Dollar crunch imperils CBN’s FX unification effort — Analysts

Scarcity of dollars and oil market lows make the Central Bank of Nigeria’s efforts to unify the foreign exchange market difficult.

The CBN is planning to unify the country’s exchange rate across board in line with loan conditionalities given by the International Monetary Fund (IMF) and the World Bank.

While this may seem appealing to the business community and investors, analysts and manufacturers raise concerns over the implementation and sustainability of the plan due to the scarcity of dollars caused by the COVID-19 pandemic.

COVID-19 has pushed down oil price in the global market, prompting acute dollar shortage in Africa’s biggest economy.

Anthony Ajulo, executive director, Colton Group of companies, a manufacturing outfit, said in a phone conversation that availability of foreign exchange had been a big problem for manufacturers over the years, which was yet to be solved. He explained that oil price, being the country’s major source of foreign exchange earnings, had crashed significantly aggravating the problem, stating that his company applied for dollars from the CBN but was unable to get it until after three months

“The policy is ill-timed, as it is coming at a time when the federal government and even the CBN are short of dollars. We understand that this was caused by the impact of the pandemic on the global economy,” he further said.

Muda Yusuf, director-general, Lagos Chamber of Commerce and Industry (LCCI), said in an interview that it was imperative for the exchange rate to reflect the market fundamentals in order to ensure sustainability and promote efficiency in allocation mechanism. This, he said, was critical for investor confidence.

Aminu Gwadabe, president, Association of Bureau De Change Operators of Nigeria (ABCON), said at the ABCON sensitisation meeting in January 2020 that though there had been efforts to achieve sustained exchange rate stability, it was necessary to checkmate volatility in the foreign exchange market by unifying the FX market.

Manufacturers and other critical players are seeking dollars to import inputs and machinery. But it is not readily available due to oil price lows, questioning Nigeria’s over-reliance on minerals for FX. Crude oil and minerals are responsible for 85 to 95 percent of Nigeria’s FX.

Akinloye Ayorinde, equity research analyst at CSL Stockbrokers Limited, said that unification of exchange rate was good for business in the long run but its sustainability was not assured.

“First of all, the CBN will have to implement a significant devaluation of the naira to have unification. Looking at various rates, if the CBN makes an average standard of N400 – N450, it will not be pleasant for manufacturers that engage in imports of raw materials and machinery as it will lead to significant increase in cost for them. However, it will be better in the long run,” Akinloye said.

Speaking on the sustainability of the unified exchange rate, Akinloye said, “It may not be sustainable because looking at the history of the naira and its devaluation, there is no vote of confidence that the CBN will be able to maintain unified exchange rate especially when it is driven by oil prices which is volatile.”