The new foreign exchange policy of the Central Bank of Nigeria (CBN) which took effect from last month generated ripples among the stakeholders with some of them arguing that the apex bank is now stylishly performing a U-turn of its earlier monetary decisions as inflation and other indices ballooning disappointedly. The CBN has been adamant to devalue naira against US dollar despite advice offered by prominent financial managers.
Under the current regime, CBN Governor, Godwin Emefiele said challenges of FOREX at official and parallel markets will be curtailed soon especially with the Foreign Exchange Principal Dealers, FXPD, arrangement under which the apex bank now trade FOREX principally with fifteen banks which it has registered as principal dealers or FXPDs, who in turn would deal with other banks and traders. The principal dealer banks were to fulfilled conditions such as Liquidity ratio of 40 per cent or more; shareholders’ funds (unimpaired by losses) of at least N200 billion; and foreign currency assets of N400 billion or more.
The new foreign exchange regime, formally flagged off last month, runs on free market principles thereby jettisoning the former FOREX supply and exchange rate controls. Taking into cognizance the potential challenges that will come with the new regulation, financial observers advised that the banks, the CBN, as well as the fiscal authorities should put a better buffer mechanism in place to mitigate unintended adverse consequences. Analysts posited that business of the FXPD arrangement would go beyond shores of foreign exchange businesses to impact other business segments negatively as the FXPD banks would dominate the market, thereby creating an uneven playing field.
Dissecting the new regime already in practices, analysts at Afrinvest West Africa, contend that “We believe CBN’s decision to introduce FXPD will have further impact on the competition dynamics of the banking industry with Tier1 banks, which overwhelmingly dominate the list of banks qualified for FXPD gaining more competitive advantage. “The CBN is the single largest supplier of FOREX in Nigeria. By providing FXPDs exclusive access to deal with the CBN for large volume transactions (with no capped spread on resale on FX sold to other authorized dealers and other retail clients), corporate clients with huge demand for FOREX could shift deposits to designated FXPDs, further widening the cost of funding gap between Tier1 and Tier2 banks. “This will inevitably filter into bottom-line performance which will further segregate the profitability of FXPDs and other banks. “Yet, we believe the decision of the CBN is justified, given the need for FXPDs to have sufficient liquidity, capital base and assets to independently source for FX.”
Speaking with Economic Confidential, a bureau de change operator in Kano, Shamsudeen Abdullah said: “Certainly, the Nigerian economy is still a huge work in progress and not anywhere out of the woods!”, basically as result of our bad attitudes and leadership deficit. Nigerians have accepted the easy-way-out attitude which encourages corruption and impunity. It’s not the monetary policy that drives any economy but the fiscal policies. This flexible foreign exchange policy is very good for the economy as it will determine the true value of the Naira. What the government should do now is to embark on a policy of outright privatization and liberalization of the economy through the Nigerian Stock Exchange (NSE). This will put the economy in the hands of the citizens; bring about transparency, accountability and productivity; automatically begin diversifying the economy as well as strengthen the economy.”
Stakeholders have also expressed fear that with the new exchange rate framework, banks will have to adopt a higher exchange rate for reporting, which means that risk-weighted assets will increase following the conversion of foreign currency loans to local currency equivalents. This, they said, will reduce the capital adequacy ratio of some banks. Consequently, the affected banks need to quickly address this weakness by shoring up their capital. Observers have also foreseen an initial sell-off by foreign portfolio investors (FPI’s) so as to repatriate funds. However, if the new policy runs optimally in the next few months, most FPIs who have been on the sidelines awaiting some form of clarity on the situation may gradually return to the market. Nigerians are anxiously expecting a reversal to stability and even a strong appreciation of the Naira at the black market, and the narrowing of the gap between the new inter-bank rate and the black market. With the current operational policy of the foreign exchange market, Nigerians expect hope that many manufacturing companies will find it relatively easier to source dollars to import essential raw materials, and consequently, a gradual pickup in overall industrial capacity utilisation and an improved gross domestic product (GDP).
Meanwhile, some stakeholders have raised eyebrows on government’s decision to focus on external borrowing in a country currently facing foreign exchange constraints and harsh macro-economic environment as Debt Management Office (DMO) announced in a report titled ‘A planned pick-up in FGN external borrowing’ its plan to increase ratio of foreign to domestic debt. The DMO has set a medium-term target of a 60/40 blend for the Government’s domestic and external obligations in its Debt Management Strategy, 2016 to 2019. The blend as at end-2015 was 84/16. The target is unchanged from the previous strategy for 2012-15, and is driven by relative servicing costs and the DMO’s determination not to crowd out the private sector.
Reacting to the fear expressed by Nigerians, the Director General of the DMO, Dr. Abraham Nwankwo, disclosed that there is a new strategy they have put in place which is the best for the economy as the government is presently making sustained efforts on diversifying the economy. According to him “one of the questions that will naturally arise and which many of you have asked us, has to do with the challenge of foreign exchange constraints. At this point, our exchange rate is not very favourable and our reserves are not as buoyant as they used to be and people are raising the question while would you go for external borrowings when you have foreign exchange constraints”.
He projected that in the next five to seven years export proceeds accrued to the economy will rise, making the exchange rate favourable. While encouraging Nigerians that the future will be sustainable, the DMO boss further stated that the citizens should take advantage of the current challenges as a stepping stone to actualize their vision and achieve their dreams. Dr. Nwankwo observed that “if we are simply focused on the challenges we have currently, there will be undue concerns about our ability to service external debt, however if you take into account that everything we are doing now are for the purpose of diversifying our economy in a sustained manner, so that in the next five to seven years, we will be exporting a variety of processed and primary products. We have all it takes in terms of variety of opportunities in agriculture and in solid minerals for example.
