High Hopes on CBN’s Planned Fine-tuning of Forex Policy – Thisday

Godwin-Emefiele

Following the disclosure by the Central Bank of Nigeria(CBN) that it would continue to fine tune the foreign exchange policy, expectations are high, given the challenges that had beset the forex system and attendant effects on the economy, write Kunle Aderinokun and Olaseni Durojaiye

As the country continues to grapple with shortage of foreign exchange, particularly the United States dollars, it has emerged that the nation’s FX policy would continue to be fine tuned by the Central Bank of Nigeria. Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, dropped the hint during the just-concluded annual meetings of International Monetary Fund-World Bank, which held in Washington DC, United States.

Indeed, the FX shortage in the system and the negative impact on the economy require no reiteration. Arguably, the worst hit is the real sector. The protracted situation has rendered the sector prostrate as many manufacturing businesses have either closed shop or downsize capacity because they are unable to procure the requisite USD to either import raw materials or spare parts required in their production lines. This has resulted in sharp increase in unemployment rate in the country.‎

The new thinking to review some aspects of the current FX policy, introduced in June includes: to boost availability of FX in the system and ease access to it by manufacturers and other end users. Analysts contended that these were the same core objectives that promoters of the current regime articulated when it was introduced.

One analyst, speaking on condition of anonymity insisted that,“But that has not been the case as the challenges persists.”

Announcing plans to continue to fine tune aspects of the current policy, Emefiele, stated that, “We heard the IMF Managing Director, Christine Lagarde, saying there was need to consider further liberalisation of the Naira, but like I have always said, the flexible exchange rate regime document that we have in place is a very sound document and truly speaking, I have not seen one person that has criticised it. But what we only have to talk about is fine-tuning few aspects of it, in terms of the implementation of the content of that document. That is why I said, we would, from time to time, continue to look at it. As we are looking at it, I repeat, we would see how we would continue to fine tune it, to the extent that whatever we are putting in place would be such that would benefit Nigerians, and improve their lives as well as the country.”

He explained further that, “We held meetings with some groups of foreign investors who have shown interest in coming into Nigeria, but that they had few issues with some of our policies which they want us to address. They liked the fact that we adopted the flexible exchange rate regime, but there are some areas they want us to change, and like I always say, these policies are not cast on stones. We can always go back and look at them but what is most important in our mind as we are trying to look into these policies is that we will make sure that they are policies that have been done in the interest of Nigeria and Nigerians. What is important at this stage is how we protect Nigerians. We are committed to ensuring that we reduce the level of unemployment and what we can do to ensure that manufacturers continue to improve their industrial capacities, as well as how to make it possible for them to get foreign exchange to run their factory.”

Reactions

Fundamentally, the FX policy was expected to facilitate FX inflow; on the contrary, foreign investors appear to be wary of the current economy outlook and are apprehensive that the new FX policy is not totally immune from incessant interventions by the CBN. As a result, the naira has not truly appreciated against major currency at both interbank and parallel market segment since supply has failed to meet demand.

Besides, analysts contend that the interventions by the CBN negate the spirit and letters of a market-driven FX Policy and encourage the practice of price fixing at the interbank market adding that it had not allowed the naira finds its actual true value against any major currency.

In his analysis, an economist and Chief Executive Officer, Global Analytics Consulting Ltd, Tope Fasua, welcomed the proposed review, saying “I think it will be a step in the right direction.”

“Especially if it is about reviewing the 41 items that were placed on embargo from even the interbank forex market, that would be a most needed elixir by now,” he pointed out.

Fasua lamented that, “The recent FX policy would have probably not turned out so choppy if we didn’t have that embargo, for that created a loophole for legitimate importers to continue accessing and fuelling the black market.”

Aside from this, he, however, added, “It is proper for the CBN to continue tweaking its policy. That is dynamism. Every progressive agency must be dynamic in its policy making.

“We look forward to the policy review even though the best situation is if they ensure non-interference and preferences and only intervene as market players through the banks.”

Likewise, an analyst and investment manager, Adetola Odukoya, is of the expectation that, “a positive review will be favourable.”

According to him, “It is a very well-known norm in finance that capital controls -such as being currently implemented in Nigeria- and FDIs or FPIs do not mix. Therefore, I’m anticipating a review that will engender an environment that will encourage greater fluidity in financial flows.”

In an interview with THISDAY, Partner at Exotix Partners, Esili Esiegbe, opined that the new plan by the CBN might be due to discovery of non-compliance or low compliance by FX dealers to sell 60 per cent of their FX to the real sector adding that the new plan may be geared in that direction even as he noted that such interventions may not augur well for the market.

According to Esiegbe, “It is rather early to predict what aspects of the current FX policy will be reviewed. However, the planned review may be another form of subsidy unless the CBN opts for a direct intervention in the FX market. This could be by looking at how to make the policy of 60 per cent FX sales to the manufacturing sector more effective.

“CBN shouldn’t be intervening in the FX market as it currently does. The directive to sell 60 per cent FX to the real sector is too much intervention in itself even though one acknowledges the importance of the sector to the economy. Doing so will besending wrong signals to investors and traders and other stakeholders. Buyers should be allowed to determine at what price it sells or buy FX given the prevailing market fundamentals,” he stated.

It will be recalled that the policy was roundly welcomed by operators in the sector especially the Manufacturers Association of Nigeria (MAN), and Nigerian Chamber of Commerce, Industry and Agriculture (NACCIMA) when it was introduced in August.

MAN President, Dr. Frank Jacobs, had told THISDAY Newspaper at the time that, “The directive will help give fillip to the efforts of government to reflate the economy. You would recall that MAN has been in the forefront of advocating for a special consideration and allocation of foreign exchange to the manufacturing sector of the economy. This is in view of its contribution to the development of the economy; job creation, and most importantly the much needed diversification of the economy, which is one of the priorities of the present administration. The new circular is therefore a welcome development and would give fillip to efforts of the government aimed at reflating the economy.”

Interestingly, while speaking with this newspaper in an interview during the week, Jacobs reiterated the needs of the association including a reduction in lending rate to five per cent and noted that the directive bordering on 60 per cent FX to be reserved for the sector is yet to be implemented and called for the inclusion of MAN in the implementation in order to ensure that it is not compromised.

He also stated that while MAN had forwarded a list of items contained in the list of 41 items banned from accessing FX in the official market, which are actually raw materials and which the association wants removed; it has come to its notice that some banks have been selling FX to importers of some of the items included in the list which translates to undermining the CBN policy.

“We want more per cent of FX to be reserved for manufacturers. The 60 per cent FX that is meant to be reserved for manufacturers has not been implemented. It has not impacted any of our members; we want it to be implemented and we want MAN to be involved in the implementation so that we can identify true manufacturers.

“We expect a review of the 41 items banned from accessing FX at the official market. Some of the items contained in the list are not finished products; they are raw materials for production, we have forwarded the list to the CBN and they are aware of it. We’re also aware that some banks have been selling FX to importers of some of the items contained in the list, like fish and fish heads, this amounts to undermining the CBN,” he stated.

However, Managing and Chief Economist, Global Research, Africa, Standard Chartered Bank, Razia Khan, said it was “difficult to know exactly what the CBN plans to do.”

“Foreign investors have made clear that they would like to see a clearly market-determined FX rate, and the possibility of exit from Nigeria that will only come from improved USD liquidity, before they are likely to commit to Nigerian asset markets (whether equities or bonds) in a more meaningful way,” she noted.