What flexible exchange policy means for the common man

CBN Governor Godwin Emefiele

On June 15, 2016, the Central Bank of Nigeria (CBN) issued revised guidelines for the operation of the Nigerian inter-bank foreign exchange market.
The guideline removed tight currency controls on the naira. The policy liberalised the exchange market and exchange rate regime, thus tacitly devaluing the naira and leaving market forces to determine the value of the currency.

For 16 months, the CBN had placed controls on the naira, pegging it for N197 to the dollar but the greenback exchanged for over N350 in the autonomous market.
While the controls lasted, the economy was the worst for it as investors, particularly institutional portfolio investors, fled the Nigerian market to other climes.
Recent statistics from the Nigerian Bureau of Statistics (NBS) show the economy shrank by 0.36 percent in the first quarter of this year, the first negative growth in many years and experts had warned of full blown recession in the second quarter. The economic numbers are not out yet but they may be radically different from those of the first quarter.
In issuing the new guidelines, the CBN said the objective was to enhance efficiency and facilitate a liquid and transparent, Foreign Exchange (FX) market
Under the new regime, largely driven by the Nigerian Inter-Bank FX market the value of the naira has fully been opened to the forces of demand and supply.
“The CBN shall operate a single market structure through the autonomous/inter-bank market i.e. the Inter-Bank Foreign Exchange Market with the CBN participating in the FX market through interventions (i.e. CBN Interventions) directly in the inter-bank market or through dynamic Secondary Market Intervention Mechanisms,’’ CBN governor, Mr. Godwin Emefiele had announced.
Participants in the inter-bank FX market shall include Authorised Dealers, Authorised Buyers, Oil Companies, Oil Service Companies, Exporters, End-users and any other entity the CBN may designate from time to time, he added.
Twenty-four hours after the policy was launched, all the backlog of $4.02 billion pent-up demand for foreign exchange with the naira exchanging at 280 to the dollar, was cleared.
With that success, all those businesses that had legitimate access to CBN forex market window but couldn’t because CBN couldn’t meet their demands, got forex. That meant they had access to forex capital to sustain their businesses and expand operations.
Also the response from the foreign investors and other foreign interests was positive and renewed hope for new capital inflow into the Nigerian economy.
The naira is currently trading at some N282 to the dollar from the previous N197 to the greenback. This showed the naira lost N103 value. But at the black market, the naira gained over N20 to the dollar as it sold for between N320-325 to the dollar as against the N345 it previously.
However, the National President of the Association of Bureaux de Change Operators of Nigeria (ABCON), Alhaji Aminu Gwadabe, said ABCON in a notification to the association’s members last week stated that: “In line with our statutory roles of naira rate stability in the market, ABCON urges all its members to operate within price band of buying at N280/$1 and selling at N300/$1.”
Though it is not immediately clear how much investment has flowed into the Nigerian economy since the flexible market policy was introduced, experts say the investments would eventually come and the impact would be on all Nigerians, including the ordinary man on the streets.
The special adviser to the CBN governor on financial matters, Mr. Emmanuel Ukeje, explained the benefits to the ordinary Nigerian thus: “We are expecting in the long-run that there will be inflow of investments into Nigeria and that is what we need now. If a foreign investor brings in $20 million for instance, the investor will bring the money through a local bank, the bank will monetise foreign currency into naira and lend to Nigerians. Nigerians will then use the money to expand their businesses and industries. That means more employment and deepening of the economy. There will be huge multiplier effect.”
Rislanudeen Muhammad, a former acting managing director/CEO of Unity Bank and CEO of Safmur Investments Ltd and Mua’amalah Consulting & Global Services Ltd, said an open transparent two-way quote will help in dealing with speculators and rent seekers in the forex market who unnecessarily hike the dollar price and increase hardship for Nigerians.
He said the policy “will hopefully help foreign investors take positive decisions and bring in liquidity into the market with medium to long-term effect of bringing down the rates and also dealing with imported inflation.”
Muhammad noted that even though the action was belated, it will hopefully bring down and stabilise prices, reduce inflation rate and improve employment in medium to long term.
He explained that the economy was already one leg in recession with Q1 GDP growth rate at -0.36 percent for the policy to achieve its full objective, thus there was need for full synchronisation of fiscal and monetary policies.
“However, the single market regime will engender investor confidence as transparency would return in the market. Nigeria is a huge market and an investors’ delight, thus investors would naturally return with this new forex policy. But the immediate effect would be that the naira would lose value but in the long term, when the market becomes pretty liquid, the naira value would firm up,” the former managing director of Unity Bank said.
He also noted that, the interbank and parallel market rates can only be closed if there is adequate liquidity in the market. That will hopefully happen in the short to medium term, he added