With N381/$1 Exchange Rate Adjustment, FG, States Get More Cash

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•AfDB pushes for rates’ cut to stimulate growth
•Projects $189.7bn GDP losses for Africa

Obinna Chima and Dike Onwuamaeze

The adjustment of the official naira exchange rate from N361/$ to N381/$ by the Central Bank of Nigeria (CBN) means that the three tiers of government will have more naira to share during their monthly Federation Account Allocation Committee (FAAC) meetings.

The new rate was posted yesterday on the website of FMDQ OTC Securities Exchange, the Lagos-based platform that oversees foreign-exchange trading.
Revenue from Petroleum exports accounts for about 80 per cent of Nigeria’s earnings and makes up a significant portion of the amount that is shared monthly by the federal, state and local governments.

According to analysts, the exchange rate adjustment would benefit the three tiers of government as the new naira exchange rate at the official market means that they would get more naira to.

Others that are expected to benefit from the development according to analysts are the Foreign Portfolio Investors (FPIs) who invest in the Nigerian market as well as institutional investors with a huge dollar position.
However, the downside of the development according to analysts is that prices of goods and services are likely to rise as well as the landing cost of petrol.

The official exchange rate adjustment comes less than one week after the central bank adjusted the naira exchange rate at the Secondary Market Intervention Sales (SMIS) to N380/$1, which also used to be N360/$1.
A top central bank official had told THISDAY at the weekend that from time to time, the exchange rate adjustment would continue to happen, either upward or downward in line with market fundamentals.

“Certainly, no single rate can be achieved, but we would keep moving towards I&E rate,” the source had said.
The CBN Governor, Mr. Godwin Emefiele, recently assured investors that the desire of the central bank was to achieve exchange rate unification” around the Nigerian Autonomous Foreign Exchange Market (NAFEX)/ I&E rate.

Emefiele had explained thus: “What we mean by exchange rate unification is moving towards the NAFEX. NAFEX is our dominant market for the purchase and sale of forex and it is a free market where everybody is free to sell their dollars and those who want to buy are free to buy dollars.
“That means that whether you are a businessman, a bank, CBN, and you have dollars, you can bring it to the market to sell and if you want to buy dollars, you can come to the market.

“Like some of you must have seen, three years before 2019, we saw a relatively stable forex market because the NAFEX rate and even the rate at which the central bank transacts business outside the NAFEX were substantially close to each other. So, the CBN will continue to pursue unification around the NAFEX.”

Members of the Organised Private Sector (OPS) have commended the move by the CBN, saying the development would allow the exchange rate to reflect the market fundamentals and avoid distortions in the economy.
The Director-General of the (LCCI), Dr. Muda Yusuf, described the unification of the rates as an important move to stem the looming liquidity crisis in the foreign exchange market.

Yusuf stated that multiple exchange rates were a major source of distortion in the foreign exchange market as the system complicated the management of the foreign exchange market and perpetuated a rent economy that created opportunities for arbitrage, which engendered resource misallocation.

“It is imperative for the exchange rate to reflect the market fundamentals in order to ensure sustainability and promote efficiency in allocation mechanism. This is also critical for investors’ confidence. This should, however, be complemented with appropriate trade policy regime, fiscal policy measures and institutional strengthening to achieve the objective of heightening self-reliance and economic diversification,” Yusuf said.

He added that the disadvantages of the multiple exchange rate system are the impediments it posed “to the attraction of investment as well as inhibiting the inflow of foreign exchange and creation of transparency issues in the allocation of foreign exchange.”

AfDB Pushes for Rates’ Cut to Stimulate Growth

The African Development Bank (AfDB) has advised the Central Bank of Nigeria (CBN) and other central banks on the continent to quickly ease financial conditions by cutting interest rates in their respective economies.
The multilateral institution also advised central banks to apply a combination of macro-prudential and unconventional monetary policy tools to support the vulnerable sectors of the economy, just as it recommended that targeted interventions should be implemented for affected firms and sectors.

The AfDB gave the advice yesterday when it launched its African Economic Outlook (AEO) 2020 Supplement, which was presented by its Director of Macroeconomic Policy, Forecasting and Research, Dr. Hanan Morsy, during an event, held online.
Morsy said: “Central banks could resort to their own forms of quantitative easing, targeted at funding the most affected sectors such as firms in the hospitality and entertainment industry like airlines, hotel chains, logistics and sports by temporarily re-profiling or restructuring their debts.

“To support vulnerable groups, a programme could be targeted to micro-enterprises and the unbanked in the informal sector, financed by the government and potentially run by other agencies closer to the ground.”
The AEO report projected that the real GDP in Africa would contract by 1.7 per cent in 2020, dropping by 5.6 percentage points from January 2020 pre-COVID –19 projection if the virus has a substantial impact over a short period.

However, the report stated that there could be a deeper GDP contraction in 2020 of 3.4 per cent, down by 7.3 percentage points from the growth projected before the outbreak of COVID–19 if the pandemic continues beyond the first half of 2020.
“Cumulatively, GDP losses could range between $173.1 billion and $236.7 billion in 2020–2021.

“With the projected contraction of growth, Africa could suffer GDP losses in 2020 between $145.5 billion (baseline) and $189.7 billion (worst case), from the pre-COVID–19 estimated GDP of $2.59 trillion for 2020,” the AEO said.
Moreover, some losses could be carried over to 2021 as the projected recovery would be partial.
It said: “For 2021, the projected GDP losses could be from $27.6 billion (baseline) up to $47 billion (worst case) from the potential GDP of $2.76 trillion without the pandemic.”

The bank projected that the most affected economies would come from those with poor healthcare systems as well as those that relied heavily on tourism, international trade, commodity exports, those with high debt burdens and high dependence on volatile international financial flows.

The AEO also observed that the pandemic has already triggered an increase in inflation on the continent and in some cases by more than five per cent in the first quarter of 2020.
It attributed the rising inflation to the disruptions in the supply of food and energy, the bulk of which are imported. “Overall, although headline inflation, which includes food and basic energy prices, would be expected to rise, core inflation might remain stable until demand picks up after the pandemic.

“The pandemic and its economic consequences are expected to trigger expansionary fiscal policy responses across all categories of economies in Africa. The implied expansionary fiscal stance would further widen fiscal deficits in the continent.

“This worsening fiscal position would be the result of above-the-line increases in budgetary outlay on COVID–19 related health spending, unemployment benefits, targeted wage subsidies and direct transfers, and tax cuts and deferrals,” it stated.
The AEO also showed that countries in Africa would witness higher debt-to-GDP ratios, which are projected to increase further by up to 10 percentage points beyond the pre-COVID trajectory in 2020 and 202.
It also predicted that remittances and foreign direct investment could plunge due to job losses abroad and wane in investors’ confidence.

The AfDB also advised African governments with fiscal space to help businesses and households to stay afloat through targeted temporary tax relief, cash transfers, and hardship allowances.
“Governments can support those who have been laid off from their jobs or lost their livelihoods with measures such as cash transfers, an extension of the period for filing taxes for affected businesses or temporary subsidies to affected industries,” the bank said.

It noted that given the global scale of the pandemic and its repercussions, “governments and development partners must respond in a coordinated, targeted and rapid manner to be effective in limiting its impacts.”
It said: “Across Africa, the response must be well-sequenced and multipronged, involving a public health response to contain the spread of the virus and minimise fatalities and fiscal response to cushion the economic impacts of the pandemic on livelihoods and to assist businesses,” adding that “labour market policies to protect workers and their jobs, and structural policies to enable African economies to rebuild and enhance their resilience to future shocks” are needed.

It also recommended that African governments should address the structural bottlenecks that would make the continent more vulnerable to future shocks in order to prepare the continent for a post-COVID–19 world and enhance its resilience.

Morsy stated that the focus of the restructuring would be to accelerate structural reforms that would rebuild Africa’s productive base and increase its productivity by addressing obstacles in the business environment.

This, according to her would require, “investing in human capital to build a workforce with the skills for engineering, manufacturing, and construction. Sectors such as agro-processing, digital technologies, ICT-based services, and trade logistics require government intervention to improve their competitiveness.”

The AfDB also recommended that the government should address obstacles that have hindered the widening of the formal sector of the economy by easing business registration and adapting tax regimes that would encourage informal businesses, which could not join the formal sector due to the fear of being overwhelmed by administrative requirements and large tax bills.

It said: “Aggressive information campaigns can highlight the benefits of formalisation, such as access to capital and greater opportunity to expand operations and boost profits. Moreover, reform requires innovative approaches that are flexible and adapted to the needs of informal workers, such as allowing workers to contribute voluntarily to a retirement fund.”