As Naira Floats Like a Butterfly
With effect from tomorrow, the naira will be struggling to find its level in the flexible foreign exchange market. In practice that would mean a steep devaluation from the current, artificially fixed official exchange rate of about N197 to the dollar, but it remains to be seen what the effect will be on the black market, where the ordinary person gets his forex.
The Buhari administration’s determined effort to resist naira devaluation ended on Wednesday when the Central Bank of Nigeria [CBN] announced details of the flexible foreign exchange policy that it had earlier announced. The new policy has many elements but the chief ones are that the forex market will now operate as a single market structure through the interbank/autonomous window and the exchange rate would be purely market driven “using the Thomson-Reuters Order Matching System as well as the Conversational Dealing Book.” Technical jargon aside, Nigerians dread anything that is “purely market driven,” deriving from previous experience.
CBN said it will participate in the market through “periodic interventions” to buy or sell forex. CBN also said there will be forex primary dealers who would deal with it for large trade sizes on a two-way quotes basis. The primary dealers will operate alongside other dealers in the inter-bank market. The apex bank said “there shall be no predetermined spread on forex spot transactions” and “all forex spot purchased by authorised dealers are transferable in the inter-bank market,” meaning it can be resold.
CBN however said the 41 items it earlier classified as “not valid for foreign exchange” remain so. The apex bank also introduced what it called “long tenured forex forwards of 6 to 12 months,” which authorised dealers must sell to end users trade-backed and with no predetermined spreads. It said this will enhance liquidity in the market. CBN also said it will introduce “non-deliverable overthe-counter [OTC] naira settled Futures.” This new forex product, it said, would help moderate market volatility.
According to CBN, proceeds of Foreign Direct Inflows and international money transfers will be purchased by authorised dealers at the daily inter-bank rate while nonoil exporters are allowed unfettered access to their forex proceeds which shall be sold at the inter-bank market. This twin measures are meant to entice foreign investors, Nigerians in diaspora and others who repatriate forex home, as well as non-oil exporters. Since all of them will earn a lot more naira from their forex, we expect their stepped up activities to significantly enhance forex liquidity in the Nigerian economy.
In the wake of CBN Governor Godwin Emefiele’s unveiling of these measures last week, attention shifted to see who the ten primary forex dealers will be. CBN initially laid down stiff requirements, that a primary forex dealer must meet at least two of three criteria: N200 billion in shareholders’ funds, N400 billion worth of forex assets and 40% liquidity ratio. Last Friday however, it backtracked on these stiff guidelines and decided to allow all the country’s deposit money banks to become primary dealers. This move doused fears that CBN was about to create a cartel of mega banks at the expense of the smaller ones.
This near-total deregulation of the forex market marked another complete policy reversal for President Muhammadu Buhari, who said as recently as late May that he saw no convincing reason to devalue the naira. He also said that countries that benefit from currency devaluation are those with a developed industrial base whose manufactured products gain in export competitiveness from devaluation. Still, Buhari endorsed CBN’s policy. In an essay he published in The Wall Street Journal, the president said, “The central bank has moved to introduce greater flexibility in our exchange rate policy. These actions are a down payment on our people’s ability to succeed.” He said the new policy is needed to boost foreign exchange supplies and that the country must radically increase its exports and productivity and improve its investment climate.
Naira deregulation got high praises from all the expected quarters. The Nigeria stock market voted with its pocket, gaining N294 billion soon after the decision was announced. Expectations are that foreign investors that fled from the stock market in recent years due to exchange rate controls would now come back. Airline Operators of Nigeria (AON) also lauded the policy, saying it would enable airlines have easier access to forex, which constitutes the bulk of their operational costs.
Much more controversially, the International Monetary Fund [IMF] endorsed the new policy, which it had been urging on the Buhari regime for months. IMF’s spokesman Gerry Rice said the policy “is an important welcome step” and that “it will provide greater flexibility in the foreign exchange market.” In terms of Nigerian public perception, there is no greater kiss of death for an economic policy than IMF endorsement.
Emefiele was quoted to have said in a letter that he expects the naira’s value to settle at about N250 a dollar. This will be about 25 percent above the current official rate but about 30 percent below the prevailing black market rate. Inflation rate is already galloping in this country and if deregulation leads to further price increases, then it will increase the hardship on the ordinary Nigerian, at least in the short term. Just as with fuel price deregulation, the hope is that naira deregulation will produce huge long term benefits to the economy and to Nigerians. We must however remain vigilant lest it derails and produces the opposite effects.
In a letter to the Nigerian president, the Central Bank governor said he expects the naira to settle at about 250 to the dollar.