The private sector caused the failure of Nigeria’s past FX policy; responsible for the future of the new

Nigeria’s central bank on Monday launched a foreign exchange interbank trading window to boost the supply of foreign currency in Africa’s largest economy which has seen the supply of hard currency dip following the slump in global oil prices. Crude is the country’s major foreign currency earner.

While hopes are high that the apex bank’s decision to allow the naira to float freely, will make things better in Nigeria, risks remain. According to  Ikpenmosa Uhumuavbi, a corporate lawyer who is Senior Counsel at Brace Law Partners, the Nigerian economy as it is, is not ripe enough for a free market system.

“A system that is still developing and as a result, structurally deficient in so many areas, cannot accommodate the sophistication of a free market architecture,” Uhumuavbi told The Nerve Africa.

The lawyer who frequently comments on the Nigerian economy believes the old policy of having a fixed exchange rate would have the best deal for Nigeria and would have worked perfectly.

Nigeria has suffered from foreign exchange shortages since global oil prices fell in 2014. Public finances have been affected, as have currency reserves, as the country depends on oil for more than 70 percent of government revenues and more than 80 percent of foreign exchange.

The Nigerian central bank pegged the naira at 197-199 per dollar in March 2015 and restricted trading in foreign currencies, making imports more costly for a nation that is a net importer of refined fuel and food products. Despite these challenges Uhumuavbi said things would have worked fine if the private sector had cooperated.

“The poor acceptance of the previous FX policy by the organised private sector, contributed to its failure,” he says.

However, the doctoral candidate in International Banking, Corporate & Securities Law did not spare the Nigerian government from blames.

“The fiscal authorities were not forthcoming with their policies and programmes,” he adds. “We expected swift action from the cabinet to complement the programmes of the monetary authority.”

To drive home his point about the importance of the previous FX policy which has now been jettisoned, Uhumuavbi highlighted what the old policy was meant to do.

“Stimulate backward integration and development of local competences; encourage local production and consumption; discourage excessive reliance on import of products with very good local substitute; support the growth of manufacturing by encouraging value addition to products that are hitherto exported in their raw or unprocessed state; and freeing up resources to support the development of our industries,” he says.

Uhumuavbi dismissed claims by businesses that said they had to source forex from the parallel market due to restrictions placed by the CBN. According to him, it was for that purpose that the CBN had a special window to support legitimate claims with regards to growing critical sectors.

“Businesses were free to access that window. That didn’t happen. Rather they pushed for change of policy,” he laments.

With the Nigerian economy on the brink of recession, the CBN decided to float the naira. The currency had been quoted at 253 against the dollar on Monday as the new interbank market opened but by the end of the day, it had depreciated to N281.85 per dollar. The central bank sold $4.02 billion to clear the backlogs of matured foreign exchange obligations of banks. The apex bank sold $532 million in the spot market and $3.489 billion in the Futures market.

Now, that Nigeria’s foreign currency market has been liberalized, actions must be taken to ensure the impact of the new policy is felt in the economy. To Uhumuavbi, the buck stops with the private sector.

“Well, the right step from now going forward is to continuously educate the organised private sector on the need to support government in its drive to reform the economy and redirect it towards the right trajectory,” he says.

“The private sector should desist from short fixes or quick wins if we must grow our economy,” he adds, stating that successful economies all over the world have long term views.

He calls for continuous engagement with the private sector to ensure things work out well. According to him, public-private partnership (PPP) has been on the table but private sector buy-in is poor. A lot is being achieved throughout the world, especially in terms of infrastructure, through PPPs. Discussions around how the private sector can partner with the government to develop infrastructure should be paramount, as improved infrastructure will encourage local manufacturing which is crucial to Nigeria at this moment.

“Improvement in infrastructure is part of the discussion the private sector needed to engage the government on and not how to promote speculation,” says Uhumuavbi.

“Our economy needs investment in those building blocks like hard and soft infrastructure. For the hard infrastructure, we need to invest in the industrial and services sectors.

“For the soft infrastructure, we need social investment in education, health, pension, housing,” Uhumuavbi says.

The lawyer concludes that Nigeria needs to also improve the structure of its market to take full advantage of the benefits that come with portfolio inflows which are expected to increase with the floating of the naira.