Nigeria loses N8tr to FX arbitrage in three years
• Realistic exchange rate will add N4tr to federation account in 2023, says Yusuf
• Ex-CBN Director: It’s not intervention but outcome of regulatory control
• Three years after, rate harmonisation still illusion
• FX inflow dwindle as dollar demand pressure continues
From 2020 to last year, Nigeria lost, at least, N8 trillion to rent seekers who explore the multiple rates in the foreign exchange (FX) market to rip off the country, data obtained by The Guardian yesterday have shown.
This came as the Central Bank of Nigeria (CBN) continues to dilly dally on the exchange rate convergence, three years after it promised same.
Dating back to the 1980s, Nigeria’s FX stability has buckled under multiple rates, a challenge that has led to speculative trading, rent seeking and other market manipulations.
The market arbitrage (difference between the official and parallel market has widened in the past three years from N100 per dollar or about 30 per cent in 2020 to over N400 per dollar (above 100 per cent) sometime last year when the black market rate spiked to N880/$.
Development institutions, including the International Monetary Fund (IMF), are wary of exchange rate differential in excess of five per cent and warn that such could trigger unhealthy manipulation that could negatively affect other efforts on market stabilisation.
From 2020 to 2022, the CBN spent about $42 billion intervening in the foreign exchange market to stabilise the naira. The amount was sold to the end-users, including students and tourists, at the official rates, which are way off the effective exchange rate of the naira.
According to the Financial Stability Report, a publication of the CBN, the apex bank sold $9.2 billion in the market in the first half of last year. Full data for the second half are not available, but the annualised value is assumed to have surpassed, especially with the level of social and economic activities associated with the second half.
Whereas the black market rate averaged N650/$, the pseudo official window rate (the Investors and Exporters (I &E) window finished at suppressed N447/$ on average. That puts the arbitrage at N203/$, pushing the CBN’s FX subsidy in the year to about N3.65 trillion.
In like manner, 2021 FX intervention left a hole of N17.5 trillion in the country’s external reserves. At an average arbitrage of N160 per dollar, the country frittered about N2.62 trillion the end-users would have paid if they bought at the more accessible parallel market. Then, the moving average of the exchange rate was N400 as against N560 it exchanged at the parallel market.
Though the CBN has dismissed the parallel market as a reference point of the true value of naira, some experts see it (being the most accessible to end-users) as the closest to the true market.
The CBN had to adjust the official rate three times in 2020 as the country battled impacts of the COVID-19 crisis, which created a gaping hole in its foreign earnings. The year popped at N307/$ but three months into the year, the rate was adjusted to N361/$ and moved up by plus N20 towards year-end, putting the average official exchange rate at N350 per dollar.
As for the parallel market, the price oscillated around N450/$, which translates to an arbitrage of N100 per dollar. With the total FX sale by the CBN pegged at $17.5 billion in the COVID-19 year, as it were, the difference between what the CBN realised from the sale and the market value was N1.75 trillion.
In his prepared analysis on the impact of FX subsidy, which was shared with The Guardian yesterday, Dr. Muda Yusuf, a private sector thought leader and advocate of a free market, said a realistic exchange rate regime would add N4 trillion to the Federation Account. He decried the CBN FX sale programme, saying it constitutes an enormous burden to the economy and public finance.
Nigeria is facing an all-time tight fiscal space. This year’s budget is stuffed with over 50 per cent deficit, even in the face of spurious revenue projections. The Federal Government is contemplating an additional loan of N8.8 trillion to support funding of the budget, which could raise its outstanding liabilities to nearly N80 trillion.
Yusuf, the Director of the Centre for Promotion of Private Enterprise (CPPE), said FX sale is the next burden to PMS subsidy that has encumbered the government. In 2023, PMS subsidy is projected at N3.36 trillion or 15.4 per cent of the total spending envelope. Except the social safety net is removed at the end of the first half, as envisaged, it could gulp twice as much this year alone.
“The Nigerian economy is heavily burdened and encumbered by two major subsidy regimes: the fuel subsidy regime and the foreign exchange subsidy regime. Huge sums of revenue can be unlocked from these subsidy regimes if appropriate reforms are implemented.
“Already, there is a plan to discontinue petroleum subsidy, which is a positive development. This action would unlock a minimum of N6 trillion in revenue into the federation account yearly. Additionally, there would be an end to the several years of plundering of the nation’s resources through the subsidy regime.
“The next administration would need to demonstrate the political will to put an end to this predatory practice,” Yusuf said.
He identified FX intervention, which is allocative and creates room for inefficiency, as the second major subsidy regime where huge revenues can be unlocked as the country grapples with policy options to survive the fiscal falling knife that befalls it.
He said the negative impacts of FX subsidy have been grossly understated in recent years, leading to a loss of trillions of naira that would have accrued to the Federation Account.
“These are a huge loss of revenue to foreign exchange subsidies which are as damaging to the economy as the fuel subsidy. But curiously, the National Assembly and the CBN had seriously, grossly and inexplicably underestimated the exchange rate benchmark in the appropriation bills of the past few years.
“For an economy that is burdened by a huge fiscal deficit and unsustainable debt obligations, this should not be allowed to continue in 2023. The reality is that forex end-users are paying well over N700/$ for their business transactions. Selling government forex at less than N500/$ is inexcusable.
“The exchange rate assumption in the budget should be immediately reviewed to reflect exchange rate realities and boost revenue to the federation account. This could be done within the framework of the Finance Act, which is, fortunately, being reviewed. A realistic exchange rate benchmark would boost the federation account revenues by about N4 trillion in 2023,” the economist said.
The 2023 budget exchange rate benchmark is N435.7/$, which is an N11.52 discount of the current I&E window. It is almost N300/$ behind the parallel market rate.
Yusuf said a more realistic benchmark would not only benefit the Federal Government but the sub-national and local governments that draw from the Federation Account.
He added: “Unlocking revenues from the forex subsidy would be a significant major step towards realisation of the fiscal consolidation objective of the government.
“This would also reduce the current tendencies to impose an additional burden of taxation on businesses and moderate macroeconomic headwinds.
“It should be stressed that this is not a devaluation proposition. It is a strategy meant to correct distortions in the forex ecosystem, boost government revenues, curb corruption in forex transactions and enhance liquidity in the forex market. It will also improve efficiency in forex allocation, promote transparency in the forex environment and raise investor confidence in the Nigerian economy.”
Currency brokers, middlemen and other rent seekers are the ultimate beneficiaries of the unreasonably huge arbitrage opportunities, a reason the CBN, two years ago, stripped the BDCs of the weekly funding. Historically, the gap has created room for round-tripping and other official manipulations.
A former deputy director of the apex bank, Stan Ukeje, is among experts who have taken a firm position against continuation of a multiple exchange rate regime.
Yesterday, he told The Guardian that there was nothing in the allocation of dollars that is similar to what is considered an intervention in other climes.
He stressed that the CBN, which has stressed its commitment to rate harmonisation, is a victim of “regulatory capture”, a similar problem other institutions, including the NNPC Limited and the National Insurance Commission (NAICOM) have faced.
In an ideal system, he said, the monetary system sells or buys dollars to prevent extreme volatility rather than a system where the regulator consistently suppresses the direction of the market with supply. He also decried the wide arbitrage, saying it is a major distortion and causes much manipulation.
“In our case, we are always supplying but never buying. Even a monopolist does not control both supply and price. It is not done anywhere. But if left alone, the CBN knows what to do. But there is obviously a regulatory capture, and this affects all regulatory institutions in the country,” Ukeje noted.
The former central banker had said the current structure of the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) could not restore sanity and act as market clearance, except it is liberalised to accommodate other traders.
Also speaking, an investment banker, David Adonri, described the arbitrage as a major loss and leakage. With the CBN always resorting to external reserves to fund the intervention, he said the Federal Government and Nigerians are the major losers.
He also said the CBN must be a buyer and seller while the market is liberalised to operate like the stock market to achieve sanity.
While some of the beneficiaries engage in round-tripping, thus cashing out their profits, some of the end-users, such as students, use subsidised FX to pay their tuition and other expenses only to stay back in Europe and America after their schooling and contribute to building other economies.
The CBN top officials and board have, at some point, contemplated stopping or restricting some categories from the end-user window to conserve the country’s FX but backed out because of the likely backlash. Some industry experts have attributed the current ordeal faced by the governor, Godwin Emefiele, to the courageous ousting of BDCs from the retail market.
In other countries, currency trading institutions play a clearing role – buying and selling at almost equal proportions. But with the majority of the sellers opting for more rewarding black market deals, Nigeria is an exception.
For instance, CBN’s total purchases in 2020 were $3.468 billion as against the $17.51 billion it sold, putting the net outflow at $14 billion. In the first half of last year, the apex bank received a total inflow of N1.33 billion from international oil companies (IOCs) majorly; the figure was 14 per cent of its total allocation (N9.23 billion) in the two quarters.