With lingering current account deficits, Nigerian businesses will remain at the brutal end of an acute dollar shortage that has contributed to stifling their growth, and the economy’s, unless the country abandons its managed float exchange rate regime and allows the market determine the naira’s value.
Africa’s biggest economy has remained a net consumer (and borrower) to the rest of the world seen in its current account deficit of $4.88bn in the first quarter of 2020, although $2bn up from Q4 2019, the seventh quarterly deficit in a row.
As Nigeria sets to now unify its various exchange rates in bold reforms that could unlock growth, the reoccurring balance of payments problem is one more argument for a market-determined naira.
“Our managed float is causing the misalignments that result in our balance of payment problems which in turn are leading to the CBN adopting various means of managing demand for FX,” an economist who does not want to be named told BusinessDay. “This is putting a downward pressure on the economy.”
A current account deficit, which usually occurs when a country imports more than it exports, puts pressure on the naira due to higher demand for dollars for international purchases.
Under a flexible exchange rate system, higher demand leads to higher price of dollars. Otherwise, the central bank has to intervene to prop up local currency value by supplying dollars from its foreign reserve.
For Nigeria, with limited central bank buffer, the dollars cannot go round and for businesses that are not able to buy the greenback from the CBN, the more expensive parallel market is last resort.
A recent instance was the announcement by the CBN last year to restrict manufacturers of milk from accessing forex through the official window, after Godwin Emefiele, governor of the apex bank, estimated it cost the country between $1.2bn to $1.5bn annually to bring in milk and other dairy products into the country. No less than 40 items have been blacklisted by the bank.
The argument by the CBN is that Nigeria is depending on foreign markets for raw materials it can produce locally. The apex bank has created and supported many initiatives aimed at boosting Nigeria’s self-sufficiency especially in food production.
More recently, due to several administrative measures by the bank to manage its dollar supply amid severe liquidity decline, businesses are struggling to stay in business because a foreign-exchange shortage spawned by the collapse in oil prices means they can’t import raw materials.
Last month, Mansur Ahmed, president, Manufacturers Association of Nigeria, told Bloomberg that members were trying to remain afloat.
“Certain sectors will suffer more than others, notably those companies that are heavily dependent on imports” such as pharmaceuticals, electrical-products and automobile businesses, Ahmed said.
BusinessDay reported that liquidity in the I&E window, created in 2017 to ease dollar shortage, is drying up as foreign portfolio investors are not supplying because they cannot get their money out.
Sources tell BusinessDay most of the traders are matching what they bring in with their own demand. All the demand pressure has built up to a backlog of $7bn, according to some estimates.
With reserves of around $36.166bn with low prospects for the oil market this year, analysts are sceptical of CBN’s ability to meet current demand and bet on a further devaluation after March’s adjustment from 307/$ to 360/$ and increase of I&E rate to 380/$.
On its part, the CBN has assured that it is buoyant enough to meet “legitimate” dollar demand.
Experts have warned that the country’s manner of managing its exchange rate is hampering growth.
At the recently concluded BusinessDay national conversation, the Oxford economist Paul Collier noted that Nigeria is damaging its own economy by maintaining multiple exchange rates and by seeking to allocate foreign exchange.
The Vice President Yemi Osinbajo-led Economic Sustainability Committee in its report, the Nigeria Economic Sustainability Plan 2020, advised the unification of exchange rate, a direction the apex bank has indicated it would go.
While unifying exchange rate is in line with positive steps necessary to unlock growth, plans need to be put in place for an eventual floating of the naira, experts say, a lasting solution to the country’s dollar problems as seen in the case of Egypt.
In such an event, the naira would trade at least at N400 levels, stoking domestic price levels. But foreign portfolio investors would be less worried about capital loss due to multiple exchange rates and capital controls that delay repatriation of funds.
That confidence would typically translate to increased inflow, other things being equal, and dollars would be available for businesses to engage in international trade.
Naira closed at 458/$ on the parallel market on Friday, with BDCs quoting at $460, according to Everdon Bureau De Change. At the I&E, the naira closed at 386.33/$.
