Due to the negative effects of the country’s foreign exchange reform on the economy, experts are recommending the bolstering of non-oil exports as a crucial measure to counteract the current decline of the naira, writes Oluwakemi Abimbola
Since the Central Bank of Nigeria announced the unification of the exchange rate in June, the local currency has been struggling against major currencies. While financial analysts have praised the central bank for lifting the peg on the naira, the subsequent unintended consequences of this policy have had detrimental effects on the economy.
In mid-August, the local currency weakened to an all-time low against the dollar at the parallel market, also known as the black market, trading at 950/$. This further widened the gap between the official and unofficial rates of the naira, defeating the essence of CBN’s unification of the rates.
When the CBN announced the harmonisation of all segments of the Nigerian forex market, the apex bank said the move was part of the Federal Government’s efforts to improve liquidity and stability in the market and attract foreign investors.
This unification allowed the naira to float; meaning the FX rate was now determined by the laws of demand and supply.
The apex bank also stopped the RT200 programme and the naira4dollar remittance scheme, which encouraged remittances and inflow of foreign currency.
The statement signed by CBN’s Director of Financial Markets, Angela Sere-Ejembi, said, “All transactions will now be done through the Investors and Exporters window, where the exchange rate will be determined by market forces. Applications for medicals, school fees, BTA/PTA, and SMEs would continue to be processed through deposit money banks.”
In its half-year report titled The Turning Point, investment firm, Afrinvest, revealed that the naira had dipped by 41.9 per cent against the dollar in terms of year-to-date returns in 2023, even as the strength of the American currency wanes on the global stage.
Comparing the external reserve with the FX rate, the investment firm stated that no policy could artificially fix the rate at N600 without further worsening the delicate condition.
Using different valuation models built on the assumption of achieving $60bn reserves in eight years, as set out by the Tinubu administration, Afrinvest projected that dollar/naira exchange rate would range between 700 and 800 at the end of 2023 and 2024.
Using the Money Zero Maturity model, the asset management firm projected the naira trading at 773.08/$ at the end of 2023 and 790.3/$ at the end of 2024. With regression analysis, the naira was projected to trade at 753.78/$ as of the end of 2023 and N 730.23 at the end of 2024 worst case scenario.
Since the harmonisation of the forex market, the CBN seems to be throwing all manner of approaches at the naira in a bid to stabilise it.
From the CBN governor, Folashodun Shonubi, lashing out at black market operators and speculators, which provided a brief respite for the naira, to the reintroduction of the Bureau De Change operations with new operational changes, two years after the apex bank banned the sale of dollars to BDCs.
Under the new framework, the spread on buying and selling by BDC operators is set to fall within a permissible range of -2.5 per cent to +2.5 per cent of the Nigerian Foreign Exchange market window’s weighted average rate from the previous day.
Again, the move was touted as one that would provide more stability and transparency to exchange rate fluctuations.
Nigeria’s oil firm, the Nigerian National Petroleum Corporation Limited, announced that it had taken an emergency crude oil repayment loan of $3bn loan from the Africa Import and Export Bank in order to strengthen the ailing local currency.
NNPCL, in a brief statement titled ‘Relief for the naira: NNPC Ltd secures $3bn emergency crude repayment loan from AFREXIM Bank,’ said the loan would be used by the oil company to support the Federal Government in stabilising Nigeria’s exchange rate.
It was also gathered that the facility would also help in reducing the pump price of Premium Motor Spirit, popularly called petrol.
“The NNPC Ltd and #afreximbank have jointly signed a commitment letter and term-sheet for an emergency $3bn crude oil repayment loan. The signing, which took place today at the bank’s headquarters in Cairo, Egypt, will provide some immediate disbursement that will enable the NNPC Ltd to support the Federal Government in its ongoing fiscal and monetary policy reforms aimed at stabilising the exchange rate market,” part of the statement read.
Some stakeholders explained that while the move would infuse dollars into the economy, the loan would not address the concerns around foreign exchange in the long run.
They argued that as Nigeria continues to import petrol, the pressure on the dollar would persist.
A professor of Capital Market at the Nasarawa State University, Uche Uwaleke, said that it was worrisome that it was the NNPCL taking out a loan instead of the apex bank.
“Contracting external loans to lend to the CBN creates an erroneous impression of insolvency on the part of the CBN, which is not a healthy signal to foreign investors.
“Much as an intervention in the forex market by the CBN is desirable, a more cost-effective option would have been to use what is left of our external reserves as opposed to taking a loan from Afreximbank or even the IMF,” he added.
The Nigerian Exchange Limited recently revealed that it planned to introduce dollar-denominated listings on its platform, in order to boost forex in the country.
The Chief Executive Officer of NGX, Temi Popoola, said that selected companies would be allowed to offer the dollar-denominated assets.
He said, “Our primary objective is to enable these companies to issue bonds denominated in dollars and eventually offer equity in dollars as well. It could potentially address the challenges posed by fluctuations in foreign currency.”
Popoola reiterated that the proposal, which did not have a timeline yet, presented an opportunity for companies with diverse business models, some of which not only generated revenue in dollars but also reported profits in dollars.
This plan has been met with mostly enthusiasm by capital market operators, who opined that it was timely.
Reacting to the proposal, a former President of Chartered Institute of Bankers of Nigeria, Okechukwu Unegbu, expressed enthusiasm at the positive impact it would have on the economy.
He said, “You know there is no forex in Nigeria now. We have less than $5m in our foreign reserves. What the NGX is planning is to help the companies to source for their own dollars. I think it is a good plan. My only concern is whether it will work because Nigeria is not so stable. We need a stable economy for such a thing to take place.”
Raising concerns, however, was the former Statistician-General of the Federation, Dr Yemi Kale, who said via his X handle (formerly Twitter), “If firms raise dollar debt, they also have to repay in dollars. So, a firm issues dollar bonds to make FX transactions e.g., imported inputs. It produces and sells its products in naira, then has to convert profit back to dollars to pay investors at maturity. See the risk?”
The Managing Director of Cowry Asset Management Limited, Johnson Chukwu, in a chat with The PUNCH pointed out that the continued depreciation of the value of the naira was due to the illiquidity in the FX market. He said if there was enough liquidity support to intervene in the market from the CBN, to stabilise the exchange rate and clear demand arrears, then Nigeria would have achieved some level of stability, and restore confidence in the FX market.
“The direction that the naira will go is dependent on the confidence that people have on the local currency and that that confidence will come from the belief that there is enough supply to meet demand,” he said.
Speaking on the various attempts to stabilise the naira, Professor of Economics, Ekpo Akpan, opined that they were not likely to be ineffective if there were no attempts to boost manufacturing.
He said, “If your economy is not productive, you are going to have a problem with the value of your currency. Our economy is a consuming economy. So, you cannot float your economy, you have to do a managed float. The emphasis is on the word managed. The dollar, pounds sterling, Euro are not your money. You cannot have enough.
“It is a supply and access problem. The economy has to be productive and export non-oil goods and services and earn foreign exchange.
“So, NNPCL borrowing from Afriexim bank will not help much, even CBN bringing back BDCs will not help because in most countries BDCs look for their own dollars. They also buy and sell. Nigeria and Kenya were the only ones giving dollars to BDCs to sell, which is not the right approach.”
According to the former Monetary Policy Committee member, the solution to the country’s forex challenge is to have a productive economy.
“In the last 60 years, Nigeria’s manufacturing sector still contributes less than 10 per cent to GDP. So, we don’t have a genuine manufacturing sector. We are not exporting enough non-oil goods and services to earn forex; that is the long-term solution,” he pointed.
Also, the Managing Director of Afrinvest Consulting, Abiodun Keripe, stated the currency market may continue to be unstable if conditions suggest that authorities are not in control.
“Where you have an FX market that doesn’t give confidence to investors, that doesn’t suggest that policymakers are in control, FX will dry up in the economy. If you look at Q1 of 2023, total capital importation in Nigeria was just about $1.1bn, which doesn’t paint a good picture when compared to about $8.5bn that we used to do at some point.
“Despite improved export earnings, Nigeria’s heavy dependence on import affects trade balance. So, we have a lot to do with respect to improving our exports. The crude oil exports must likely improve, but you have a lot of work to do around that,” he said.
Pundits are hopeful that the government would find a lasting solution to the country’s forex shortage by promoting non-oil and providing conducive environment that would encourage foreign inflows.
