Nigeria’s move to allow its official N306 exchange rate for the naira weaken to a more market-reflective rate is a big boost for cash-strapped Federal Government, states and local governments who could all do with more cash at a time of unstable revenues.
Analysts also say the transition to a simpler and flexible rate is the first step in unpicking the trade-destroying policies that have held back economic growth in Africa’s most populous nation in recent years.
BusinessDay exclusively reported last week that Nigeria’s central bank will allow the N306 rate it has kept for four years to weaken to around N360 as part of steps towards collapsing the country’s multiple rates into a single rate as the pressure from tumbling oil prices forces Abuja’s hand on long-delayed currency reforms.
Adjusting the naira to a market-determined rate puts more cash in the hands of the federal, state and local governments, who depend mainly on oil receipts to carry out their fiscal obligations.
Allocations to the three tiers of governments had been made at N306 per dollar despite the market rate being much weaker at above N360.
However, an exchange rate of N360 per dollar means all three tiers of government would receive additional revenue of N54 for each dollar in revenue allocations.
In 2019, N54 for each dollar would have put an extra half a trillion naira in the hands of the federal, state and local governments, according to BusinessDay’s calculations.
Some N2.93 trillion was shared between the three tiers of government using an exchange rate of N306 per dollar in 2019. That’s $9.58 billion. When converted to naira using the N360 rate, that comes to N3.45 trillion, a difference of N520 billion compared to the actual amount that was shared using the N306 rate.
The states are already eyeing higher revenues from federal allocations after finance commissioners of the states rejected the official conversion rate of N306 for February allocations.
This created a stalemate and led to the FAAC meeting held Wednesday be declared inconclusive by Hassan Dodo, director of information, Ministry of Finance, Budget and National Planning, who did not give a reason for the abrupt end of the meeting.
Sources familiar with the matter say the states are already aware that the Federal Government has approved a weaker official exchange rate and are keen to start reaping the higher revenue benefits as soon as possible to help cushion lower revenues in the coming months as a result of the slump in global oil prices and reduced demand.
“The move to adopt a weaker official exchange rate has saved the FG and states from a financial catastrophe as the expected surge in federal allocations will help cushion the impact of falling crude oil prices on revenues,” Ayodeji Ebo, managing director at Lagos-based advisory firm, Afrinvest Securities, said.
The rate convergence will also help boost foreign direct and portfolio inflows into the country, according to Ebo.
But he has his reservations over whether the N380/$ rate which the CBN now sells dollars to FPIs is fair enough.
“The rate may need to weaken a bit more to around N400/$ for it to be market-reflective,” Ebo said.
Other analysts said the naira should trade around N400-N450 to reflect its true value.
While the FG, states and local governments are set to benefit from a devaluation, it’s a different story for the CBN which may have to take a haircut of close to N200 billion in its naira-settled OTC FX Futures contracts that have been entered at a cheaper exchange rate.
“With over $10 billion in outstanding OTC FX Futures contracts, the devaluation could cost the CBN some N180 billion or more,” a senior banker told BusinessDay.
The one-year FX Futures was priced at N371 per dollar Thursday before it was suspended Friday. That leaves a difference of N9 per dollar compared to the new N380 rate at which foreigners will now access dollars.
On the flipside, however, there are some benefits from the change of tack for the CBN.
Nigeria’s apex bank is feeling the heat of the global oil price slump to below $30 per barrel from a peak of $65 per barrel this year. The pressure on the CBN has been made worse by its weak buffers. The bank’s external reserves are down more than 20 percent this year alone to a paltry $36 billion.
With a devaluation, the CBN would spend less trying to defend the naira, although this is dependent on how close the new rate for naira is to its true value.
There has been a consensus among analysts that Nigeria’s multiple rate exchange system was inefficient, unnecessarily complex, and prone to corruption.
The International Monetary Fund (IMF) has often criticised the practice and tagged it inimical to foreign investment inflows and sustainable economic growth.
LOLADE AKINMURELE, MICHEAL ANI & SEGUN ADAMS
