Why Nigeria’s foreign exchange rate policy is a minefield ─Report

*Navigating Nigeria’s foreign exchange rate policy is said to be ‘tricky’, in view of the latest weaker, market-determined rate for investors and exporters, known as the Nafex regime

Web Editor | ConsumerConnect

Navigating Nigeria’s foreign exchange rate policy is tricky, a report has said.

There are multiple exchange rates; officials issue confusing and contradictory statements; promised reforms don’t materialise; and the Central Bank of Nigeria (CBN) and the Ministry of Finance, Budget and National Planning don’t always appear to see eye-to-eye on how to manage the Naira.

Economic fallout from the pandemic, including deterioration in state finances, has made the need for clarity all the more pressing, reports Bloomberg.

Why does Nigeria have multiple exchange rates?

Nigeria is Africa’s largest producer of oil, which accounts for more than 90 percent of foreign exchange earnings.

Plunging crude prices starting in 2014 caused an economic squeeze. Rather than devalue the Naira, the central bank in 2017 opted to implement one rate for government transactions, pegged to the US Dollar, and a weaker, market-determined rate for investors and exporters. That weaker rate is known as the Nafex.

Other rates were instituted for travellers and small and medium-sized enterprises. The idea was to improve liquidity and encourage dollar inflows. (There’s also a thriving currency black market, which values the naira at about 18% less than the Nafex rate.)

How did the pandemic make things worse?

As oil revenues plummeted during the Covid-19 crisis, the naira was devalued twice in one year.

More recently, March 22, the authorities announced that the Nafex will also be utilised for government transactions.

Still, the Central Bank of Nigeria continues to list the pegged exchange rate of N379 to the Dollar on its website, and Mr. Godwin Emefiele, Governor of CBN, insists Nigeria isn’t transitioning to a flexible exchange-rate regime.

What is gained by expanding use of the Nafex?

Nigeria has faced pressure from the International Monetary Fund and World Bank to reform its foreign exchange policy.

The World Bank has been withholding a $1.5 billion loan until the government begins instituting currency reforms to attract investment.

Extending use of the Nafex moves the government a step closer to restarting talks on the facility, which it needs to cover a widening budget shortfall and boost foreign-exchange reserves.

Devaluing the naira for official transactions will also help boost government revenue, because all the nation’s crude is sold for dollars and the revenue is converted to naira in its books.

What’s the downside?

Nigeria spends about 70 percent of its income servicing public debt. Adoption of the Nafex for government transactions means interest costs on the Dollar component of Nigeria’s debt will rise in Naira terms, negating part of the budgetary benefits of a weaker currency.

Moreover, the nation’s Debt Management Office uses an exchange rate of 380 naira to the dollar.

If it, too, switches to the weaker Nafex rate, the nation’s debt metrics would deteriorate, making it more difficult and expensive to raise new financing.

Electricity and gas prices are also linked to the exchange rate and will rise with the adoption of Nafex, placing further pressure on government to cut costly subsidies at the risk of stocking social unrest.

Implications for investors?

Nigeria may be moving towards more conventional management of its currency. Vice-President Yemi Osinbajo said the government is committed to eventually adopting a single exchange rate.

That might draw foreign investors who have been deterred by the current system.

The adoption of the Nafex by government agencies for all their transactions would also provide motivation for the central bank to keep the naira stable through increased Dollar supply to the Nafex market.

That would help address low liquidity, a major shortcoming of the current currency regime.

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