Nigeria’s current monetary and fiscal conditions provide no better time for the African nation to abandon a system of multiple foreign exchange rates that has deterred foreign direct investment when it hasn’t confused investors and analysts.
If this opportunity passes, a big devaluation could be on the cards a year from now by 2020, according to emerging and frontier markets focused investment bank, Renaissance Capital (Rencap).
Historical data analysed by Rencap showed that in so many countries before, and Nigeria itself in the 1980s and again in the 1990s, the authorities held onto the multiple exchange rate regimes for too long, often culminating in building up stresses that led to a shocking devaluation of the fixed rate, high inflation and considerable pain for the poorest in society.
Nigeria could be straying along these lines if there is no shift in the FX regime, according to Rencap.
However, this could be forestalled if the country takes advantage of the small gap in FX rates and a budget deficit of 5 percent of GDP to unify the multiple rates.
“A small gap between the market and fixed fx rate of around 20 percent at present, instead of up to 2,000 percent gaps (e.g Ghana in 1983) is a very good start,” said Charles Robertson, Rencap’s global chief economist, while he also noted that Nigeria’s fiscal deficit- which is “not out of control”- is an added advantage.
“On all these key points, Nigeria looks well placed to seize the opportunity to reunify its exchange rates.
“It would send a positive signal to foreign direct investors, and therefore contribute to an inflow of foreign exchange, jobs and managerial expertise,” Robertson said in a note to BusinessDay.
Robertson joins a motley crew of analysts and economists who say Nigeria has never been in a better position than now to bite the bullet on foreign exchange reforms.
“A trigger could be the change or renewal of the Central Bank of Nigeria (CBN) governor on 2 June,” Robertson added.
The CBN has kept a system of multiple exchange rates since 2016 following the collapse in oil prices that starved the economy of petrodollars and led to acute dollar shortages.
The system somewhat helped steady what was a sinking economy while achieving its primary goal of smoothing the impact of a commodity shock.
However, although the country has trimmed down some of its fx rates, the elephant in the room is the sheer gap between the defacto peg by the CBN and the market rate.
The CBN’s artificial rate has hovered around N306/$ for nearly two years now while the market rate which is largely reflected on the Investors and Exporters window is 18 percent weaker at around N360/$.
Policy analysts say the main obstacle to a unification of the fx rates may be political and may not happen anytime soon. However, a recent IMF Article IV report suggests the authorities are ready to collapse the multiple rates into one.
The government had said in its economic blueprint in 2017 that it planned to ditch the multiple rate system to free up investment capital. Two years later, that hasn’t happened.
Asides the risk of a big devaluation, other costs of keeping multiple exchange rates includes reduced FDI and high corruption.
FDI inflow into Nigeria has already taken a severe hit.
In 2018, Ghana, which is about seven times smaller than Nigeria (in population or GDP terms), attracted $3.3bn in FDI, compared with $2bn for Nigeria. SA and Ghana are now attracting 10 times more FDI per person than Nigeria, when Nigeria as the continent’s biggest economy should be attracting huge investments ($20bn or more annually to equal
Ghana). Even Ethiopia, with a less literate population and half the electricity (per capita) that Nigeria has, received three times more FDI per capita in 2018.
Multiple exchange rates also encourage corruption.
A BusinessDay expose earlier this year exposed an fx racket running into tens of billions of naira.
LOLADE AKINMURELE
