Momentum is building in government circles in Nigeria towards a market-determined foreign exchange management regime which will also see a convergence of the country’s multiple exchange rates, senior government officials told BusinessDay last night.
Foreign direct investment (FDI) inflow has virtually dried up for Africa’s biggest economy with one of the deterrents of fresh inflows being the country’s resistance to have a market-determined rate for its currency.
That may now be about to change with the clearest sign being a commitment made to the International Monetary Fund (IMF) that Nigeria would seek a more flexible and unified naira to respond to the external shock inflicted by the coronavirus pandemic.
BusinessDay also learnt from government sources that the reform of the foreign exchange market has been uppermost in recommendations of the Presidential Economic Advisory Council set up last year.
“A unification of the multiple exchange rates will be a big boost for the economy,” said Ayodeji Ebo, managing director of Lagos-based investment bank, Afrinvest Securities Ltd. “There will be a reduction in foreign portfolio outflows and we will see fresh inflows. It will also reduce pressure on naira and reduce the incentive for round tripping.”
To attract FDI, however, Ebo said Nigeria would need more than just a unification of exchange rates to create vehicles for investment and improve the ease of doing business.
Nigeria maintained a plethora of exchange rates or “windows” with the official rate at N306, whereas the rate on the Importers and Exporters (I&E) window was seen by investors and business leaders as the more independent.
There was an adjustment to the exchange rate last month when the monetary authorities moved the official rate to N360 to the US dollar.
In an April 21, 2020 letter of intent to request a $3.4bn funding from the IMF, the Nigerian government pledged to adopt currency flexibility and accepted that this would help protect dwindling international reserves and avert economic distortions.
“We are committed to maintaining this more unified and flexible exchange-rate regime, which will operate in a market-determined manner and be allowed to respond to shocks, with the Central Bank of Nigeria only intervening to smooth large FX fluctuations,” the government said in a letter contained in the IMF’s staff appraisal of the financing request.
The letter was signed by Finance Minister Zainab Ahmed and Central Bank Governor Godwin Emefiele.
In its own recommendation to President Muhammadu Buhari, the Doyin Salami-led Economic Advisory Council had welcomed the recent review of the official exchange rate by the CBN but urged quick movement towards a more determined mechanism for exchange rate management because of the situation that Nigeria found itself.
It also requested the president to abolish the practice whereby private companies including oil companies are compelled to sell their foreign currency to the central bank. This way, the companies can sell directly to deposit money banks in Nigeria.
The council said a more market-reflective rate would help Nigeria and its tiers of government make the painful adjustment to current fiscal realities, allowing the federal, state and local governments more naira proceeds to cover vital requirements to save the country from social upheavals.
According to the council, the change would also help Nigeria improve its competitiveness so it could better take advantage of emerging opportunities in a post-COVID-19 global market place.
Thirdly, the council said the adoption of market-determined rates and the convergence of rates would help Nigeria advance gains so far recorded in the emerging revival of the agricultural sector by facilitating fair pricing for farmers and their labour.
Asking that the I&E window be adopted as the only exchange rate in Nigeria, the advisory council said the national currency should not be allowed to become overvalued in the future because of the negative impact on economic growth and capital formation.
On April 28, the IMF approved $3.4 billion of emergency funding for Africa’s biggest oil producer, the single biggest disbursement for any country yet with the coronavirus pandemic.
Nigeria has now fallen off the table of top five FDI recipients in Africa where Egypt (1st), South Africa, Congo, Morocco and Ethiopia now hold sway in that order.
According to a report by the United Nations Conference on Trade and Development (UNCTAD), “FDI to West Africa declined almost 20 percent in 2018 largely due to Nigeria where inflows plunged 43 percent.”
Even smaller African peer, Ghana, now tops Nigeria on the FDI table.
Total FDI into Nigeria as a percentage of gross fixed capital formation has plunged to a mere 3.8 percent compared with Ghana where it is at 22 percent.
SEGUN ADAMS
