Renewed economic hope: Willing buyer, willing seller

BY OLUWATOSIN OLADETAN 

Oluwatosin Oladetan, (ACCA, PMP, NIM), an actuary, business and corporate strategist, financial analyst and process improvement professional, is a Volunteering Analyst/Contributor

The Nigerian currency between 1907 and 1958 was the British West African Pound, prior to the introduction of the Nigerian Pound that lasted between 1958 and 1973. There was a region of the country that introduced the Biafran Pound between 1968 and 1970 during the agitation of the group for a sovereign state. The Nigerian Pound whose subdivisions were the shillings and pence remained the legal tender till 1972. On January 1, 1973, the Nigerian Naira, coined by Obafemi Awolowo, was launched by Shehu Shagari, the then minister of finance and the exchange rate was £1 = ₦2 i.e., $1 = ₦0.658. The Nigerian Naira reacted in a wavy trend in line with market forces and had an official average year low rate of about $1 = ₦0.55 in 1980 prior to the emergence of the impact of the most severe recession after World War II. This recession resulted from the impact of the Iranian revolution on the global oil supply chain as the rise in the prices of oil moved the existing high rate of inflation to double digits in developed countries.

Nigeria, which was primarily an agrarian economy, became afflicted with the Dutch Disease as it invested more in the development of federal parastatals to boost the production and supply of crude oil, such as the Western Nigeria Development Corporation, Nigerian National Petroleum Corporation, among others, from the revenue earned from crude oil sales. The global decline in the prices and demand for crude oil resulted in major economic hazard for the nation in the 1980s. There were implementation of fiscal and monetary policies and programmes such as the Structural Adjustment Programme (SAP), among others, pioneered by the government to ameliorate the economic hazard. The SAP could not achieve the desired growth in the economy unlike similar programmes implemented by other countries like China and India, due to the actions of key actors and forces of the government, among others. In the course of the SAP, multilateral agencies like the IMF and World Bank demanded strenuous conditions such as the devaluation of the naira ($1 = ₦4.00) among others to enable the approval of loan facilities for Nigeria.

Nigeria operates a managed (dirty) float exchange rate system. An intervention of the government and regulatory authorities in the pricing of foreign currencies in the market. Even though devaluation of a currency is not an option that will yield positive results in the transformation of an economy, there have been devaluations of the naira at different points in time up to May 2020 when the rate was ($1 = ₦410.50). This devaluation also created arbitrage opportunities as there were three different windows to access foreign exchange at different rates, such as the CBN official rate, Investors and Exporter Window, and the Parallel Market Rate.

The country has a net trade deficit as it is heavily import dependent. The major source of income is from the sale of crude oil. Since there has not been enough investment in development of infrastructure; and policies, systems and frameworks have not been positioned to enable the private sector to export more goods and services, foreign direct investment (FDI) has also been too low to address the foreign exchange demand in the country, leveraging external reserves and debt to fund exchange demand, capital and revenue expenditure has been the go-to way for the government.

Prior to the assumption of office by the 16th Nigerian President, he stated in his campaign that he looked forward to a Nigeria where there is a unified exchange rate determined by market forces (free float exchange rate system). This system will not have the government and regulatory bodies intervening in the management of the exchange rate. The Central Bank of Nigeria (CBN) recently issued a Circular and a Press Release to move in the direction of the president’s campaign’s pledge. This moved the exchange to close at a central rate of ($1 = ₦632.27) on June 14, 2023, in the Investors and Exporters Window and the Official Market. The parallel market rate averaged $1 = ₦755.00 on that same day. Over the next few weeks, we expect lower arbitrage opportunity to exist among the markets as there is also a re-introduction of an order-based two-way quotes having a bid-ask spread of ₦1 and clearing of all transactions by a Central Counter Party as well as the cessation of the RT200 Rebate Scheme and the Naira4Dollar Remittance Scheme.

A flipping of the coin shows two possible outcomes (positive and negative) on the economy and Nigeria as a state.

There are pros this policy will bring to light such as:

• Lesser arbitrage opportunity available in the market as everyone will soon be able to easily access foreign exchange at the designated trading points.

• Increased naira earnings from Nigerian goods and services traded on the international market, increased naira terms inflow from foreign direct investment, portfolio investors and other remittances from the diaspora.

• Reduction in government revenue expenditure, structured to aid increased remittances of the dollar within the country such as the Naira4Dollar and the RT200

• Reduction in the nation’s capital flight as foreign investors are more confident about the value of their investment and their expected returns.

There are also cons the impact of this policy will have on the average person transacting in the Naira.

• Cost-push inflation on raw materials, semi-finished or finished goods and services, previously obtaining foreign exchange at the historical rate prior to the new policy as the inflation rate is still on a steady state upward.

• Increased cost of national budget funding and management as the government must source for similar naira with more dollars to service debt and manage obligations requiring foreign exchange.

As Nigeria continues to bask in the euphoria of an intended stronger economy within the next 24 months, from the implementation of the policy, the government should also take into consideration the following actions.

• Investment in the productive non-oil sectors having the potential to attract more foreign exchange income to the nation purse

• Stimulation of an enabling environment for non-governmental business growth and development. Considerations are an increase in business access to finance, road infrastructure, efficient transport and logistic system, increase in electricity production and distribution by interested players, enhancement of the ease of doing business index within the nation, among others.

• Strong government intervention on fighting corruption, terrorist financing, money laundering and other economic termites within the nation. This will enable the government to invest more on capital expenditure and social welfare across the nation.

• Reduction in further arbitrage opportunities that might result from bureaucracies and complexities around trading foreign exchange.

• Increase in the awarding licence to firms intending to import crude oil within the midstream and downstream pending when Dangote and other local refineries will be able to serve the petroleum demand of the whole nation.

• Structured and beneficial Private Public Partnership to create viable employment, increased standard of living, wealth and earning power for people transacting in Naira.

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