CBN’s Steps Towards Single Exchange Rate Appropriate, Say Manufacturers, Analysts

• MAN: Apex bank’s objective’ll improve forex availability, shore up reserves, strengthen naira

Kunle Aderinokun

Determined to crash the parallel exchange rate and achieve a single exchange rate, the Central Bank of Nigeria last Tuesday made some moves to further strengthen the value of the naira. The CBN, in a circular signed by its Director, Trade and Exchange Department, Mr. W.D. Gotring, directed oil marketing companies to make payments for port charges to the Nigerian Ports Authority (NPA) and Nigerian Maritime Administration and Safety Agency (NIMASA) using the official foreign exchange window.

This is a further step forward to the one it took towards unifying its multiple exchange rates penultimate week, when it started allowing banks to use the Investors and Exporters’ (I &E) window when quoting the naira rather than the official rate.

On Tuesday, the day the CBN gave the directive to oil marketers, the naira closed at N365/$ on the parallel market while it closed at N363/$ on the BDC segment and N362.38/$1 on I&E forex window. However, as at mid-day on Friday, the dollar exchanged for the naira at N370/$ at the parallel market and sold for N368/$ at the BDC end of the market.

The official exchange rate remained the same at N305.65/$1 while Nigeria’s external reserves was put at $31.222 billion as at August 8.

Economic analysts and manufacturers have considered the steps taken by the apex bank in this endeavour to be in the right direction. Pointing out that the journey towards a single exchange rate is tortuous, they acknowledged that it is achievable. That is why, it is a widely-held view by majority of the analysts that the CBN would do more good to the naira than harm by having a market-driven system and building confidence in the futures market.

President, Manufacturers Association of Nigeria, Dr. Frank Jacobs, said the measures taken by CBN were “a good development that should have enormous impact on the Nigerian economy and more importantly the foreign exchange market.”

According to him, “The new policy guideline is commendable. This is because, I believe that the Forex involved will continue to revolve within the monetary system. In this case, the CBN will be availed more forex opportunity for rebuilding the external reserves which in turn will strengthen the value of Naira.”

Frank explained: “The short term focus of the circular is to accommodate payment of port charges payable by oil marketers of imported petroleum products to the Nigerian Ports Authority (NPA) and Nigerian Maritime Administration and Safety Agency (NIMASA) in the CBN official forex window using the Form ‘M’. The medium term objective is to further improve on the availability of forex in the country and reduce the difficulty encountered by the Oil companies in paying the charges of NPA and NIMASA. The long term goal is to further shore up the forex reserve, improve on the value of the Naira and ultimately narrow the premium between the official and the parallel market rate.”

“To fully appreciate the importance of this guideline, we probably need to take stock of what was obtainable prior to this CBN circular. Before now, oil companies pay port charges to NPA and NIMASA in Dollar, which they source principally from the BDCs and Parallel segments of the Forex market. The magnitude of these forex transactions usually put the markets under severe demand pressure which often depresses the value of Naira. However, since the CBN will facilitate the payment of the port charges in the official forex window, the huge forex demand of the oil Companies will be moved away from the BDCs and parallel markets. This will, no doubt, leave the markets more stable and the value of Naira better predictable,” he added.

“From my understanding, the mechanism of the new directive is such that as Oil Companies open form ‘M’ with their banks with the Naira equivalent of the port charges, then the CBN would pay the Dollar value to the NPA/NIMASA.

Interestingly, with the Treasury Single Account (TSA), NPA/NIMASA would adherently return the same amount of payment received to the CBN. It is obvious that the transmission process will be more of paper work with the Dollar value eventually ending up with the CBN,” he emphasised.

However, Frank advised the CBN to support the swift realisation of the aim of the guideline. “The CBN should be expedient in reviewing and re-admitting the remaining 59 HS Codes (raw-materials) of industrial raw-materials that are locally unavailable excluded from participation in the official Forex market. The huge forex needed for importation of these excluded raw-materials are currently being sourced from the BDC and parallel markets, which, no doubt, may continue to off-set the impact of the new guideline on the stability of the markets.”

In the same vein, the Director, Union Capital Ltd, Egie Akpata, believed it was a step in the right direction. He, however, added that the move was “not remotely enough to say we are near having a single exchange rate.”

Providing his expert opinion on exchange rate convergence, the Executive Director, Corporate Finance, BGL Capital Ltd, Femi Ademola, noted that, the ideal approach to foreign exchange management was to have a single market. According to him, “The current situation in Nigeria where there are several exchange rates for different services is not optimal.”

Ademola, however, added that, “As a developing economy, it should be understood that there is the need for evolution to the most appropriate model for the economy.

Although market determined exchange rate is perfect, it appears to be the least problematic in all the exchange rate mechanisms.”

“By allowing most services to access the official exchange rate market, there is the possibility of a convergence to a single market in the near future. While the BDCs could still operate as agents in the market, the influence of the parallel market would be reduced to insignificance in the new scheme,” Ademola posited, adding, “Finally, there will be the need for the official market to collapse with the I & E window so that we can truly have a single foreign exchange market.”

Similarly, the CEO, The CFG Advisory Ltd, Adetilewa Adebajo, recalled that Nigeria had come a long way from the J.P Morgan Bond Index exclusion meltdown and the self inflicted mismanagement of the Naira. He, nevertheless, added that, “Confidence has now been restored to the markets and the rates have seen major convergence from the 520 Naira to the dollar high.”

Adebajo advised the CBN to “embrace a market driven system as the convergence remains stubborn despite the massive raw dollar intervention.”

According to him, “The CBN should focus on a market driven system and build more confidence in the futures market. They should also focus less on raw dollar interventions and use the futures market to telegraph the market, create stability and in the process preserve the reserves.”

For the CEO, Global Analytics Consulting, Tope Fasua, who stated that a single exchange rate regime was “an arduous task but it can be achieved,” “the ‘irrational exuberance’ of the market if I may use a Greenspanian term seem to have calmed down.”

“A lot of the volatility that we saw was due to mere speculation and that is obvious. Our economy is not so deep as to demand billions of dollars every quarter and even if it was I support whatever could be done to de-dollarise the economy and focus us on patronage or local products. It should now be evident that the single-minded push by market players for Nigeria to fully float its currency was and is still premature and could have greatly depreciated the currency in a way that will precipitate the trio of currency, financial and economic crises. Those who advised as such were a tad too academic and not contextual in their approaches,” he added.

However, pointing out that, “What the CBN has done at the end of the day is to create legitimate markets for an emotive segment – education and health and even travels,” Fasua said, “Ironically the same people who favoured a market-based approach seem to believe that segment should be locked out.”

“If the CBN locks out that segment of demands a new catastrophe will set in. So for now the market has been tamed and at some point a single rate may be attempted with minimal adverse consequences. For now calm has returned since that segment of the market seems satisfied to pay a premium so long as availability is assured.”