one another. Barely three days into the programme, customers were inundated with a media campaign and personalised messages on why they should choose some banks for remittance services.