It is a welcome development that the Central Bank of Nigeria (CBN) has taken a major step towards full exchange rate harmonisation. The development came a few days after it approved the more market- reflective Investors and Exporters (I &E) rate (also known as the NAFEX) rate. The latest move by the apex bank is a step in the right direction, as it is expected to improve confidence in policy-making. However, recovery in portfolio inflows will not be immediate, as investors will wait for more dollar liquidity in the economy. A full unification of the exchange rates will entail closing the gap between the official rate and the parallel market rate.
With the harmonisation of the exchange rates, Nigeria now has two rates: the sole official rate and the parallel market rate. The multiple exchange rates was adopted apparently to avoid outright devaluation of the naira by keeping a stronger pegged rate for official transactions and weaker exchange rate for non-government related transactions. The International Monetary Fund (IMF), the World Bank and other stakeholders had criticised the multiple exchange rates, prompting the World Bank to hold back $1.5billion loan request by Nigeria in a bid to push for more foreign exchange reforms. The I&E forex window was established in April 2017 as part of CBN efforts to deepen the forex market and accommodate all forex obligations.
The purpose of the window was to boost liquidity in the forex market and ensure timely execution and settlement for eligible transactions. Expectedly, CBN will now focus on clearing the dollar demand backlog, and reduce the gap between both rates, which will give the much-needed boost to the economy.
What the CBN has done is in line with present economic realities. Prior to its latest action, the naira traded at N486/$ in the parallel market, implying a gap of N76 between the now official NAFEX rate and the parallel market rate. This forced the CBN to discreetly devalue the naira by 7.6 per cent or N410.25/$. According to the CBN Governor, Godwin Emefiele, “we are still running a managed-float exchange, no longer dealing in the official rate transaction…” He however added that the apex regulator “is monitoring the market to see what is good for the economy.”
No doubt, moving towards single exchange rate will be good for Nigeria’s economy. Hitherto, the fragmented FX market had been riddled with confusion and arbitrage. With the harmonisation of the rates, there is going to be more flexibility of the I&E rate, which will ultimately narrow the gap between the official rate and the parallel market rate. This, indeed, is overdue. A full unification of the exchange rates at a market-reflective rate could reduce the amount Nigerians buy the dollar at the ‘black market’ rate which is overpriced. Besides, it will to a great measure, ease the dollar scarcity and enable manufacturers have access to dollar. Over all, an effective harmonisation of the rates is a key requirement for unlocking donor financing in the economy, as well as efforts to borrow externally.
With Nigeria’s fragile economy in need of recovery stimulus, all hands must be on deck to avoid inflationary headwinds, as depreciation of the naira, drop in crude oil earnings and the reduction in foreign portfolio inflows could significantly affect the supply of FX into the country. Caution should be the watchword in the latest plan by the CBN. We say this considering that the harmonisation of the exchange rate market may lead to cost push inflation. In that situation, the cost of goods and services will rise, and the burden eventually passed to consumers. The impact may worsen poverty in the land. Nigeria’s poverty index is currently one of the highest in Africa.
Beyond that, Nigeria’s current GDP of 0.51 per cent, far below the projected three per cent population growth, is unacceptable. Foreign investors are closely following CBN’s next move. The economy is in negative territory, no doubt. We, therefore, urge both the fiscal and monetary authorities to initiate creative measures that will stimulate sustainable growth, by making concrete efforts to tackle insecurity and monetary policy stability. The government should open up the economy by lifting some of the restrictions on essential goods.
The forex market should be aggressively funded and inflation rate drastically reduced. Since trade is one of the sectors that is crucial, in terms of employment and foreign earnings, the nation must improve its trade with other countries. It is sad that Nigeria’s balance of trade with other nations has contracted so much in recent times. Trading is a function of credit availability and liberalisation of the environment. Though the borders have opened, the impact of long closure is still telling on the economy. Altogether, diversification of the economy remains instrumental to producing more export products that will yield foreign earnings and strengthen the value of the naira.