The curious case of the CBN’s long-standing N306/$ rate

The Central Bank of Nigeria’s N306 exchange rate is useless to businesses and households, yet it has remained for the third year running.

Every market player, from commercial banks to investors, uses the more market-reflective N360-N363 per dollar exchange rate. Even the same CBN makes dollar interventions at around N354 per dollar.

The CBN’s spokesperson, Isaac Okorafor, did not immediately respond to an email seeking answers to why the CBN continues to keep the rate.

Until state-owned oil firm, Nigerian National Petroleum Corporation (NNPC), became the sole importer of petroleum products into Nigeria, the CBN justified its artificial rate by saying it was necessary to keep petrol prices low, meaning dollars were sold at a cheaper rate to independent importers.

Now that the independent petrol importers have downed tools and left the responsibility to the NNPC, the rationale for keeping the rate is fast fading.

The N306 rate is also the preferred one for the government’s budget and it has been this way since 2017. The biggest losers are Nigeria’s cash-strapped states.

The dollar portion of federal allocations to the states is converted at the N306 rate instead of the prevailing N360 market rate.

That implies that for every dollar of federal allocations due to the state, N54 is lost. State governors had complained about the practice but have since grown quiet.

BusinessDay calculations show that the states could have earned 17 percent more if the N360 exchange rate were applied.

The Federation Account Allocation Committee (FAAC) disbursed the sum of N2.57 trillion to the states in 2018, according to the National Bureau of Statistics (NBS).

Federal allocations are largely made up of crude oil export sales and Petroleum Profits Tax (PPT) as well as revenues from Value Added Tax (VAT), Import and Excise Duties, Royalties and Companies Income Tax (CIT).

Crude export sales and PPTs account for nearly 70 percent of total allocations, which would equate to N1.79 trillion of allocations to states in 2018 ($5.8 billion at N306).
If converted at N360 per dollar, state allocations would be N2.1 trillion, 17 percent more than the 2018 value.

There is a long list of expenditure items that the states could address with the extra cash from FX revaluation gains, from investments in infrastructure to payment of workers’ salaries.
That case has been strengthened by a likely minimum wage hike to N30,000, which is sure to put a strain on the finances of the states, most of which are barely able to generate enough income to meet their costs.

“The paradox here is that the states allow the federal government to short-change them and then go back to the government to borrow money to pay salaries,” a senior accountant told BusinessDay on condition of anonymity.

One senior government worker said the state governors “are probably distracted by the upcoming elections”.

The N306 rate also deters investment, according to Atiku Abubakar, the main opposition candidate in next month’s presidential election.

Abubakar, a businessman and former vice president, said he would float the currency if he wins the Feb. 16 vote and replace the Central bank governor, Godwin Emefiele, in June, when his first term ends.

Emefiele responded to Atiku’s criticism of the CBN’s policies by saying a free float of the naira would cause capital flight and a “massive devaluation”.

The nation’s current system of multiple exchange rates had produced the “most optimal results when compared with other emerging markets in recent times”, Emefiele told reporters Tuesday after a meeting of the Monetary Policy Committee.

Under Emefiele, who was appointed in 2014, Nigeria has tightened capital controls and closely managed the naira’s value. The governor has consistently said this is the best way to curb inflation and boost manufacturing by discouraging imports.

Several foreign investors have faulted the policy and said it exacerbated an economic downturn triggered by the 2014 crash in oil prices.

The MPC held its main interest rate at its first meeting of the year, last Tuesday, at a record high of 14 percent and warned of rising inflationary pressures.
Prices rose 11.4 percent year-on-year in December, the highest rate in seven months.
Emefiele, 57, also said the central bank would increase restrictions on companies buying foreign exchange for imports.

That would include putting more food items on a list of foreign goods for which purchases of dollars from banks are banned, he said.

“We will get even more aggressive,” he said. “This is because we think the initiative the central bank has to cut imports and diversify the economy is yielding results,” Emefiele said.

Shortages of foreign exchange have eased in the past 18 months thanks to higher crude prices and the central bank opening a currency-trading window for portfolio investors that allowed them to buy the naira at a weaker level. The rate in that window of N363 per dollar has almost converged with the black-market rate, which means the naira is fairly valued around that level.
In their 2018 outlook, Nigerian banks expected a broader rate convergence in 2018, but it hasn’t completely happened. Not with the CBN still quoting N306.

LOLADE AKINMURELE