From Uche Usim, Abuja
On June 14, the Central Bank of Nigeria (CBN) made sweeping changes in the financial markets, which summarily ended the naira subsidy regime.
It floated the local currency and announced a unified foreign exchange (FX) rate; thus channeling every request for FX to the Investors & Exporters (I&E) window.
The financial markets reacted immediately with naira tumbling from N471 per dollar the previous day to N755 on Wednesday, the day the announcement was made.
Nigeria operates four foreign exchange (FX) markets: the Interbank FX market, the Investors and Exporters (I&E) window, Bureau De Change (BDC) window and the Small and Medium Enterprises (SME) window.
But with the new arrangement, all the four have 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.
This move is in tandem with President Bola Ahmed Tinubu’s plan to urgently remodel the nation’s monetary policy structure and carry out some “house cleaning”.
However, the debate of defending or floating the naira has been a long one among finance experts.
Former President Muhammadu Buhari, in his eight-year tenure, fought to defend the naira.
However, it became glaringly unsustainable after the global oil crisis of 2016 jolted Nigeria and to insulate the naira from a wide-margin devaluation, multiple exchange rates were introduced, which does not sit well with President Tinubu.
The new president believes that a unified interest rate will attract offshore and local investors, especially as the country struggles to fund many developmental projects, including the national development plan of N340 trillion, out of which the federal government will only provide a capital of N50 trillion (15 per cent of the facility).
With the rate unification, as announced by the Director, Financial Markets of the CBN, Dr Angela Sere-Ejembi, applications for medicals, school fees, BTA/PTA, and SMEs would continue to be processed through deposit money banks at the prevailing market rate.
There has also been the re-introduction of the “Willing Buyer, Willing Seller” model at the 1&E Window where an entity with demand for FX seeks out another entity with FX to sell at a mutually-agreed price through an authorised dealer.
Operations in this window shall be guided by the extant circular on the establishment of the window, dated 21 April 2017.
Here, all eligible transactions are permitted to access foreign exchange at this window.
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 byt otal 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 Counter Party (CCP)
Reintroduction of Order Book to ensure transparency of orders and seamless execution of trades.
There is also a cessation of RT200 Rebate Scheme and the Naira4Dollar Remittance Scheme, with effect from 30 June 2023.
Analysts note that the success of these policies will also depend on addressing current economic problems such as inflation which is currently at 22.2 per cent among other fiscal reforms.
There are worries that adding the naira adjustment pains to the recent subsidy removal will be too hard for citizens to take in.
However, the International Monetary Fund (IMF) has welcomed Nigeria’s unified market-reflective exchange rate regime.
The IMF Resident Representative in Nigeria, Ari Aisen, in a statement on Friday, noted that the Fund would give the country every support necessary to succeed.
The IMF said the development is consistent with its long-standing recommendation which will bolster the country’s economy.
Also commenting on the new development, Prof Uche Uwaleke, Nigeria’s first professor of the capital markets, called for caution, even as he said that the unification of exchange rates makes for a more transparent forex market.
“I think that the CBN should implement that in a way that does not cause massive distortions in the general price level.
“In this regard, a sudden free float of the naira is not advised given that the economic fundamentals required to support a naira float are still very weak especially in relation to sources of forex.
“It’s rather early to bank on sustainable capital inflows from foreign direct investments due in part to insecurity and the overall unconducive environment of doing business in Nigeria.
“This sudden naira devaluation may draw foreign portfolio investments which is part of the reason the stock market is surging.
“But we also know that portfolio investments are hot money and do not represent a sustainable source of forex inflows.
“In consideration of this therefore, I would advise that 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 minimize their unintended consequences”.
For analysts, the new development will generally ensure easier access.
For students and those seeking offshore medical treatment, the forex subsidy party is over but it will be easier to obtain at the prevalent market rate.
For businesses, it represents a double-edged sword- both bitter and sweet. For businesses that have taken dollar-denominated facilities prior to the new rules, it has ballooned the debt to be repaid.
If a business took a $100,000 loan in January 2023 through the official channels, that would be N47,000,000.
By the time the business begins to pay back by the end of the year, it will be paying back at the new rate anywhere between N66,400,000 to N75,500,000. That is approximately N20,000,000 difference.
For citizens, the prices of imported goods which were priced at 471 to the dollar, will swell. For instance, imported goods, drugs and pharmaceuticals will get more expensive.
Again, floating the naira also grows Nigeria’s foreign debt portfolio. In the past $10 billion debt meant N4.7 trillion naira. With the new rate, $10 billion debt now oscillates between N6.64 trillion and N7.55 trillion.
So, what does FX unification mean for Nigeria?
A Financial Consultant and Global Markets Associate, Joshua Ishola and Benjamin Dada, a tech journalist, in an article explained that it will lead to improved price discovery.
“As prices across the multiple windows become unified and transparent, it will reduce the arbitrage opportunity whereby well-connected and influential people (like politicians) in the country can buy dollars at an undisclosed, but often lower rate from one window and sell it at the parallel market rate on another window (often via BDCs). Thereby profiting off the spread and leading to a reduction in available dollars for other legitimate use cases.
“Secondly, it will lead to an increased supply of dollars. One of the ways this will come to be is from what we’ve discussed in point one already—because these powerful people can’t just buy and hoard dollars to sell higher at a later date; there will be more dollars available on the market. But more importantly, local and foreign institutional investors will become more comfortable importing their dollars into the Nigerian economy for trade. Likewise, remote employees will feel more comfortable receiving their salaries in local banks’ domiciliary accounts than in offshore wallets and cross-border apps like Revolut and Payoneer.
“They (investors and privileged individuals) know that they will get a fair naira market value when they decide to exchange their Fx for spending in Nigeria. Investors will be confident that when it’s time to repatriate their shareholder dividends in Fx, they can purchase it at a fair market value. Likewise, remote employees will feel more comfortable receiving their salaries in local banks’ domiciliary accounts than offshore wallets.
“Thirdly, more Nigerians will be able to access dollars more readily. The prevailing Fx crunch has meant that the average Nigerian cannot purchase dollars from their local banks to fulfil international duties like paying the fees of a school outside Nigeria. For those that even received remittances from relatives in the diaspora or salaries from multinational companies, many have been unable to access their hard-earned Fx deposited into their domiciliary bank accounts. By increasing transparency and boosting dollar availability across the different windows, retail consumers can get dollars easily and at a fair value from the BDCs, their main Fx window.
“On the flip side, we envisage a temporary rate hike as a reaction from the market. But rates will eventually adjust due to competition and the influx of dollars. We’ve seen signs of this already. Data from FMDQ—the organisation authorised to publish I&E rates—reveals that dollars traded at ₦790 shortly before the market closed for the day. This should not be taken as the official rate; if anything, it’s an outlier as the median rate was still ₦476 with some occurrences (8% of the total number of recorded rates) above ₦700.
“Finally, as noted, the cost of living should go up in the short term, but if the policy is properly executed, the upsides we’ve listed will come to fruition”, the article stated.