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Nigeria’s dual exchange-rate system may be ending

By David Whitehouse
Posted on Tuesday, 23 April 2019 16:42

Nigeria's Central Bank Governor Godwin Emefiele.
Nigeria's Central Bank Governor Godwin Emefiele. REUTERS/Afolabi Sotunde

Godwin Emefiele’s term as governor of the Central Bank of Nigeria (CBN) officially ends on 2 June. His dual exchange rate structure, which the IMF has long urged Nigeria to scrap, may not last much longer.

Charles Robertson, global chief economist at Renaissance Capital in London, believes that Nigeria is preparing to unify its exchange-rate system this year. “The gains of the dual exchange-rate system have been had. The costs are now starting to rise.”

  • The dual system, he says, doesn’t encourage investors and can encourage corruption.

Some countries in the past have waited too long before trying to reunify dual exchange rates, only to find that delay led to the divergence between rates becoming increasingly hard to manage, Robertson says, giving Venezuela and Ghana as examples.

  • He doesn’t expect Nigeria to repeat that mistake. “The authorities seem to be up for it. There’s no advantage in waiting.”

The IMF said this month, after its annual bilateral discussions with Nigeria, that continued foreign-exchange restrictions are among the factors that dampen long-term foreign and domestic investment and keep the economy reliant on volatile oil prices.

  • The IMF also said that that a unified, market-based exchange rate would “support inflation targeting”.
  • The elimination of exchange-rate restrictions and multiple-currency practices would “remove distortions and help economic diversification”.

Damaged confidence

International investor confidence suffered under Emefiele, under whom multinationals had a hard time dealing with the CBN.

  • In 2018, the bank fined South Africa’s MTN $8bn for alleged improper dividend repatriation.
  • The dispute was settled out of court. HSBC and UBS closed their offices in Nigeria in the wake of the dispute.

Emefiele is unlikely to be reappointed. Since the end of military rule in 1999 no Nigerian central bank governor has served more than one term. The job traditionally rotates between candidates from different regions.

  • Emefiele, a Christian, succeeded Lamido Sanusi, a Muslim northerner, in 2014.
  • Ahmed Kuru, managing director of the Asset Management Company of Nigeria, and Aisha Ahmed, deputy governor of the CBN, are among leading candidates to take over.

Emefiele first introduced the dual exchange rates amid a severe shortage of foreign exchange after the 2014 oil price crash. He defined a stable naira exchange rate as being of “overriding importance”.  According to analysts at the Albright Stonebridge advisory group, the overvaluation of the naira has “made Nigeria a less attractive market for international investors and undermined growth”.

But some believe that the dual system is set to last. According to Focus Economics in March, President Buhari’s re-election means that a move towards a free-floating exchange-rate regime is unlikely.

  • Speaking to Reuters, Nigeria’s information minister Lai Mohammed said: “Right now, the currency is converging naturally at about 360 naira to the dollar. Three years ago, the same … was about 525. I don’t think the central bank is in a hurry.”

In a 16 April research note, John Ashbourne, senior emerging markets economist at Capital Economics in London, argued that under Emefiele foreign-exchange controls cut consumption and encouraged corruption without boosting domestic production. Rather than allowing the naira to weaken in response to lower oil prices, the CBN held the official rate artificially high in 2015.

  • This added to the cost of Nigeria-made products, and essentially subsidised imports, Ashbourne writes.
  • The new Nafex rate, introduced in 2016, is now used for 70-80% of transactions. It remains “complex and open to abuse”, Ashbourne writes.
  • Ashbourne argues that, given Buhari’s support for Emefiele’s policies, the next governor will probably continue in the same vein. Interest rates “will remain too low to tackle inflation, and the country will continue to struggle with a multiple rate FX system”.

Robertson argues that Emefiele’s record as governor is “not as bad as people make it out to be”. Dual exchange rates, he says, “may turn out to have been a reasonable policy option”. Without them, he says, Nigeria could have seen a much worse recession and even the collapse of its banking system.

Bottom line: Buhari’s re-election and the end of Emefiele’s term have created a window of opportunity to end the dual exchange-rate system that Nigeria seems set to take.

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