The Naira exchange: Welcome to the future

Two days ago, the Central Bank of Nigeria (CBN) started the operations of single and market determined exchange rate for the Naira. In one fell swoop, the bank ended over forty years of official determined exchange rates, the often repeated and inadequate devaluation, official allocation of foreign exchange, and the unproductive speculative and arbitrage opportunities. Essentially, the bank has ushered us into the future, and I believe, as a by-product, will help deepen our financial system.

I have no doubt in my mind that the measures announced by the bank Governor, Godwin Emefiele, surprised even the most charitable of his critics. There were two chorused expectations in the period leading to the announcement. First, it was expected that the Governor will repeat the mistakes of the past by devaluing the Naira but which often immediately triggers another round of pressure, which eventually leads to another devaluation. That is the history of the Naira since 1986, especially when oil price falls, as it has done in the last two years. Secondly, there was the expectation of a two-tier market, which often accompanies previous rounds of naira devaluation of the Naira, with the notion that some industries are preferred to some others, which often further exacerbates distortions in the market.

As expected, “the morning after” provided some clues on how the market will operate. The bank led to set the tone for transparency and liquidity by the intervention it made through the Secondary Market Intervention Sales (SMIS) and effectively addressed the backlog of unmet demand to the tune of $4 billion through both spot and forward sales. The initial expectation of a very volatile market did not materialise. The Naira closed at N282 the dollar, and the rate at the open parallel market started to fall, to about N315 yesterday. So, in essence, the measures are not only widely accepted as an excellent framework for a market determined exchange rate, but has also taking off well. The market has also started to address speculation, a critical element driving the rates in the parallel market.

Therefore, in the immediate term, there is no doubt that the single market structure has the capacity to deliver liquidity, improve transparency in the way foreign exchange is allocated in the economy, improve access and demand and supply conditions. My expectation overtime is that as the rules become increasingly clear, and the market continues to mature, and market efficiency continues to improve, then the market will become predictable.

Those are the immediate implications. The medium and long-term implications are not easily predictable. However, what is clear is that as important as this and the other monetary and exchange rate measures before it are, they require structural changes, driven by fiscal measures in order to succeed.

Markets work and exist on the basis of workable underlying demand and supply conditions. Otherwise, the market collapses. This policy is about efficiency of the market for the allocation of foreign exchange in Nigeria, but it is and cannot be a substitute for the serious fiscal policies required that will ensure that the Naira is in demand by foreigners for investment purposes.

Since the turn of the century, emerging and developing economies, for which Nigeria belong to, accounted for increasing levels of global GDP, put at 60 percent of the global GDP as at 2015. This increase followed above average global growth levels in these economies during the period and also led to the lifting of millions out of poverty. However, the new reality of the last two years is of slow global growth, poor international investment flows, and low commodity prices. But it is in midst of this crises that we have embarked on two major important economic reforms in the space of two months. The first was obviously the removal of subsidy of petroleum products that has led to sanity at our filling stations, and the second is the establishment of a market-determined rate for the Naira by the CBN. So, positives are emerging from a poor economic environment.

More needs to follow. The long term recovery and prosperity of this country will not materialise without extensive structural and economic reforms. The long term implications for these policies and any other reform is how they help attract investment into the country, support economic growth, generate employment and deliver the prosperity that will lead to reduction in poverty. So, there is no doubt in my mind that Nigeria, as it was recently at the back of rising oil prices, can also be in the face of declining oil prices, an excellent destination for investment if the policies are right. What is required is not so much government expenditure but the right policies to unlock the billions of dollars of investment potential in the critical sectors of our economy.

But not only must the narrative of the government change, but the perception that the state is a better allocator of scarce resources must also change, and we must hasten the reforms and the pace of the these reforms. In the power sector, which we have not seen the rate of investment envisaged after privatisation, and other sectors such as aviation, for which we can put our airports for sale, road infrastructure and of course the oil and gas sectors, there are potentials there that can attract billions of dollars in investment in the coming years if the policies and incentives are right. I thank you.

 

Ogho Okiti