The Rush to Stabilize the Exchange Rate of the Naira

By Boniface Chizea

 Dr.Boniface Chizea

The airways are agog with the story that the Chairman of the President Committee on Fiscal Policy and Tax reforms, Mr. Taiwo Oyedele has signaled that urgent reforms should be anticipated very soon that would make the Naira exchange for between 650 and 750 before the end of the year which he described as a fair price. In the heat of the ensuing discussions I was engaged on a virtual interview by TVC Television for their weekly Business programme to discuss this development to be aired on Friday November 03, 2023.

Even though what has been proposed will amount to a major relief for all concerned were it to be possible which we doubt very much. We must bear in mind the rate projected was it to be realized will still represents a massive depreciation from the rates of about 460 Naira/dollar under the managed float regime with the immediate past Administration. Demand management is not the best as it entailed lots of human interventions and manipulation with all manner of clever creative approaches thrown into the mix. This development if successful will give a semblance of stability which is much desired and craved for by all economic agents. But as we discuss, we must also be wary because there is no market for dollars in Nigeria. I am sure that we can all vouch for that now as we are better informed in that connection following our nascent experience. What we talked about as a distant dream happened before our very eyes as on October 30, 2023 the rate of exchange broached the 1,000 Naira to dollar mark! And since then the Naira rate of exchange for all practical purposes has been on a free fall.

But the situation of daily fluctuations in the rate of exchange creates a veritable nightmare situation for businesses as they are left groping in the dark; presenting a situation of uncertainty which economic agents are not averse at managing. Businesses are nurtured on how to manage risks but confronting uncertainty is a strange ball game. But it is commendable that the authorities have not simply thrown up their hands into the air but at least we are talking about what could be done. And as we do so all options must be on the table including may be temporarily adopting aspects of Demand management to create a badly needed situation of stability as we checkmate the free fall rate of exchange rate experience which most of us find so abhorrent and excruciating.

As we all know a major contributing factor to the current experience of free fall is the unpatriotic tendency of some bad eggs amongst us who live on capitalizing on the arbitrage opportunities. In fact if it is not falling they are prepared in their pursuits for their blind and selfish ends to manipulate the situation. The announcement of a rate which we have targeted as a “fair rate” is good for the psychology of the market. The rate of exchange has been in all our experience on a down ward spiral that one of safest things to do is to take a bet on the direction the rate of exchange will go. On a recent radio program with Sunny Irabor one contributor did indicate that President Sani Abacha of blessed memory was able to make the rates appreciate under his watch from the position he inherited from President Ibrahim Babaginda. I am yet to collaborate this assertion.

But what is a fair price for the exchange rate of the Naira? How do we determine what is fair? Taiwo Oyedele has indicated a range of between 650 to 750 and on one occasion the Central Bank itself is reported to have observed that 700 Naira to a dollar is a fair rate. But to the best of my knowledge there is no model of the economy anywhere that I know of. But even if we adopt Purchasing Power Parity for this purpose; what is the cost of a hair cut in Britain vis-a-vis its cost in Nigeria; that remains a rather crude measure as we would have to take many other essential measures as constant which really is not the case. But the average economic agent in Nigeria is more concerned with the stability of the rates which makes life comfortable for most and falls squarely within the core mandate of the Central Bank which is the maintenance of macro and exchange rate stability; you can safely read fighting inflationary spiral.

Let’s now consider aspects of the major planks of the anticipated reforms. But as we do so, it is proper to note that the authorities have indicated that inflow of 10 billion dollars is anticipated shortly in a matter of weeks and also there is the resolve to securitize anticipated dividends inflow from Nigeria Liquefied Natural Gas operations to the tune of 7 billion dollars. We have not heard much again regarding the expected inflow of 3 billion dollars from African Export/Import Bank which we were told was ill advisedly negotiated by Nigeria National Petroleum Company Limited. There is no doubt that such inflows will provide temporary succor as we tackle this dilemma headlong.

The resolve to clear backlog of remittances estimated at 7 billion dollars should be right on target; hits the bull’s eye because there is no other issue that has made the Nigerian investment ecosystem as unattractive as this issue. And it was a major factor that contributed to the free fall in the rates as should be expected as there was stampede to exit no matter the rate. As I express these views, it has been reported that efforts to clear these backlog has commenced in earnest and that is really good news; music to the ears.

There is recommendation that Bureau de Change should be allowed undeterred access to the official foreign exchange window. That will be contrary to the initial idea that underpinned their establishment in the first place. BDCs were meant to carter to the retail end of the market by providing services to Nigerians who require to meet their personal foreign exchange denominated obligations. That was what they were licensed to do. But with time it became common knowledge that large funds particularly ill-gotten was being moved through the BDCs. We must bear this condition in mind as we progress. If we want to refocus the scope of their operations, we must be intentional about doing so.

I am personally wary of the argument to pull all demands unto the official window as a means of making the parallel market redundant. That will amount to a wrong reading of the situation as we only increase demand pressure without commensurate sustainable improvements in the supply chain ; a perfect recipe for sustained turmoil at the market.

In the same vein one decries the recent decision to revise the denial of access to the official window by some 43 products and services which included tooth picks! One main consideration for this stance is that the denial of access goes back to 2015; about ten years now. And as should be expected adjustments have since been made and in some instances local capacities have been developed. Therefore this is the type of policy somersault which often scares foreign investors from our shores. But a major take away is the need to adopt incremental approach as we make progress otherwise we would perennially continue to have our fingers burnt. We made this announcement and it grabbed the headlines but ended up worsening our situation.

The decision to abolish the black market is a ruse not worth pursuing. It is not practical. We can criminalize such dealers but any attempts to physical drive them away will only end up driving such operators underground. In the same light one notices that Abokifx has stopped publishing the rates. We had similar experience in 2022 when the Governor was up in arms against this publication. There is some sense in trying to stop such publication because it is alarmist. But anyone interested in knowing the rates only needed to visit any of our hotels and the rates are readily advertised. But the Central Bank as we discuss must rise to the challenge of having its website regularly updated to stand in the gap.

Whatever could be done to improve transparency particularly with the guidelines is most welcome. The decision to go into future contracts to supply foreign exchange at agreed rates will go a long way to give needed confidence. But the challenge is to keep fidelity to the terms of the contract which will not be a walk in the park for a country grappling with the challenge of inadequate supply of foreign exchange. There is also talk of an attempt to digitalize aspects of the transactions. That is cutting edge which must be encouraged by all. But we must make thorough preparations before commencement to avoid starting in fits which thoroughly undermines confidence.

It has just been reported that Morgan Stanley Capital International has downgraded and Reclassified Nigeria index to stand alone from its previous Frontier Market category. This follows closely on the heels of similar reclassification by FTSE Russel which also similarly Reclassified Nigeria equity on September 08, 2023. Therefore the race to come to terms with the urgent needs to rise to the occasion to confront the extant challenges undermining the viability of Nigeria as an investment destination could not have been more urgent. We must mobilize and muster the full force at our disposal to displace those always there to take advantages of any loopholes real or imaginary for their personal aggrandizement at the expense of the collective interest of a generality of our population.

Boniface Chizea Ph.D

Bic Consultancy Services 

Lagos

November 02, 2023.