Reactions and expectations for Nigeria have been pouring in for weeks after the Central Bank of Nigeria (CBN) announced a new change to how the country’s foreign exchange market works, meaning that foreign currencies will be bought and sold at market-determined rates. there is policy impact.
Previously, currencies had multiple exchange rates. The International Monetary Fund (IMF) has repeatedly called on Nigeria to stop this. Large discrepancies between official and unofficial rates hampered supply and created severe foreign exchange shortages.
In general, experts say the existence of multiple exchange rates indicates a dysfunctional economy, undermining investor confidence due to lack of capital inflows and lack of foreign exchange. .
But according to Vertex Bank, all that has changed. In a recent statement, the recent policy changes introduced in the country’s foreign exchange (FX) market were aimed at improving supply, curbing speculation, and enhancing customer confidence by increasing market transparency, liquidity and , revealed that it was intended to facilitate price discovery. Ensuring stability across the foreign exchange market.
CBN’s Director of Corporate Communications, Dr. Isa Abdulmumin, said in a statement released after the recent extraordinary Banking Committee meeting that the He explained that all visible and invisible transactions are covered. (PTA), airlines, and other remittances were subject to Investor and Exporter (I&E) windows.
As a result, Abdul-Mummin said banks will ensure expeditious processing of all eligible unseen transactions using rates applied at I&E windows on behalf of customers.
Abdul-Mummin further explained that regular domicile account holders have free and unlimited access to the funds in their accounts. He said the Depository Bank (DMB) would benefit CBN by including the “purpose” of such transactions.
The CBN Director will allow cash deposits to personal accounts, provided that the DMB conducts appropriate Know Your Customer (KYC), due diligence and adheres to the existing Anti-Money Laundering/Fighting Fundraising spirit and language. added that it is not restricted. Terrorism (AML/CFT) laws and other related rules and regulations.
Abdul-Mummin also said that Apex Bank will prioritize the orderly settlement of pledged foreign exchange futures trades when they are due to boost market confidence. He added that the central bank will normalize the cash reserve ratio (CRR) maintenance process and ensure fairness in its implementation across the banking industry.
what to expect
This is not the first time Nigeria has liberalized its foreign exchange market, said Stephen Onyew, professor of economics and business at Allegheny University. First he was in 1986. Further efforts continued in 1995, 1999 and 2016, but all were marred by various obstacles.
“As an economist, I have observed the mixed reactions of Nigerians to this policy. Yes, I believe the new policy could have some positive consequences: it could reduce Nigeria’s bloated parallel foreign exchange market, curb rent-seeking, and stabilize macroeconomic conditions. It should promote the economic environment, attract foreign investment, promote exports, stabilize the exchange rate, and prevent the economy from dollarization, all of which will improve the investment climate and promote economic growth.
“Nigeria’s foreign exchange black market is unlike anywhere else in the world. It handles most of the foreign exchange transactions in the country. Evidence of this will be the decline in the vast number of black market currency dealers in airports, hotels and boulevards, but some, especially those involved in money laundering and other illicit financial transactions. Black market activity will remain.”
He also said the large gap between parallel interest rates and official interest rates is fueling rent-seeking behavior in Nigeria. There are those who are primarily interested in siphoning foreign currency at official rates and exchanging currencies at black market rates.
He explained that these speculators will need to engage in more productive activities if the new policies are to be effectively implemented.
Another economist, Paul Ugochuk, said the new policy would promote exchange rate stability and predictability. He believes the new policy could curb foreign currency hoarding, increase supply and stabilize the exchange rate.
“This is good for the economy,” he said. What matters for economic growth and development is not the exchange rate itself, but whether it changes rapidly. ”
Opinions of Other Stakeholders
Open Access Data Center (OADC), the connectivity and data center infrastructure arm of the Western Indian Ocean Cable Company (WIOCC), said the impact of the new exchange rate policy is affecting its business operations in Nigeria.
Regarding business operations in the country, WIOCC Nigeria General Manager Swomir Cheslinski said the new exchange rate policy has had a positive impact on business operations.
“The liberation of foreign exchange has had a huge impact on our business. In the past we had some problems when trying to purchase equipment from Nigerian vendors and had to cut Naira into purchasing equipment. We needed to evaluate the offer, so we received the offer from overseas, but when we receive the offer from overseas and evaluate it, we compare Apple and Apple and convert it to dollars. You must use the official CBN rate when converting to dollars.
“This is a disqualification for Nigerian traders because in terms of dollars the Naira is twice as expensive as their overseas competitors,” he said.
He revealed that foreign exchange policies have had a positive impact on his own business, while also affecting other areas.
PwC’s Fiscal Policy Partner and African Tax Leader Taiwo Oidele also cites some of the impacts of exchange rate harmonization.
Eudel revealed this on his official Twitter handle. On the positive side, he said, government revenues would increase in naira terms, resulting in higher taxes and revenue-to-GDP ratios.
He said the budget deficit would be reduced and some cost savings would be expected. “Significant distortions in the market have been eliminated with the Nigerian Naira now being exchanged on the official forex market at market-determined rates. This is expected to have both positive and negative impacts.” Government revenues will increase in naira terms, resulting in a higher tax revenue to GDP ratio, but corporate tax collections will increase as many companies experience foreign exchange losses due to the appreciation of the exchange rate. If the government’s foreign exchange income exceeds its foreign currency debt, it could reduce the fiscal deficit, otherwise the deficit would increase Potential impact on gasoline pump prices to some extent as the government suspends various foreign exchange interventions (e.g. $4, RT200, which costs tens of billions of naira) Cost reductions should come in. The country will attract currency inflows, especially from earnings of portfolio investors, FDI and exporters.
“The impact on discrete remittances will be minimal. Capital markets will likely benefit from further appreciation as foreign investors take positions. overall, this is a positive move.
“But the government needs to manage the dynamics to restore confidence. The stagnation in foreign exchange demand needs to be addressed, and the government is prepared to supply foreign exchange to stabilize the exchange rate in the short term. need to be put in order,” he wrote.
Corporate treasurers, under the auspices of the Manufacturers Association of Nigeria (MAN) and the Association of Business Finances of Nigeria (ACTN), said the new foreign exchange policy would promote market efficiency and restore investor confidence in the Nigerian economy. said he would.
MAN Executive Director Segun Ajay Qadir said he was optimistic that the policy would help boost market efficiency and restore investor confidence in the economy.
He also said that while it is very difficult to obtain foreign exchange at the official rate, member states struggling to obtain foreign exchange through alternative means obtain it at exorbitant and uncompetitive rates. He said the shortage of foreign currency is an obstacle for the manufacturing industry.
“Foreign exchange shortfalls will slow as currency arbitrage activity declines. A weaker naira will make Nigeria’s exports more competitive in international markets, which will likely lead to higher exports and higher capital inflows,” he said. rice field.
Similarly, ACTN President Yinka Ogunnubi said: “We believe this policy change by the CBN will result in ‘market efficiencies,’ resulting in a more market-determined exchange rate that reflects the true value of the currency based on demand and supply.” We also believe that increased transparency and predictability of the offer could increase “investor confidence” and attract more foreign investment.
Skyway Aviation Handling Company (SAHCO) PLC president Dr Taiwo Aforabi said retail investors would benefit more from the foreign exchange unification policy. He said that apart from Nigeria, there is no place in the world where two exchange rates exist in the market.
“Once it’s unified, when we go abroad to buy equipment, we’ll find that it’s kind of a tariff relief, and it cuts the cost of what we buy. It’s the same common market as everyone else. We are therefore delighted with what the new government is doing to support us and all our investors, as soon as the situation changes and improves, we will move to other We believe that investors will be able to participate.
Aviation Roundtable (ART) President Gabriel Olowo also expressed confidence in the unity policy, declaring that the government’s ability to maintain it would help economic growth.
He said the foreign exchange unification would also solve the financial blockade problem that foreign airlines have been battling in the country for the past 18 months.
According to British company AUD Group UK, economic conditions and the quality of a country’s economic policies will determine the stability and effectiveness of a country’s exchange rate policy. They say the naira can only become more stable if it attracts investors and tourists, diversifies its economy and exports more non-oil products.
