As FG Beats Retreat on FX Rates Unification

Economic analysts believe last week’s reversal of policy on foreign exchange rates unification is a big lesson that policies that are not well thought-out before implementation will not stand the test of time, reports Festus Akanbi

By now, it should have dawned on many economic analysts and global financial institutions that rallied support for President Bola Tinubu over the multi-layered economic reforms unveiled after his inauguration on May 29 this year that there is a big difference between ideas and reality. 

The president had announced a total removal of the controversial fuel subsidy programme in one fell swoop and effected the unification of foreign exchange rates. It was a twin policy decision which fetched the current administration accolades, especially from the World Bank President, Ajay Banga, who was convinced that President Tinubu is determined to do the right things and take the proper steps.

“I commended him for a lot of the things he’s doing early in his term, not easy; macro, fiscal reforms and stability are very important. He’s very determined to do the right thing,” Banga had said.

Economic Reality

However, as days passed by, the reality in the country is pointing to a different narrative at home with a general dislocation to the nation’s economy. The seriousness of the situation is underscored by the latest threat of organised labour amid the proposed plan to effect another round of fuel price hikes.

Analysts said that although President Tinubu has ruled out another round of fuel price increase, they argued that the effect of the last price adjustment has forced many businesses to close shops while others are being forced to scale down their operations.

They contended that the instability in the pricing of petrol is child’s play in comparison with the impacts of the unification of forex rates on the economy and amid the ensuing confusion, President Tinubu has announced several measures including the plan to sell a stake in the Nigerian National Petroleum Company (NNPC) Limited and 19 other national assets or entities.

He is seeking to raise capital from the sale of the stakes to finance his administration’s project to reduce the government’s dependence on loans. On its part, the Central Bank of Nigeria has started introducing foreign exchange intervention measures aimed at clamping down on currency speculators in the foreign exchange markets. 

There were reports that the apex bank has started introducing some measures aimed at reducing pressure on the naira at the parallel market. For instance, the CBN directed that the naira payment option for proceeds of Diaspora remittances should be made within a limit of -2.5 per cent to +2.5 per cent of the previous day’s average rate on the Investors’ and Exporters’ window.

FX Buffer

Meanwhile, the naira on Wednesday got some relief as the NNPCL entered into an agreement with the Afrexim Bank for an emergency $3billion crude oil repayment loan. The loan is expected to provide some immediate disbursement that will enable the NNPCL to assist the federal government in its ongoing fiscal and monetary policy reforms targeted at foreign exchange market stabilisation

The NNPCL/Afreximbank’s deal aligns with experts’ call for the creation of a formidable buffer in times of the free fall of the local currency. Speaking with THISDAY, the Managing Director of Cowry Asset Management Company, Mr. Johson Chukwu, said there is an urgent need for the government to apply for a facility to create the needed backup for forex management.

When asked to suggest a quick way out of the current quagmire, Chukwu said: “My approach would have been to approach the International Monetary Fund (IMF) for a balance of payment support line facility.” He maintained that this option is important and can serve as a low-hanging fruit given the fact that it would take a long time for the federal government to conclude its planned sale of its major assets.  

“It will take some time to get NNPC to a position at which you can do an initial public offer. It will take some time to get investors to buy up our JV assets. So, when I raise money from these other sources, I will pay down on that IMF facility and also liquidate some of the debts we owe JP Morgans and so on. Yes, I won’t be in a better reserve position that I need, but subsequently, say in the next nine months, things would have stabilised and I may even call for the re-evaluation of the value of the naira,” Chukwu said.

He explained that the priority of the government is to stabilise the exchange rate, saying if this is done, “we are going to achieve some level of stability in the pump price of fuel. You will manage inflation better. You will restore, to some extent, the purchasing power of an average household and reduce the level of pain some people are going through. So, the first thing is to focus on stabilising the exchange rate because a lot of the problems we are having now come from the gyration in the exchange rate.”

Chukwu’s position corresponds with that of the Agora Policy, an Abuja-based policy think-tank, which noted that forex and monetary policies should be part of a comprehensive economic plan where the exchange rate serves as a tool for export diversification and attracting capital flows to foster overall development.

To address the present challenge, the think tank said policymakers must look to strike the iron while it is hot to avoid reform fatigue by seeking out sources of large dollar liquidity on concessional terms.

This, it said, can be achieved by exploring the option of a standby arrangement from multilateral agencies of significant scale ($5-10 billion) to acquire credibility.

“Having front-loaded fiscal consolidation and external sector adjustments, Nigeria has the credibility to embark on key partnerships to catalyse increased capital flows,” the report said.

It said the global geopolitical environment means Nigeria has a window to obtain this funding if it is ready to push the envelope.

These dollar flows are necessary to give the market ‘time to breathe’ as left unsolved, the Naira could come under fresh speculative pressures which might drive a return of policymakers towards the very pegged arrangement they recently jettisoned,” the report noted.

“The goal is to ensure that FX adjustments reflect the trends in the balance of payments in a credible manner over the near and medium term,” the think-tank said.

Analysts observed that the naira has lost an essential source of support after the central bank’s long-delayed financial statements revealed that adequate foreign-exchange reserves at its disposal were much lower than previously disclosed according to a Bloomberg report.

The issue with the net reserves shown in the report last week means the central bank’s capacity to defend the naira is limited, the Chief Executive of Lagos-based CFG Advisory, Adetilewa Adebajo, said.

Analysts, therefore, believe that the extent to which the CBN could carry its interventionist role will determine the anticipated result of the exercise. According to Chukwu, ideally, the central bank must intervene. However, he lamented that the CBN as of today, doesn’t seem to have the resources to intervene sufficiently to stabilise the exchange rate. 

And as the CEO of Cowry Asset Management puts it, the Central Bank of Nigeria is still the market maker in the forex market because we are practising a mono export economy and the proceeds of oil export go to the CBN. So as long as the CBN is the recipient of the largest proportion of foreign exchange inflow into the country, it remains the market maker, the only one who has the war chest or the financial muscle to intervene in the market.