About ten months ago, the Central Bank of Nigeria (CBN) officially announced a new foreign exchange policy in order to ease the difficulties encountered by Nigerians in obtaining funds for foreign exchange transactions.
The implication of this is that the Nigerian currency has been floated and that there will be a single market for acquisition of the foreign currency.
We recalls that the new foreign exchange policy removed the allocation rules on commercial banks. This policy also comes with the reduction of CBN’s forward sales tenor which dropped from the current maximum cycle of 180 days to 60 days from the date of the transaction.
Speaking in exclusive interview, on the policy has affected the market so far, Babatunde Ajayi, the head of Corporate and Structured Finance team at Investment One Financial Services Limited, said: “The recent measure by the Central Bank of Nigeria (CBN) to pump dollars into the forex market has provided some relief to individuals and companies.”
Read the full interview below:
The CBN pumping dollars into the forex market, some believe it is a temporal solution and a welcome development, what’s your take on it?
I would agree (to a limited extent) that the CBN’s recent measures have provided some relief to individuals and companies operating in Nigeria. However, I am becoming increasingly wary about the CBN’s objectives regarding these recent measures. Initially, it seemed that the objective was to provide stability to the market and ease transactions.
However, the stance has begun to seem more like it is intended to “punish speculators”. I am also worried by the fact that since the CBN began to supply USD to the market, the growth we saw in the country’s foreign reserves over the last four months or so, has apparently stopped.
What would you advise the federal government to do?
First of all, I think the Federal Government (including the President and the Minister of Finance) must stop trying to interfere in the monetary policy functions of the Central Bank. The Central Bank must have the independence and courage to make its interest rate and exchange rate decisions free from ALL political interference. That is the law of the country and any attempt to curb that independence will set us back several decades. Specifically, I believe too many regrettable pronouncements have been made by the President (on devaluation) and the Minister of Finance (about the independence of the CBN and how they intend to work with the National Assembly to curb its powers). For those of us who are professionals in the field of economics and finance, these are very sad pronouncements indeed.
In addition- swift implementation of an economic plan. Think of the bold plans that were announced by the Government of the Kingdom of Saudi Arabia early on in this oil crisis- increasing taxes, reducing subsidies, the decision to sell ARAMCO via IPO, etc. It took nearly 18 months for our government to come up with a plan, and that was done only after multilateral lenders (World Bank, AfDB, IMF) insisted that no loans would come unless they saw a credible plan. We need to be working three times as fast as the rest of the world, because we are very far behind!
Do you think CBN would be able to sustain its intervention on the forex market?
I am beginning to doubt that it can. Oil prices are becoming a bit more volatile and this may increase if shale oil producers become more efficient and are able to profitably produce oil at current prices, because higher unchecked production will mean an oil glut and lower oil prices. Our current streams of dollar earnings are far too thin (and outside our control) for us to gleefully be spending dollars as we are currently.
The import restrictions CBN introduced a while back, do you believe this measure is working to stabilize the naira and economy?
I do not believe those restrictions were effective in any way. The job of the Central Bank is to ensure a fair and transparent market in financial instruments (amongst other things), not to police the market and determine who gets what. Indeed the effect of the famous “41 items” was to drive that demand to the parallel market and that is a great part of what has caused the spikes and volatility our economy has suffered in the last two years. I consider the measure a very crude form of capital controls, one that Nigeria’s level of economic sophistication should have far exceeded by now.
In my view, the best way to reduce frivolous importation is to make people pay full price (plus taxes) for their unnecessary purchases. When you do that, no sermons are needed. People’s brains reset themselves immediately.
Would the country have lost more if it opted for devaluation of Naira?
I don’t think the solution to Nigeria’s economic challenges would have been a simple devaluation. Remember that a devaluation, by definition, is an monetary policy action of reducing the currency value by a specific level. What Nigeria needs is a foreign exchange market where the price of the Naira is driven by demand and supply, without all the unnecessary restrictions that the Bank has placed on Banks and the market in recent years.
What I mean is this- anybody who has dollars to sell, let him sell on the official (interbank) market at whatever price he or she wants (that evidently isn’t happening today, with the exchange rate at the interbank staying at 305/306 for nearly six months!). Anybody who needs to buy dollars, let him bid to buy at the price he/she can pay. At the end of the day, buyer and seller will meet at a point. It will cause some pain, but it will be more transparent than the current system, which has created multiple exchange rates (which most people can use to buy dollars) and will impose discipline on us, since frivolous USD spending will also reduce.
In fact, the CBN can intervene modestly in the market, when it observes that the exchange rate is going too far in either direction. But the CBN should not be the market champion, market police and sole supplier in the foreign exchange market. That wouldn’t be a market.
Remember that Nigeria isn’t the only country that went through a downturn due to the oil price crash. Kazakhstan, Egypt, Brazil, Russia, Saudi Arabia and Norway all went through some economic volatility. But very few countries are still struggling with recession. We simply refused to face the shock, by employing all kinds of restrictions on the flow of foreign exchange and eventually damaging the economy (granted that the Niger Delta activities in 2016 didn’t help either).
One other point- who says that Nigeria needs a strong currency? I am beginning to strongly believe we need a weak currency, for three major reasons: 1) To enforce discipline on us and make folks buy only what they need. 2) Make us more creative in seeking for hard currency income as a country. 3) The discipline point will also force us to do what we need must to attract foreign and domestic capital- make business easier in our country. We are far too comfortable with the good fortunes from oil.
What measures do you think CBN needs to adopt to rescue our currency?
The CBN needs to adopt the following:
- 1. Stand up to political pressure.
- 2. Let the currency go and stop trying to control it.
- 3. Allow the banks increase their net open positions.
- 4. Allow a fair and transparent market, in which buyers and sellers are comfortable about how prices are set and how their transactions will be consummated.
- 5. Focus on market stability and stop “fighting speculators”.