Beyond the New Forex Structure

Despite the adoption of a flexible foreign exchange regime, the alignment of monetary and fiscal policies is a necessary condition for the country to be able to attract the much desired capital inflows and attain sustainable economic growth, writes Obinna Chima

The main objective of macroeconomic policy is to achieve sustainable economic growth in the context of price stability and viable external accounts. As a result of this, it is essential to achieve a close degree of coordination among policy makers in the areas of monetary and fiscal policy.
The impact of measures taken in either of these areas will inevitably depend on how the policies in each area affect those of the other.

Indeed, without efficient policy coordination, the objective of one authority may hamper the objective of the other.
That is why in Nigeria, although the new foreign exchange policy introduced by the Central Bank of Nigeria (CBN) has received applause globally, experts have warned that for it to have far-reaching impact on the economy, there must be a response from the fiscal authorities. They stressed the need for trade policies to woo foreign investors back to the country.

Clearly, since the third quarter of 2014, Nigeria has been dealing with the effects of three significant and simultaneous global shocks. These include the over 70 per cent drop in the price of crude oil, which contributes the largest share of the country’s forex reserves; global growth slowdown and geopolitical tensions along critical trading routes in the world; and normalisation of monetary policy by the United States’ Federal Reserve.

As a result of this, the country recorded a significant decline in its forex reserves from about $42.8 billion in January 2014 to about $26 billion this month, just as its volume of forex inflows have fallen from as high as $3.2 billion monthly in 2013 to current levels of below a billion dollars per month.

This has seen the central bank introduce various monetary policy measures to avoid further depletion of the reserves. This further led to the introduction of the new forex system, which took-off last week. Part of the objectives of the new framework, which included the introduction of the naira-settled Over-the-Counter (OTC) FX Futures trading, was to discourage people from front-loading or hoarding forex due to uncertainty. The new flexible forex regime is also expected to discourage speculative attacks on the naira.

Eyes on Non-oil Exports
As part of efforts to boost activities in the non-oil sector of the economy, the central bank recently unveiled a N500 billion low interest rate non-oil export facility. The fund was established to support the diversification of the economy away from oil and to expedite the growth and development of the non-oil export sector. It is also expected to stimulate inflow of forex in the country. According to the guidelines for operating the fund, the CBN will invest in a N500 billion debenture to be issued by Nigerian Export-Import Bank (NEXIM) in line with section 31 of CBN Act.

It further stated that the facility was essentially designed to redress the declining export credit and reposition the sector to increase its contribution to revenue generation and economic development. It will improve export financing, increase access of exporters to low interest credit and offer additional opportunities for them to upscale and expand their businesses in addition to improving their competiveness.

The Nigerian Export – Import Bank (NEXIM) shall be the Managing Agent of the Non-Oil Export Stimulation Facility (ESF). It shall be responsible for the day-to-day administration of the Facility and rendition of periodic reports on the performance of ESF to CBN.
Also, in order to ensure continuous flow of credit to the export sector at competitive rates, especially against the background of declining export loans and the need to promote sustainable non-oil exports, the Export Credit Rediscounting and Refinancing Facilities (RRF) was expanded by N50 billion to support the banks in the provision of pre- and post-shipment finance to exporters to undertake export transactions.

With these, the acting Managing Director/Chief Executive, NEXIM Bank, Mr. Bashir Wali, explained that over the past few months, the Nigerian Export-Import Bank has been working with the central bank to review existing policies and strategies towards increasing funding support and stimulating additional investments in the non-oil export sector.
The NEXIM Bank therefore urged Nigerian exporters and export oriented businesses to utilise the facility to expand and upscale their operations towards boosting the current low contribution of non-oil exports, which had remained at about five years over the years.

Need for Trade Policies
To analysts at the Financial Derivatives Company Limited, forex policy must always complement trade policy so as to achieve the overall objective of macroeconomic growth. The FDC stated that forex policy alone is not a silver bullet.
The Head of Research at SCM Capital Limited (formerly Sterling Capital), Mr. Sewa Wusu, with the restructuring of the forex system, which has restored confidence in the economy, there is need for positive response from the fiscal authorities.

He urged the federal government to fine-tune policies around non-oil exports by creating incentives for exporters.
Wusu noted that if operators in the non-oil export sector are given the enabling environment and their products developed to be attractive and acceptable globally, it would earn the country enough forex and help strengthen the country’s earnings.
“Government needs to do a lot on the fiscal side because in the past few months, we have seen positive response from the monetary side. So, there must be complementary efforts so as to help the country regain the lost momentum.

“So to complement the central bank’s effort, government needs to look at ways of ensuring that the economy, which had been diversified, according to records from the last rebasing exercise, it earnings potential of the diversified sectors are strengthened to attract the required forex inflows.
“What the government needs to do is to look at those sectors that had been diversified and create the right framework and enabling environment for them to thrive, so that their products would be good for exports. That would help boost the forex revenue capacity of government,” Wusu added.

To the Managing Director/Chief Executive, Cowry Asset Management Limited, Mr. Johnson Chukwu, a flexible exchange rate system would provide opportunity for inflows from other sources other than crude oil sales.
He also urged the fiscal authorities address challenges faced by businesses in the country.
“I want to believe the federal government would back this new forex policy up with other fiscal policies, particularly as it relates to investments and in an area like infrastructure by making the infrastructure sector attractive for private sector investments.

“That would now help drive inflows. But what the central bank has done was most expected. I think clearly, in the medium term, it would help open up the economy and help stabilise the exchange rate,” Chukwu said.
Also, the Chief Executive Officer of Afrinvest West Africa Limited, Mr. Ike Chioke recently urged the federal government to ensure the alignment between monetary and fiscal policies.

“When you talk about government revenue, oil is the key input. There is a declining consumer confidence and it trickles down the system. But I feel government hasn’t done enough in cost-cutting,”Chioke said.

He added: “The CBN is right in saying there are certain items that we shouldn’t be importing. But that actually is not the job of the CBN. The CBN should be focused on monetary. The fiscal authorities ought to design its policies by targeting growth enhancement in certain sectors. Government needs to get its act together.”

He stressed the need for the federal government to direct policies to support critical sectors in the economy.
The foregoing shows that aligning monetary and fiscal policies have a strong influence on decision-making as the coordination of these policies is of great significance on restoring the economy. Inconsistent and uncoordinated policy-mix leads to poor economic performance of any economy.