The foreign exchange market plays a crucial role in any nations’ economy. For many, it is a microcosm of the economy; just as experts have described it as a magnet that attracts investors into their destination of choice; BENJAMIN UMUTEME writes.
There are many factors that attract foreign investments into a country. From a government’s favourable legislation and political goodwill, to having and maintaining a good transport and infrastructure network to help transport products and raw materials to marketplaces.
Also, investors look at the tax rates as they are always on the look-out for countries with lower tax rates. And most importantly, a weak exchange rate is ideal for foreign investors because it is cheaper for investors and companies to buy assets.
And this is the challenge before Nigeria’s fiscal and monetary authorities as over the years, the country’s FX market operated on several rates, which distorted the market and with genuine business men unable to access the dollar while engaged in buying and selling of the greenback.
Setting the stage
In his inauguration speech, President Bola Tinubu had set the stage for the reforms in the FX market when he said that his administration will review all complaints and various anti-investment inhibitions.
“We shall ensure that investors and foreign businesses repatriate their hard-earned dividends and profits home,” he said.
Speaking further, Tinubu insisted that the Central Bank of Nigeria must ensure a unified exchange rate.
According to the President, “This will direct funds away from arbitrage into meaningful investment in the plant, equipment and jobs that power the real economy.”
Walking the talk
And true to his words, the CBN under the then acting CBN Governor, Folashodun Shonubi, decided to float the naira instead of the multiple exchange rates under former Governor Godwin Emefiele.
Formerly, the country operated four foreign exchange markets, namely, the Interbank FX market, the Investors and Exporters (I&E) window, Bureau De Change (BDC) window and the Small and Medium Enterprises (SME) window. With the managed float introduced by the Apex Bank, all four were 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.
The idea behind the new policy direction is for the naira to find its real value instead of the government having to defend it against major currencies.
The new direction by the Apex Bank saw the naira tumbling from N471 per dollar at the official rate to about N755, and presently, it has crossed the one-thousand-naira threshold.
The implication of this is that businesses are finding it difficult to operate smoothly. Thus, many have been forced to shut down due to their inability to access FX.
Conducive business environment
After his screening and confirmation, CBN Governor, Dr. Olayemi Cardoso, on his first day in office did promise that a conducive business environment awaits any local or foreign investors that plans to make Nigeria their investment destination.
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 assured the Bank’s new management team will do its best to address the drawbacks to FX market volatility stressing that credibility and transparency shall be his watchword as he implements the Bank’s monetary policy.
Explaining further, the new CBN helmsman said a data-centric approach would be adopted 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.
Boosting policy
Some of the measures taken so far to give fillip to the rate unification would still see applications for medicals, school fees, BTA/PTA, and SMEs being processed through deposit money banks at the prevailing market rate. Added to this is the re-introduction of the “Willing Buyer, Willing Seller” model at the 1&E Window that allows buyers and sellers to mutually-agreed price through an authorised dealer.
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 by total 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 CounterParty (CCP). Re-introduction of Order Book to ensure transparency of orders and seamless execution of trades.”
Experts speak
Professor of Finance and Capital Market, Uche Uwaleke, while acknowledging that Nigeria’s weak economic fundamentals would make it difficult for a complete float of the naira said that the only “sustainable solution to deal with the liquidity challenge in the forex market is to have multiple streams of forex comprising export proceeds and foreign investments.
“On the demand side, I support the idea of curbing dangerous currency speculation by making the trading in forex outside the Banks and BDCs illegal. By doing so, the CBN can be in a position to monitor activities in the forex market.”
Uwaleke further said 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 minimise their unintended consequences,” he said.
For his part, financial expert, Solomon Adebayo, said that to address the liquidity issues in the FX market, the government should convert all dollar deposits in banks to Naira.
According to him, the country’s economy is dollarised and it was not good for the economy and for national security.
“Discourage incentives to keep dollar deposits, the demand will fall immediately. The socio-political fallout would be managed by politicians. That’s what they know how to do well. I believe Nigeria must survive first before anything else.
“The currency problem is not just a supply problem. There is a demand angle to it. So we have a system problem. The CBN has the data on the ever-increasing dollar deposits and Investment being made by Nigerians. Let them act boldly, decisively and in the interest of the country.
“Allow local banks to manage FX reserves. Allow local banks to manage at least 40 per cent of FGN FX reserve in export-oriented products, Eurobonds, dollar denominated selective investment schemes. This includes Medical Tourism, Eco Tourism with FX cash flow generating potential.
On his part, the Director General Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, said there was a need to sanitise the foreign exchange market in order to restore investors’ confidence.
“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.”
