Nigeria’s naira has remained relatively stable at all segments of the foreign exchange markets in the last one and half years, no thanks to the introduction of the Investors and Exporters’ Foreign Exchange Window by the Central Bank of Nigeria in April 2017 and the relative stability in the global oil price in recent time. But still, the naira is traded within a range of N306 to the dollar on the official window and N363 to the dollar on the investors’ window. Prior to the prevailing stability in the foreign exchange market, the naira had fallen rapidly against the US dollar in the months after President Muhammadu Buhari took over the government in May 2015. This was as a result of policy vacillation by the government when it failed to take appropriate measures to restore investor confidence in the economy. The global prices of oil had fallen far below $50/barrel on the international market, the country’s forex reserves were also down due to speculative pressure on the foreign exchange market by offshore investors exiting the market and this impacted negatively on the foreign exchange reserves. The new government had failed to announce its cabinet neither was the President in a hurry to calm the market through a series of intervention, hence the speculative attack on the naira. President Buhari in his characteristic rigidity insisted that he would not allow official devaluation of the naira in spite of the obvious impact of a fall in price of crude oil on foreign exchange income and a declining foreign exchange buffer. The regulatory bank on its part seemed not sure of its next move because of the body language of the new sheriff whose disposition towards liberal economy was negative. In response to the pressure on the external reserves, the CBN slammed forex restrictive measures and introduced other capital control policies to curb speculations on the local currency. These measures created more panic in the system with many investors including individuals resorting to mounting pressure on the available dollars.
Rumours that the new government planned to change the colour of the naira as a measure to track stolen money from the treasury further put more pressure in the local currency as many people moved to convert their local currency into dollar. The CBN forex restriction and capital control measures failed to address the challenges in the market and the naira fell sharply on the parallel market due to increased demand and scarcity of the dollar in other segments of the forex market.
At some point, the naira weakened to around N550 to the dollar on the parallel market even though official market rate remained around N220 to the dollar. The CBN had to adopt currency rationing to support the demand at the official window, which now had resorted to a crude way of foreign exchange allocations to douse tension. Many businesses were closing down due to currency shortage resulting in declining productivity in the economy and by the second quarter of 2016, the economy had entered recession, its first in 25 years. Inflation then shot up to around 19 per cent as the effect of currency shortage bit harder on businesses while the economy gradually slowed down. Even with all the negative signals that the economy could dip further, the CBN stuck to its gun on capital control and forex restrictions and rather than tighten liquidity to curb pressure on the naira and rein inflation.
A former CBN Director of Trade and Exchange blamed the current CBN governor, Godwin Emefiele, for the mess the foreign exchange has become because of his inability to summon the political will at the appropriate time and make the right move to correct the imbalance in the market. According to the ex-CBN director, “Emefiele has contributed to the currency mismanagement. I don’t know whether it was fear of the unknown or sheer lack of knowledge.” Corroborating the position, another top banker in a new generation banker angrily accused the CBN governor of coming to mess up the foreign exchange market with his currency restriction and multiple forex windows. The banker said before the governor came, the country had already developed an efficient foreign exchange market system that was driven by market efficiency and price discovery methods. However, another banker and economist countered the position and said the governor was limited by choices available to him at the critical time. He said the governor was caught between floating the currency and encouraging the devaluation of the naira with negative consequence on price stability in the country. He said the governor chose the auspicious measures to help conserve the country’s foreign exchange reserve and support critical areas of the economy with forex allocation. Atiku Abubakar, the presidential candidate of the opposition Peoples Democratic Party, also criticised the CBN foreign exchange policy, saying if he won the presidential election, he would float the naira and overhaul the regulatory bank in line with his liberalisation policy.
Atiku was particular about his plans to carry out a major reform of the regulatory bank if he won the election held on February 23. He categorically said that he would sack Emefiele as he considered him an ineffective administrator of the country’s monetary policy authority. Even though the country’s currency exchange rate has achieved some measure of convergence on some of the foreign exchange windows, the CBN remains adamant on sustaining the present forex management policy of multiple exchange rates, considered by experts to be susceptible to manipulation and abuse.
Emefiele said recently that allowing Nigeria’s naira to float would lead to massive depreciation of the naira, and ultimately to currency crisis in the country. Both the World Bank and the International Monetary Fund have on different occasions called on Nigeria to end its present foreign exchange regime that created room for multiple exchange rates. According to the Bretton Wood institutions, the current foreign exchange regime has created distortions in the economy and could keep away the needed foreign investors from the country. Nigeria currently has about five exchange rates in operations; the interbank rate which currently trades around N306 to the dollar; a special rate for Muslims and Christians embarking on pilgrimage to Mecca and Jerusalem; investors’ and exporters’ window; another one for paying school fees and medicals and the parallel market rate. A business newspaper recently wrote a damning report on the huge arbitraging going on in the foreign exchange market. According to the paper, many privileged persons are taking advantage of the margin between the interbank market and other forex windows to rip the country off in billions of naira.
Although the CBN spokesman, Isaac Okorafor, debunked the report as untrue, not many Nigerians are willing to accept the regulatory bank’s claims that there is transparency in the foreign exchange management. An economist said it is a matter of time before the country’s currency risks a disorderly depreciation if steps are not taken to correct the prevailing distortion in the market. Nigeria’s foreign exchange reserves stood at $42.95 billion as of February 8, 2019 compared to $41 billion a year ago and better than $28.64 billion two years earlier. The improvement in the forex buffer is majorly as a result of recovery in oil prices, trickles of dollars from offshore portfolio investors and huge Eurobond issued by the government within the period. The government has borrowed up to $10 billion from the international capital market in the last three years to fund infrastructure projects. As it is, the Nigerian economy relies mainly on revenue from crude oil export and any negative development in the global market has consequences on the economy due to lack of diversification of the government revenue base. Also, adjustment in the interest rate in developed economies could mean further capital flight from the country and invariably impacts negatively on the state of the local currency.
Although in apparent realisation of the need to broaden the revenue base of the country, the present government has tried to introduce reforms in tax administration, and expand the non-oil sector’s contributions to revenue to reduce dependent on oil sector. Income from tax has improved to a large extent due to increased drive to collect tax revenue; automation of collection methods and the introduction of an amnesty scheme to encourage voluntary declaration of assets by people hitherto evading tax. However, lack of political will has prevented the government from reaping more dividends from the tax reforms and this is considered a major setback on the attempt to expand the tax net. The CBN should be ready and willing to carry out extensive reforms in the foreign exchange market the outcome of the presidential election notwithstanding and ensure that the resources of the country are not frittered away through the present piecemeal interventions that give room for arbitraging and round-tripping by unscrupulous elements.