New forex policy: Death knell for the naira?

Since the onset of the novel Coronavirus (COVID-19) pandemic about one year ago, Nigeria’s monetary and fiscal authorities have been churning out a potpourri of policies to deal with the dreaded pestilence and its impact, just like all other nations of the world. Unsurprisingly, some of the policy measures have been ill-digested, experimental, and hasty; again, just like in many other climes.

Yet, certain obvious peculiarities of Nigeria usually make its own challenges more telling and lingering. By default or outright mismanagement of resources, Nigeria has remained a mono-product economy, largely import-dependent and perpetually vulnerable to the vagaries and vicissitudes of crude oil market and its politics in the global arena. Economy diversification has remained a mere mantra or sing-song of successive governments in the country. Now we’re talking about effective diversification; that is, sectors of the economy other than crude oil and gas operating in ways that the export of their products substantially improve foreign exchange inflow into the Nigerian economy. It means having a ‘portfolio’ of exports that do not just augment inflow from oil sales but readily can sustain the economy even without oil.

At present, there is no effective diversification; and so, the health of the Nigerian economy still precariously hangs on oil price movement. So, with the crash of the price of crude oil owing to the virtual shutdown of the global economy ravaged by COVID-19, by second quarter 2020, Nigeria’s foreign exchange (forex) inflow almost dried up. Again, unsurprisingly, due to the economy shutdowns and collapse of supply chains, Nigeria and most countries of the world went into deep recession by the third quarter 2020.

The concomitants of this have been high and rising inflation rate (standing at over 16 per cent by February 2021, from about 11 percent a year ago); collapsed Gross Domestic Product (GDP) growth rate that is practically at zero level; sharply dwindling forex reserves as well as deteriorating exchange rate of the Naira against major currencies across the globe. Indeed, the monetary authorities had to ‘unofficially’ devalue the Naira twice in 2020; and within this first quarter 2021, the official exchange rate has been put at around #410/$1. Even at this rate the pressure on the local currency has been enormous and persistent, such that at the ‘parallel’ and ‘black’ markets, the exchange rate is fast inching towards #500/$1: meaning that, with one thousand Naira, you can at best, get only two US dollar!

Apparently alarmed at this pace of loss in value of the local currency vis-a-vis the dollar and others, the Central Bank of Nigeria late last year came up with a policy to encourage forex remittances to Nigeria from the Diaspora. The policy allows the beneficiaries of remittances the choice to be paid in dollar or the Naira equivalent (at the point of collection). For some reasons, the expected upsurge in forex inflow via remittances, courtesy of the new policy was not happening. Rather, the pressure on the local currency kept heightening, even, when, owing to the obviously unexpected rise in crude oil price since the dawn of 2021and forex inflow therefrom, some accretion to the external reserves was recorded.

And so, during a webinar jointly organised by the Risk Management Association of Nigeria and Moody’s Analytics of London early this year on ‘Economic and Risk Outlook in 2021’ for Nigeria and other African countries, the ‘accretion’ in Nigeria’s external reserves was loudly queried. The webinar moderator pointedly disputed the ‘rising reserves’ being flaunted by this writer, as a guest speaker. The query was pointing to the fact that many Foreign Portfolio Investors (FPIs) and Foreign Direct Investors (FDIs) are yet unable to ‘cash out’ and/or repatriate their dividends from Nigeria due to acute shortage of forex. Statistics show that the outstanding ‘un-repatriated dividends and earnings’ of the FPIs and FDIs amount to staggering billions of dollars in the past one or two years. Some, in fact, stuck, as it were, have had to ‘reinvest’ (that is, acquire more shares) their huge ‘un-repatriated dividends’ in their local subsidiaries here in Nigeria from where the dividends accrued. You may call it ‘investment by frustration.’ This scarcity of forex subsists, even as the first quarter 2021 is fast running out.

Apparently alarmed, again, by this incubus, the Central Bank of Nigeria came up with yet another policy to further encourage the inflow of forex via Diaspora remittances. Tagged “Naira for Dollar Scheme”, the new policy (an ‘experiment’ to last from March 8 to May 8, 2021) introduced a rebate of N5 for every $1 of fund remitted to Nigeria, through International Money Transfer Operators (IMTOs) licensed by the Central Bank. But one week into the implementation of the new forex policy, the naira is still experiencing serious decline against the dollar and other currencies.

In fact, by the trading week ended March 12, the naira was exchanging at N485/$1 at the parallel market and N415/ $1 at the Investor &Exporter forex window; thus, dashing expectations that the new forex management scheme will strengthen the local currency.

The point is that the new policy has unwittingly given the naira the leeway to be in a tailspin. In the first place, by allowing recipients of Diaspora remittances to be paid dollar (or any ‘hard currency’), the monetary authority is recognising those foreign currencies as legal tenders in Nigeria. So, beneficiaries of the remittances are at liberty to utilize their ‘hard currency’ in any way they deem fit, including round-tripping, arbitrage, and other speculative dealings in the forex market. Every beneficiary of remittances must now explore all options to maximize ‘gains’ from the ‘windfall’ occasioned by the “Naira for Dollar” experiment—even if only for the two month pilot run.

Now, with many ‘legal tenders’ in the Nigerian economy, the naira has lost a lot of value, worth and relevance. Given the persisting hyperinflation (at almost 17 per cent), the local currency has literally ceased to perform some of the critical functions of money, namely store of value and standard of deferred payment. It is now left with medium of exchange and unit of account (to some extent). And since the local currency no longer helps in storing value (or wealth), capital flight (by various methods) has since prevailed. So, to a large extent, what is reflecting in the ‘collapse’ of the naira is the consistent large-scale ‘exodus of financial assets and capital’ from Nigeria to other nations of the world.

Unfortunately, this ineluctable fate of the naira is intricately intertwined with the political and economic issues of the Nigerian state. The subsisting inclement investment climate, accentuated by socio-political upheavals is pointedly anathema to capital inflow and formation. Capital or money ‘flies’ to climes of stability and reasonable returns on investment. In other words, safety, security, and stability precede returns on investment. So, whither the Naira?

Okeke, a practising Economist & Consultant, lives in Lagos, Nigeria.