Nigeria’s foreign exchange management system, which has caused dollar scarcity and spooked foreign investors, is one of the major challenges awaiting the next president.
Last year, the country’s currency lost 23.65 percent of its value (year-on-year) against the dollar at the parallel market, popularly known as the black market.
At the Investors and Exporters (I&E) Foreign Exchange Window, the naira ended last year with 8.56 percent (year-on-year) depreciation against the dollar.
The I&E window closed the year with the dollar being quoted at N461.50/$, compared to N422/$ at the beginning of the year, data from FMDQ indicated.
Demand for dollars for school fees payments, medical bills, tourism, importation of inputs and other goods are high across major commercial banks.
Faced with limited supply, manufacturers, investors and individuals have resorted to the parallel market to purchase foreign exchange.
Manufacturers get only 5 percent of FX demand from the official window, while over 95 percent of the FX are sourced from the parallel market, according to Bismarck Rewane, managing director/chief executive officer of Financial Derivatives Company Limited.
“The sharp depreciation of the naira exchange rate in the parallel market remains a cause for concern. It is a trend that should not be allowed to continue and all necessary steps need to be taken [and urgently too] to stem the slide and volatility,” said Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise (CPPE).
He said these developments should not be ignored. “It is as much of an issue to consumers as it is to producers and other stakeholders that create value in the economy. It calls for an urgent review of the current foreign exchange policy.”
Fitch Ratings, a global credit rating agency, had said things are going to get worse this year for Nigerian banks amid a protracted FX liquidity crisis that has unsettled lenders in Africa’s biggest economy.
Commenting on what the new president can do to solve the FX crisis, Taiwo Oyedele, head of tax and corporate advisory services at PwC Nigeria, said: “A good starting point will be to prevail on the monetary authority to provide greater transparency on the various measures and interventions in the FX market.”
He said all non-monetary roles hitherto assumed by the Central Bank of Nigeria (CBN) should be removed, including fiscal functions such as restriction of items eligible for FX, stamp duties collection, and various sectoral interventions relating to agriculture as well as small and medium enterprises.
He said a phased plan to harmonise FX rates should be developed and implemented within six months.
On how much work the next president has to do to rebuild investors’ confidence, Oyedele said: “Investors are sensitive to policy-induced uncertainties and market distortions. Once the new president ensures that the central bank becomes more transparent in performing its roles, very robust in its policy formulations and consistent with implementation, then more than half of the job required to rebuild investors’ confidence would have been achieved.
“With this, foreign investment flows will start coming in to help meet legitimate demands.”
He said the new president must respect CBN’s autonomy and allow it the independence to operate without undue interference.
“However, the President can insist on improvements to the processes of the central bank, and remove various roles currently being performed by the CBN which are outside its core mandate of monetary policy and financial sector regulation,” he added.
Oyedele said whether investors would return to the country would depend on their assessment of the overall business and policy environment beyond just the FX regime.
“The signalling by the new president starting with the composition of his economic management team will be crucial in this regard,” he added.
Rewane projects Nigeria will adopt a free-floating exchange rate regime post-election. The reason is that the Federal Government is likely to borrow from the international Monetary Fund and will have to comply with conditions including naira devaluation, according to him.
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He said in the short-term or pre-election period, Nigeria needs to adopt a crawling peg strategy, increase foreign exchange supply and reduce punitive measures.
Yusuf, the CPPE boss, said: “My proposition is that we should adopt a flexible exchange rate policy regime. Let me clarify that this is not a devaluation proposition. Rather it is a pricing mechanism that reflects the demand and supply fundamentals in the foreign exchange market.
“It is a model that is sustainable, predictable and transparent. It is a policy regime that would reduce uncertainty and inspire the confidence of investors. It is a policy framework that would minimise discretion and arbitrage in the foreign exchange allocation mechanism.”
According to him, the Nigerian economy has the capacity to weather the current turmoil if the policy contexts are right.
“We have the market, the people and natural resources. The opportunities that the present situation offers would only be realised if policy obstructions to resource flows are removed,” Yusuf added.
