NIGERIA has officially floated its currency after many years of multiple exchange rates, which many financial experts viewed as lacking a good direction for investors to bet on the economy.
President Bola Tinubu has taken steps on unifying the country’s multiple exchange rates and scrapping a costly petrol subsidy regime as the most immediate tasks within the first two weeks of his Presidency.
The moves are being cheered by many players in the financial markets.
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Already, the markets have resounded positively to these bold reforms, but analysts warn there are consequences.
Economic watchers believe that what is going on now is a swift convergence of the rates, meaning that the exchange rate, which is the price, would trade closely with market-determined rates.
Senior analyst, Financial Derivatives Company, Dumebi Oluwole, said that the implications to Nigeria’s exchange rate is that prices would be more reflective of whatever that is happening in forex demand and supply.
“The issue with the forex market is that supply has not been able to meet demand. Companies, individuals, and even the government will now access forex in market-determined rates,” Oluwole said.
How businesses will respond to the unification
Already, businesses have been using blended rates to get fired up at the parallel market, findings have shown.
Dumebi, however, said the rates unification move has implications.
“We won’t see so much change in the price that they will get forex. What we will see is change in the accessibility, and speculation would be weak,” she said.
She added, “Such commodities like pasta, noodles, and foreign rice are going to see an uptick in their prices. Most imported products will experience an uptick in the prices till local production is incentivised and our oil production remains appreciably stable.”
She noted that remittances and foreign direct investments would experience an appreciable surge once the government sustains consistency in policy.
“It is also expected that cross-border transactions with other countries will be easier and will support forex supply,” she said.
Issue of round-tripping will be addressed
To many economic watchers, a framework that is more transparent and will remove the unwholesome practice of round-tripping and associated corruption around foreign exchange markets has been established and needs to be sustained.
“The former official price of N416 was not accessible as many people sourced their foreign exchange from the parallel market despite the wide gulf between the official and the parallel market rate,” an economist and chief executive officer of the Centre for the Promotion of Private Enterprise, Muda Yusuf, told The ICIR.
“The reality is that the operating exchange rate for the past two years has been above N700 to the dollar. If we have a unification regime, it is better for everyone to access from a common market, but we have to improve the supply,” Yusuf added.
He explained that what the government is doing is allowing the rates to reflect the fundamentals of the forces of demand and supply.
“It will be better to have the rates at N664/$1 than to make the official rate N416/$1 while it is difficult for real sector players to access it.”
“To make matters worse, those who have the rates at N461/$1 will take it from the official window and sell it in the parallel market window. We had this going on for a long time, and the system created billionaires through round-tripping,” he said.
Companies with existing loans in dollar to be negatively affected
For companies with existing loan portfolios, there are consequences, an investment expert said.
“I should mention that companies that have existing foreign exchange loans pendency, the Eurobond obligations, will have to take massive 40 per cent cut from this adjustment,” a development economist, Kelvin Emmanuel, told The ICIR.
Commenting further on the good part, Emmanuel noted that tech companies would see a resurgence of investment in start-ups.
He further said that venture capitalists would be able to price and manage risks better.
He said that venture debts would also become more attractive to start-ups not interested in raising equity through safer funding rounds.
“I expect that in time, the CBN will be able to settle foreign exchange swaps for currency withdrawals through naira cards abroad since the major roadblock has been round-tripping that was due to the wide gulf between the official and parallel markets,” he said.
Experts weigh implications as CBN floats naira
Following CBN’s directive to banks to sell dollars at market rates, experts shared their thoughts with The ICIR on what might happen.
The executive vice chairman of Highcap Securities Limited, David Adonri, said the move signalled the deregulation of the foreign exchange market.
Adonri said, “It means that the naira is now floated, and as a result, the actual value of the naira at any point in time will be market-driven and determined.
“This will enhance the allocative efficiency of hard currency resources, eliminate rent-seeking, and curb the scarcity of forex.
“It can also enhance revenue to the Federal government. A market clearance rate determined by forces of supply and demand signals the unification of the exchange rate.
“This is a giant stride in deregulating the economy, coming on the heels of subsidy removal. The structural rigidities in the economy and pressure points are gradually being eliminated.”
To the Head of Investment Research at Parthian Securities, Oluwaseun Dosunmu, the directive is in line with the policy direction of the current administration.
“We have seen the administration’s policy direction; however, the modalities for implementation are yet to be communicated.
“We anticipate that the liberalisation of forex rates will create an incentive for banks in their capacity to support trade and offer facilities to credible businesses with forex needs,” Dosunmu said.
According to him, strategic banks seek to create value and diversify their earnings by playing in the forex market, boosting economic productivity.
At the same time, he pointed out, it would likely hit the black market worse as more transactions would be directed towards commercial banks.
The president of the Association of Bureau de Change Operators of Nigeria (ABCON), Aminu Gwadabe, said the removal of the cap at the Investors & Exporters (I&E) window was done to allow for a true market clearance rate, which he said had been the agitation of several stakeholders in the economy to harness and increase various sources of supply of dollars into the economy.
Gwadabe listed such sources of supply as portfolio investment, foreign direct investment, diaspora remittances, and export proceeds.
“The directives, in my opinion, are to checkmate various illegal economic behaviours like rent-seeking, currency substitution, forex holding positions, and frivolous demands,” he said.
He added that Nigerians are awaiting the rules of engagement on the new directives, and foresaw the likely unintended consequences, in the short run, to be panic and a mild spike in the market that would push rates up.
“In the medium term, we will begin to see our sources of dollars inflow increasing in the market to provide the needed liquidity in the market for rates stabilisation.
“Being a definite free market structure, as supplies increase the rates, we’ll definitely come to settle down at a level of N600/N650 to the dollar with a somehow very little margin in both markets,” he said.
Gwadabe pointed out that the challenge would be injecting liquid into the critical retail end of the market.
He said, “In solving this problem, the bureaux de change are primarily licensed to deepen the markets and inject liquidity into the critical retail end of the market.”
“They provide the role of reducing spreads between buy and sell offer rates, which helped the naira’s stability.”
“I, therefore, advise the acting CBN Governor to leverage on BDC operators on diaspora remittances that are huge, cheap and constant to harness and achieve their desired objectives.”
A global development economist, Kazeem Bello, said the country needed to tread softly with the new directive as it could backfire and create more complex problems.
“We cannot handle the dollar market pricing like the petrol pricing. It will have severe dislocation for the market system, especially when there is acute scarcity of the commodity. People familiar with this should advise the government to tread softly.
“It will inflict pains and unnecessary costs skyrocketing. It may create a serious upset for the economy, especially in the short and medium term,” he added.
Harrison Edeh is a journalist with the International Centre for Investigative Reporting, always determined to drive advocacy for good governance through holding public officials and businesses accountable.