CBN’s exchange rates unification alarms economists, manufacturers

By Motolani Oseni, Joy Obakeye and Philip Clement

Economists, manufacturers and stakeholders in the financial sector have raised concerns over the likely economic implications of the adjustment of the exchange rate by the Central Bank of Nigeria (CBN). The CBN’s foreign exchange rate was adjusted from the pegged ₦361 to the dollar rate to ₦380, which indicated that the apex bank may have unified the Forex rates, as it priced the official exchange rate as follows, Central – ₦379.5 (₦360.5); Sell – ₦380 (₦360.1).

Reacting to the Daily Times enquiry on the development, an economist and Professor of Finance and Capital Market, Uche Uwaleke, said the recent upward adjustment of the exchange rate by the CBN is no doubt largely in response to the conditions for drawing down on the recent International Monetary Fund (IMF) RFI facility.

He explained that the development is also consistent with the Economic Sustainability Plan of the government, which has made provision for the unification of rates across all the forex windows. Uwaleke, however, noted that the forex unification is at variance with the Medium Term Expenditure Framework (MTEF) and, by implication, the 2020 budget which was based on an official exchange rate of ₦360 to the dollar. Even the 2021-2023 MTEF is equally predicated on ₦360 per $1.

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According to him, except these are quickly revised in the light of this unification effort, the country’s annual budgets in the medium term are literally dead on arrival.

“In the short term, the implication of this devaluation is that it will likely hurt the economy and bring some pains to most Nigerians given the country’s import-dependent nature and over-reliance on oil revenue. The cost of importation of critical raw materials for Small and Medium Enterprises (SMEs) including import of petroleum products, which hitherto were subsidised at the official window, will rise.”

He explained that the result will be more inflationary pressure on an economy already challenged by COVID-19 and insecurity which have combined to disrupt output, especially in the Agriculture sector. “In response and in a bid to rein in inflation, the CBN will likely raise policy rates leading to further increase in SMEs cost of funds and of production. This situation will lead to more job losses, thereby worsening the unemployment situation.

“Another negative side effect of the devaluation is that it will shrink asset values in dollar terms. This will affect the global ranking of banking and capital market institutions. Banks that have borrowed in dollars from foreign institutions will be in more trouble. Our public debt stock will also rise in naira terms. Although, he pointed out that the aforementioned economic challenges may disappear in the long run resulting in a more stable macroeconomic environment.

“As envisaged by the IMF, the single exchange rate involving devaluation has the potential of fixing the country’s BOP difficulties through reduced imports.”

Also, the unification of rates is expected to translate into more naira revenue for the three tiers of government following the conversion of crude oil sales proceeds at a higher exchange rate than the previous ₦360 to the dollar.

“This should mean improved funding of government budgets, if better managed. Furthermore, the measure will reduce round tripping and other sharp practices in the forex market made possible by multiple exchange rates.

“It will also make the forex market more transparent, facilitate planning for businesses for whom multiple rates create confusion and uncertainty because the market transparency will attract foreign investors and so in the long run, the parallel market rate will not be too diverged from the market determined rate,” he added.

Speaking in an exclusive interview with our correspondent, President of Manufacturers Association of Nigeria, (MAN) Engr. Mansur Ahmed said the move for unification is a welcome development as it possesses the potential to increase investment inflow into the real sector of the economy. According to him, this is a laudable initiative that has come at the right time, particularly now that the economic outlook is gloomy considering the impact of the ravaging COVID-19 pandemic that has culminated in uninspiring macroeconomic situations.

“The Association believes that the adjustment was motivated by the intention of the Apex bank to merge the exchange rate around Investors & Exporters (I & E) window where the Naira is weaker. However, it is important to recognise the existence of the unavoidable pains that naturally come with such transition from a multiple exchange regime to the domain of a single exchange rate, particularly the burden of dollar-denominated loans and offsetting existing credit commitments to foreign suppliers of raw materials.

“Hence, CBN should as a matter of urgency, put a measure in place to minimise the intensity of the pain by considering the outstanding obligations of manufacturers from the second quarter of 2019 till date given at ₦345 to a dollar prior to unification and allow such to be settled at between ₦330 and ₦360 per dollar to enable banks to redeem these obligations to foreign suppliers of manufacturers. Otherwise, many manufacturing factories may close, and CBN stimulus packages to such manufacturing concerns will suffer a huge setback as cash flow crunch becomes the order of the day.”

Explaining further, he said: “By way of suggestion, the Association is proposing that the CBN develop an appropriate implementation strategy that will engender a successful transition from the current multiple windows to a single efficient one.

“Also CBN should ensure that the strategy pursues two fundamental objectives; the first is to limit the short-term pains until efficiency gains materialise by responding swiftly with an inward-oriented rescue guideline, while the second should seek to boost the pace at which such efficiency gains materialise,” he added.

Similarly, an economist and Chief Executive Officer of Global Analytics Limited, Tope Fasua said, “The overriding issue is that the value of our currency has fallen from about ₦179 to the US dollar in 2015 to ₦380 officially today. That is an increase of more than 120 per cent in the amount of naira one needs in order to get the global currency.

“We are coming from a point where naira used to be worth $2.00 as it is, the feeling of despair has set in among small scale businesses and the citizens at large, with many fearing that the naira may soon become worth very little as the pressure continues to mount.”

He noted that Nigeria remains an import-dependent country and has serially failed to utilise the opportunity created by currency devaluation to reposition the economy.

“We failed in the past, and it is most likely that we may fail again. This is also happening against the backdrop of COVID-19 and the concomitant slowdown in every economy occasioned by lockdowns and shut-ins. The scenario is far from palatable. In economics, there is what is called the Marshall Lerner postulation or law. It says that a country can only benefit from devaluation if, by devaluing, it will be able to sell more of the main products she pushes in the international markets.

“Nigeria will not sell more petrol as a result of currency devaluation. SMEs will only pay a lot more for every input as inflation ratchets up. Business failures may also be accelerated. It is a frightening situation. For market players who believe the naira should be devalued, even more, I say that we have to find somewhere and somehow to backstop any continuous drop in the value of the naira. Prodding the Central Bank to continue devaluing based on the notion of overvaluation could also lead us to a Zimbabwe scenario. Let us see your clear projections and scenario planning, else we shall all be in trouble,” he said.