On April 4, 2019, Charles Robertson, the Global Chief Economist and Head of Renaissance Capital’s Macrostrategy Unit woke up many Nigerians with an interesting note titled “Nigeria: A good year to unify FX rates”.
Many of the Renaissance man’s readers like “Yours Sincerely” may have wondered what points he was driving at when he said: “Countries tend to hold onto multiple exchange rates until well after they have served their useful purpose.”
Robertson-led team went further saying that, “We believe Nigeria meets the FX and fiscal conditions needed to make a success of unification”. “The good news is that Nigeria may be preparing to unify its exchange rates, soon” the Rencap man said, while making reference to the ‘authorities’.
Last month, precisely on Monday July 29, 2019, the Financial Derivatives Company (FDC) hosted stakeholders in Lagos to discuss the unification of foreign exchange (FX) rates in Nigeria to enhance the African Continental Free-trade Agreement (AFCFTA) which was signed in June by President Muhammadu Buhari.
The colloquium featured two panel discussions urging stakeholders to advocate for greater market determination and the use of a single exchange rate for the Naira. In his presentation at the FDC forum, Amine Mati, International Monetary Fund (IMF) senior resident representative and mission chief for Nigeria said, “Countries with multiple exchange rates have lower growth and higher inflation.”
The International Monetary Fund (IMF) stated the need for Nigeria to consider unifying its FX rate, saying it will help the country’s competitiveness in the regional and global trade.
Recall that Mike Obadan, a renowned Professor of Economics had noted in 2017 that, “a multiple exchange rate (MER) system has many costs in relation to the benefits, one of which is that large differentials in rates may encourage the over-invoicing of imports and the under-invoicing of exports in those markets with relatively low rates.”
He said also that, “MERS may create distortions, become permanent, costly
and inefficient for resource allocation, unstable and not effective for their stated goals. Therefore, the CBN may consider reintroduction of a uniform exchange rate regime, to eliminate distortions created by MERS. It should then enhance access of preferred sectors/activities to foreign exchange by making it easily available.”
According to Rencap, “As so many have discovered over many decades, multiple exchange rates encourage corruption. Placing the decision over allocation of dollars at different exchange rates in the hands of unelected officials often leads to the enrichment of those officials.”
“Yet Nigeria in 2015 and 2019 has voted for a president who has made anti-corruption his key selling point to the electorate. It would be very optimistic to assume that Nigeria can avoid corruption from this policy choice, however well-meaning and honest the president and top CBN officials might be”.
In their report, the Moscowbased Investment Banking and Research group added, that, “It might be the first upside surprise for investors, following President Buhari’s re-election victory in February”.
“Apart from Venezuela (and that hasn’t gone well) we struggle to think of emerging or frontier markets with multiple exchange rates – except for Nigeria. What Nigeria’s history – and the history of other emerging markets tell us – is that (1) these systems don’t last, and (2) the longer a country waits to get rid of them, the harder it becomes,” Rencap added.
“In the meantime, multiple exchange rates are confusing (who had the biggest economy in Africa in 2018? It depends what exchange rate you use), they deter foreign direct investment (Ghana got 10 times more foreign direct investment (FDI) per capita, than Nigeria, in 2018) and they are often correlated with corruption”, he further noted.
“In the meantime, FDI is deterred. In 2018, Ghana, which is about seven times smaller than Nigeria (in population or GDP terms), attracted $3.3billion in FDI, compared with $ 2billion for Nigeria. South Africa 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 ($20billion 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”, Rencap noted.
The stakeholders’ forum was a unique opportunity for industry leaders to engage in interactive sessions and encourage the use of the AFCFTA provisions to fix Nigeria’s exchange rate problems.
“The IMF’S policy has been consistent on this issue, such that, we advise for the unification of exchange rates and the Central Bank of Nigeria (CBN) and Economic Recovery and Growth Plan (ERGP) are already working in this direction to ensure that the country has a unified exchange rate,” the IMF representative and mission chief for Nigeria further said.
In his opening remarks, Bismarck J. Rewane, Managing Director/ Chief Executive Officer of Financial Derivatives Company (FDC) said, “Greater trade can trigger deep structural change by increasing production efficiency and spreading knowledge and technologies across countries. In this case, Nigeria needs complementary structural reforms that can boost efficiency in sectors where we have competitive advantage.”
He said, “Unifying the exchange rate will impact the Nigerian economy more positively than the current multiple exchange rate regime does, which creates opportunity for arbitrage,” thereby also making a strong case for a unified exchange rate regime.
