Nigeria’s Central Bank has released guidelines on how its new foreign exchange policy will work. Governor of the Bank Godwin Emefiele on Wednesday unveiled the Framework for the re-introduction of Managed Float Exchange Rate System.
The bank had earlier said it will launch a foreign exchange interbank trading window on Monday to boost the supply of hard currency.
Governor Emefiele said Nigeria’s foreign exchange reserves declined from about $42.8 billion in January 2014 to about $26.7 billion as of June 10, 2016, with average monthly inflows falling from about $3.2 billion to less than a billion dollars per month as oil prices remain low. Nigeria depends on oil for more than 80 percent of foreign exchange.
To avoid further depletion of the reserves, Mr. Emefiele said the CBN opted to adopt policy actions to prioritize the most critical needs for foreign exchange as well as maintaining stability in the exchange rate.
While the apex bank held the naira at N197 to a dollar despite shortage of dollar at the official exchange market, several businesses in Nigeria were hit as they had to source hard currency at the black market where rates went as high as N360 to a dollar. Many small businesses also had their revenues hit. Now that the CBN has moved to liberalize the foreign exchange market, a lot of things will change.
What does the new policy mean for the average Nigerian?
Many businesses will come back to life
Some dead, some comatose due to the scarcity of hard currency needed for essential parts of their operations but the new policy would ensure the availability of foreign exchange at the same rate across board.
Over the past months, many companies have complained about how the scarcity of foreign currency has affected their businesses; now they can get back to working efficiently.
Inflation may go down
Many will argue against this but what must be noted is that only few companies have really been enjoying the CBN rate. Operating costs have risen over the past one year as some manufacturers have had to source for foreign currency (for importation of raw materials) from the parallel market. Others had to wait several weeks to be able to access forex from the central bank. This has led to a surge in prices of goods. Inflation rose to 15.6 percent in May, increasing for the seventh month in a row.
Nigeria is a net importer of food and refined fuel but not all the forex needs for importation over the past months were covered by the CBN. For instance, oil marketers were in May reported to have been given the go-ahead to source foreign exchange to import petrol into the country at an autonomous exchange rate of N298 to the dollar. However, the liberalisation of the forex market is expected to boost liquidity and we may see dollar exchanging for N260 – N280 in a few months (or sooner). If that happens, it means importers will start sourcing forex at cheaper rates than they have in the past few months; the impact of this will be felt on prices.
Days after Nigeria’s statistics bureau released a report showing the country’s GDP contracted by 0.36 in the first quarter of 2016, the central bank announced it would adopt a flexible foreign exchange regime to stimulate economic growth.
“The current context is that the economy has been declining. The Gross Domestic Product (GDP) has contracted for the first time in twelve years; unemployment is on the rise; manufacturing capacity utilization has been weakening; and investors’ confidence has been at its lowest ebb. The decision not to tighten monetary policy is therefore appropriate,” Mr Muda Yusuf, Director-General of The Lagos Chamber of Commerce and Industry (LCCI) said following the apex bank’s announcement.
The impact of the policy move is already been felt in the country; the Nigerian Stock Exchange returned to gains yesterday. Investor confidence will be restored and Nigerian can expect improved capital inflow.
Vice president Yemi Osinbajo had said at business conference in Lagos last month that the country needed to reconsider its foreign exchange policy. “This would help boost foreign exchange supply and encourage capital inflows and a free flow of remittances.”
No more preferential treatment
Although Nigeria’s wealthiest man Aliko Dangote boasts about generating income in foreign exchange in Ethiopia, South Africa, Tanzania, Senegal and Cameroon; he had been one of the few businessmen given preferential treatment by the CBN. Even when oil markets complained about scarcity of hard currency to import fuel, the capitalist got roughly $15 million per week at N199. That stops now. Everyone now buys at the same rate. Remember when Nigeria’s main opposition party accused a presidential aide of round tripping? Whether it’s for a daughter or cousin studying abroad, presidential connections will no longer be needed to source forex. We can all get at the interbank rate.
The sad part
There are many positives to take from the new foreign exchange policy but there are also negatives. One significant negative is how much bad loans banks may have to contend with.
First Bank reported an 82 percent drop in profit for 2015 after writing off bad loans worth N119 billion. More bad loans will be written off by financial institutions in 2016. The reality is that the real value of the Naira is no longer 199 to a dollar. When the inter-bank trading under the new guidelines begins on Monday, a dollar will not exchange at the old rates and those who have foreign loans taken at N160 will have to pay almost double.
“We have some debts due for repayment in dollars. We have borrowed billions of dollars at N160 but the exchange rate is now above N300,” Managing Director of Internet Service Provider, Spectranet, David Venn said in April.
Several banks had their profits hit by bad loans in 2015. The situation is not expected to change in 2016. If “taking difficult decisions” like downsizing is what they have to do to balance books, many banks will do that. Well, except they promised to reduce the rate at which they sack.
There are very important information for those very interested in the intricacies of the new policy here and here; also here. But for the average Nigerian, all you need to know for now is that things can only get better from here on.