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Nigeria: CBN may have a breather from its foreign exchange fix, but can it last?

By Ade Lawal
Posted on Tuesday, 31 August 2021 17:37, updated on Monday, 6 September 2021 18:14

Central Bank of Nigeria's logo is seen on the headquarters building in Abuja, Nigeria. REUTERS/Afolabi Sotunde

As part of the IMF's $650bn SDR reserve allocation to member states to boost Covid-19-battered global economy, Nigeria is to receive $3.3bn later this month. The country is also to issue a $3-5bn Eurobond later this year. Analysts say these would give the Central Bank of Nigeria (CBN) the capacity to temporarily ensure FX liquidity and defend the Naira, considering the recent FX supply halt to moneychangers.
But is this the best use of the money?

At its July Monetary Policy Committee (MPC) meeting, the CBN stopped the sale of foreign exchange (FX) to moneychangers in the country and discontinued the registration of new players. In fact, it returned the licence fees to those that had paid before the announcement.

The bank governor was angry that the bureau de change (BDCs) had veered away from the objective of their creation – to process FX demands of $5K or less – to becoming “(illegal) wholesale dealers in foreign exchange to the tune of millions of dollars per transaction,” thereby facilitating “graft and corruption in the country” and aiding the “dollarization of the economy”.

The governor also wondered why the number of licensed bureau de change operators grew by over 7,000% from 74 in 2005 to 5,500 by half year 2021.

Abiola Gbemisola, an analyst at FBNQuest, believes the reason and incentive for the geometric growth is because “the government has created multiple windows to access foreign exchange such as the CBN window, I&E window, Hajj and Christian pilgrimage window, PTA & BTA window and so on. This creates opportunity for round tripping where people can access FX from a particular window and trade it at another one to make arbitrage profit or premium”.

…Nigeria is heavily oil dependent and typically doesn’t save for rainy days during oil booms, but resorts to artificially rationing the available FX during low or no growth periods.

The difference between the official market and the unofficial market as at Friday 6 August 2021 was N103.56 ($0.25), representing a disparity of 20.11%, according to abokifx.com, a prominent local foreign exchange monitoring website.

One dollar at the unofficial market was worth N360 in September 2019, but N465 in the same period in 2020 and N515 at the end of July this year. The official exchange rate on the other hand averaged N306.9 and N358.8 in 2019 and 2020 and is currently trading at N412.

A breather

The X in Nigeria’s FX equation is perpetually undefined; the country’s exchange rate is always volatile and unstable. That is because Nigeria is heavily oil dependent and typically doesn’t save for rainy days during oil booms, but resorts to artificially rationing the available FX during low or no growth periods. That is why the recent stoppage of FX sale to BDCs in the country could compound the country’s woes if the CBN finds it difficult to ensure liquidity in the long run.

“The new SDR and Eurobond issuance should support the stability of the currency in the interim. However, Nigeria needs oil exports to quickly recover for any chance at sustaining exchange rate stability, meeting FX demand backlog and correcting the wide parallel market premium,” Adedayo Bakare, a Lagos-based economic expert, tells The Africa Report.

Analysts at Nairametrics, a Lagos-based financial information company, also believe that Nigeria’s exchange rate could be worse than in 2016 when the CBN banned the sale of FX to BDCs. Back then, the naira lost  46% of its value from N268 per dollar in January 2016 to N495 per dollar in December 2016. That meant that if you “held $100 in January 2016 when the CBN banned BDCs it was worth N26,800. But by 31 December 31st 2016, the same dollar was worth N49,500,” the analysts explained.

The ban was subsequently reversed.

The IMF’s SDR allocation to Nigeria and the upcoming Eurobond issuance will come in handy and also give the CBN a temporary lifeline to defend the Naira. But that may be short-lived especially if oil prices, Nigeria’s volatile top FX earner, fail to sustain recent slow rise.

First solution is political

Foreign exchange rate has become a political tool in Nigeria and therefore gets a lot of attention. In 2015 when president Buhari was campaigning for the country’s top job for example, the country’s “worsening” foreign exchange rate was a campaign highpoint. A viral campaign banner read, “Is N216 to $1 okay? It’s time to speak out!”

Analysts have maintained that this is a mismatch of political and economic policy as the government is supposed to work towards reducing inflation and creating wealth among its citizens. A first step to solving Nigeria’s foreign exchange problem is therefore to disentangle it from politics and focus on other economic variables that are in fact going to boost the foreign exchange and better the lives of the people.

“Nigerians are always preoccupied with FX largely because the economy has been dollarized and so a lot of economic activities that are unrelated to FX have been tied to it. It has become a big issue because the politicians have made it a major issue of political campaign.” Gbemisola adds.

“Solving the FX problem is actually a productivity issue and not what the CBN has always focused on. The apex bank and the politicians should instead be preoccupied with reducing inflation and driving economic growth.”

Gbemisola adds that imported inflation’s contribution to total inflation is insignificant, as concluded by a study by the CBN. Consequently, he says the CBN should be more focused on policies that drive economic growth and reduce price inflation.

With inflation rate at 17.75% in June this year (from 9% in 2015), more Nigerians fall into poverty as it becomes increasingly difficult for them to save or invest. This is compounded by food inflation, which at 22% accounts for over 60% of headline inflation and now gulps 101% of average wages in the country, according to a report by the Institute of Development Studies.

Bakare adds that the government is focusing on the symptom rather than the causes of the problem. He believes Nigeria’s import isn’t so extraordinary for the government to tie their FX strategy around that.

“We need low and stable inflation, flexible pricing of the currency and more non-oil exports. Trying to manage the demand for FX by restricting imports is not the solution, because we are not importing enough to support the economy and the majority of our goods imports are used to produce more goods,” says Bakare.

In 2018 for example, Nigeria, despite being the biggest economy on the continent, was behind four other countries in the share of total continental imports. South Africa had the largest share of 17.7% while Nigeria’s share of the total was only 6.6%.

The economic leg

The Nigerian economy has already witnessed two recessions in five years, along with a major hit from the pandemic. Even in 2019 before the pandemic, the population (estimated at a 2.6% growth per year) grew faster than the GDP (2.2%), while there was a decline in per capita GDP, according to the World Bank.

The global financial institution expects the Nigerian economy to grow by 1.8% in 2021 and by the end of the year the GDP is projected to go back to 2010 levels, “thus reversing a full decade of economic growth”.

“In the interim, the focus of the CBN should be on supporting the economy. The exchange rate and trade channel is very important, so the CBN needs to be more liberal as Nigerian companies are struggling to source raw material and export. The uncertainty and mispricing in the FX market does not inspire the confidence of investors and discourages economic activities,” says Bakare.

Bumpy ride ahead

The Manufacturers Association of Nigeria, the umbrella body for the country’s manufacturers, has passed a cautious confidence vote on the CBN’s recent policy on the BDCs. The director general, Segun Ajayi Kadir, told local media that the dominance of the moneychangers and the exorbitant costs manufacturers pay to access foreign exchange from them affect the cost of production and competitiveness of the sector.

He, however, hopes that the new policy will favour the manufacturers considering their role in Nigeria’s non-oil-powered economic recovery efforts.

“In the face of the new policy, it is important that the available FX policies and guidelines be appropriately reviewed to support manufacturing, particularly at this precarious time…We hope the banks will provide a seamless process and timely execution of FX application by manufacturers, while conditions for allocations are reviewed,” he said.

CBN’s data indicates that Nigeria’s external reserves increased to $33.56 bn as of 6 August from $33.14bn in July on the back of oil price rally. The apex bank has also increased FX supply to commercial banks by over 200% according to local business newspaper BusinessDay.

Bottom line

The IMF SDR allocation and expected Eurobond issuance will enable the apex bank to maintain a temporary supply of foreign exchange. But before this firepower begins to wane, the government needs more sustainable and less volatile means to earn adequate foreign exchange to “defend” the naira and power the economy.

To do this, it will need to truly focus on the non-oil sectors with high transformative potential. The alternative, which the present government and by extension the CBN have shown not to prefer, is to float the Naira and let its value be determined by the market.

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