FG talks on closing gap between official, parallel FX rates
“Is N216 to $1 okay? It’s time to speak out!”
That was one of the main reasons used as a campaign standpoint by President Muhammadu Buhari in 2015, when he painstakingly fought for Nigeria’s number one job.
While his tenure is about wrapping up, his foreign exchange plot has failed to materialise, and the country’s situation further dips into an everlasting decline. Undoubtedly, Nigerians have been played, and the FX manifesto was nothing more than just a political tool used to fool the public into voting the ruling party into power.
Nigeria is an exciting economy widely praised as Africa’s economic giant and doubles as the world’s poverty capital. Indeed, the nation’s government has failed to draw from the vast non-human resources to enrich itself. Neither has the sovereign command made sufficient effort to fully utilise the sizable human force within its domain towards the growth and development of the country.
With increasing poverty and hunger, together with a languid pace of growth, Nigeria’s journey to the promised land may not be a near reality; undoubtedly, the government’s effort needs to be felt in major sectors of the economy to avert the poverty curse that plagues the nation.
One of such priority sectors whose performance predominantly affects an economy is the foreign exchange market or the external sector. This sector is a crucial driver of the development of any nation. However, activities in this market for Nigeria has been characterised by consistent volatility and uncertainty, and this has been a source of headache for the nation’s apex bankers.
Nigeria’s minister of finance, budget and national planning, Zainab Ahmed, has announced that the ministry, together with the Central Bank of Nigeria (CBN), is willing to weigh into the foreign exchange crisis in the country. In her interview with Bloomberg, she announced that the ministry, alongside the CBN, is planning to synergise efforts to close the gap between the official and parallel rates in the FX market.
In her discussion, the minister exposes that the Federal Government aims to boost foreign exchange supply earnings from proceeds of oil earnings. Agreeing to a revenue default in the country, Zainab establishes that the government is working hard to curtail public spending by limiting agencies’ expenditure to 50 percent of their revenue.
Hoping for an operational commencement in 2022, she believes that oil activities at the Dangote Refinery will help Nigeria save up to 30 percent of the country’s current oil spending while the sales of petroleum products to neighbouring nations will boost FX earnings for the country. With improved earnings and subsequent FX supply increase, it is expected that the price difference between the official and parallel rates will close up decently.
Owing to a considerable expenditure base, the minister claims that Nigeria’s debt service to total revenue is high, which does not augur well for the country. Robust public spending on recurrent activities eats deep into the sovereign purse, and this is not a sustainable position for any country that seeks to maintain an excellent fiscal posture.
In addition to an output boost and the subsequent revenue gush from the refinery plant, other supply-side tactics are needed to help increase the supply of foreign exchange in the country to narrow the price spread between the official and parallel rates.
Earlier in the year, the CBN governor, Godwin Emefiele, kicked against the sabotaging activities of the Bureau de Change operators with wholesale dealings above the agreed $5,000 cap. The illegal transactions led to an economic squeeze as large-scale corruption, and dollarisation of the economy ensued.
The illegal round-tripping activities by criminal actors in the foreign exchange market boosted the premium between official and parallel rates, and Nigeria’s inability to replenish scarce dollars through sufficient revenue earnings led to domestic price inflation.
Nigeria’s undue dependence on oil receipts, as well as a sluggish disposition towards savings, has left the country with no choice but to ration available FX during low or no growth periods artificially. Halting BDC operations in the country made the matter worse.
While the CBN has driven several policies to increase dollar supply and ease pressure on the naira, it is expected that the new IMF SDR allocation and the Eurobond issuance will boost the further supply of foreign exchange to the country. With these, short-run macroeconomic stability is expected to be in sight.
Furthermore, emphasis should be placed on the economy’s productivity by engineering new investments while strengthening existing ones. Efforts to reduce inflation and drive economic growth are vital towards attracting more investments and boosting the export potentials of the nation.
The government needs more sustainable and less volatile means to earn adequate foreign exchange to properly defend the naira without causing adverse effects. Also, focusing on other non-oil activities with high transformative potentials is necessary to improve earnings and increase FX supply.
It is hoped that the amalgamation of the Federal Government and the CBN’s efforts towards boosting FX supply will yield the expected returns and that subsequent FX supply boost will force a shrinking effect on the price difference between the two most traded FX windows.