COVID-19 has proven to be one of the worst crises of our times and Nigerian policymakers were completely unprepared for the battle of a lifetime. The resilience of businesses and households was tested to an unusual degree in 2020 due to the pandemic. There were no quick fixes at the business and household level as a crisis of this magnitude could not have been predicted. Its occurrence was unsettling and created uncertainty about the future.
In many economies, governments and central banks moved quickly to support businesses and households at an extraordinary scale. While it is impossible to list all the measures adopted, the common denominator is that the policy responses sought to provide ease to businesses and households.
In Nigeria, ease was hard to come by in the operating environment. A significant challenge that hung over the economy throughout the year was FX pricing and sourcing troubles. It was bad enough that fiscal support was paltry at only 0.3% of GDP, significantly less than Sub-Saharan Africa’s (SSA) average of around 1.9% of GDP. This is in addition to CBN’s loans and debt forbearance, which while commendable, was too little to move the needle. An example is the negligible N150.0bn (0.1% of 2020 GDP) stimulus to SMEs and households, which account for a large share of GDP.
Considering these weak measures, businesses and households could do without FX challenges. While the decline in FX receipts from oil contributed the most to reduced FX supply and was outside the control of the CBN, its actions worsened the situation. The major way through which this happened was the Bank’s decision not to devalue the currency on time and the weak adjustment when it eventually did. For instance, the Bank devalued the exchange rate at the I&E window by only 5.5%, even though its own quarterly bulletin suggested overvaluation of around 12.2% and the parallel market rate had devalued by 20.9%.
The CBN preferred gradual and negligible devaluations, which tend to cause more problems than sizable and quick adjustments based on the experience in other countries. It is surprising that a 5.5% adjustment was expected to correct the overvaluation caused by maintaining a fixed exchange rate for 3 years between 2017 and 2020. For instance, Egypt floated its currency in late 2016, resulting in a depreciation of more than 53.4% at a point. This helped secure a $12.0bn IMF facility while foreign investors that had stayed on the sidelines returned, thereby boosting external reserves. Subsequently, the Egyptian Pound gained 20.4% and the economy and FX markets have become more resilient.
The CBN also paused FX sales to the I&E window and parallel market for many months before resuming sales later. In a crisis, central banks are expected to be the last line of defence. Instead, the CBN started to ration FX supply upon the resumption of sales. These actions of the CBN meant that exporters and investors were on the sidelines, with the latter not repatriating FX earnings and the former deciding not to invest. At the individual level, remittance flows were also affected due to the unfavourable exchange rate decided by CBN for International Money Transfer Operators (IMTOs). These issues only further worsened the country’s FX liquidity challenges.
In many cases, businesses had to wait for months to be able to purchase FX from the official market, which eventually had to be supplemented from other sources because of rationing. Meanwhile, CBN’s actions had made it even more expensive to obtain dollars from the parallel market. The implications are numerous. Businesses found it difficult to access FX, which is critical for those with FX obligations. Manufacturers, for instance, require access to FX for sourcing raw materials, which are then processed into final goods. They also could not buy machines and spare parts. In May 2020, the Manufacturers Association of Nigeria (MAN) reported the lack of FX access for five weeks and a backlog of over $1billion. Businesses with obligations to providers of capital in FX require the same to repay loan obligations and dividends. Businesses also require FX to pay for foreign services (insurance, royalty & licence fees, computer & information services, etc) which power the digital economy.
The cost of the delays in approval of FX sales and unmet demand is steep for businesses, especially when one considers that FX uses are even more diverse than already mentioned. If factories are not running at full capacity, sales and profitability would decline and workers would be laid off. The prices of goods will also be expensive as businesses pass on higher costs of production to consumers, thereby fuelling inflation. This sets off a vicious cycle, which worsens demand for businesses and poverty for households.
Households bear even more costs. Many were affected by FX sourcing challenges when the CBN stopped sales to BDCs, which supplied retail users. While retail demand was not as strong due to lack of travel amid COVID-19, many with obligations (school fees, family upkeep, etc) abroad could not meet them. CBN’s rigid rules, which made physical dollars vastly different from electronic dollars in domiciliary accounts also made conducting transactions difficult. Many banks also reduced available FX on debit cards to $100, with significant implications as many people could not fund dollar based investments, pay for courses and other important uses.
Looking to the future, there is little optimism that the CBN’s strategy would change for the better. We have been here before and it seems lessons were not learned. It has been more than a year since COVID-19 disrupted the FX market, and while many countries are on the road to recovery, the CBN is yet to do the needful. This will only make the recovery process more lengthy and painful for businesses and households.
Ojo is a Lagos-based financial analyst
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