How CBN’s Forex Exchange Policy Can Upscale Nigeria’s Economy – Analysts
Analysts have emphasised the need for the Central Bank of Nigeria (CBN), to provide better clarity on its exchange rate policy to gain the confidence of foreign portfolio investors and avoid recurrence of the negative consequences that followed similar suspension for six months five years ago.
They also implored the apex bank to boost foreign exchange allocation to commercial banks with a view to enabling them cater for all genuine demands as well as scale back processing requirements to attract Nigerian into the official foreign exchange loop.
They told Daily Independent that the CBN must intensify public awareness on the need to embrace the latest development to prevent unfavourable reactions that could further promote speculative trading and address the gap which the decision would create.
According to the analysts, the apex bank should develop policies to further open-up the export potentials of the economy, especially in the solid mineral and extractive sector, agriculture and manufacturing beyond exporting primary products, which will further reduce the growing depletion of the external reserves while stimulating the value of our currency
The 137th Monetary Policy Committee (MPC) meeting of the CBN, had last week offered Nigerians more to digest than the position on monetary policy variables for the rest of Q3:2021 through the ban on foreign exchange (FX) sales to Bureaux De Change (BDC) operators’ and the suspension of new BDC licences over allegations of FX racketeering.
The MPC also retained all monetary policy parameters – MPR 11.5%, Asymmetric Corridor +100/-700, LR 30%, and CRR 27.5%, to strike a balance between pro-growth agenda and taming inflation.
The apex bank in January 2016 suspended dollar sales to BDCs on account of similar allegation. This was followed by the directive to commercial banks (same as last week) to fully take up the responsibility of facilitating foreign exchange sales to Nigerians in need of FX for items not included in the list of 41 items banned by the CBN.
But, the option then, failed as insufficient foreign exchange supply to banks (from CBN) and customers’ apathy to banks’ cumbersome kept demand at the parallel market elevated.
There was also a sharp 67.2% y/y decline in foreign capital flows (through FDI, FPI, and other investments channels) in H1:2016 to $1.8bn, as foreign investors shunned Nigeria due to currency risk.
The foreign reserves and the official exchange rate fell sharply by 4.0% and 43.7% respectively to $26.5bn and ₦283/$1 over the six months period.
These developments fuelled steep rise in inflation to 16.6% at the end of June 2016 from 9.6% (in January).
More so, the developments escalated the country’s recession impact, as Gross Domestic Product contraction worsened to -1.5% by H1:2016 from -0.7% in Q1:2016.
Although the GDP (Q1:2021 +0.5%) and foreign reserves ($33.3bn) position in H1:2021 are relatively stronger compared to 2016, we are of the view in foreign capital flows to $2.9bn (in H1:2021) reflects renewed loss of confidence in the Nigerian market by foreign investors. that the sharp 61.1% y/y contraction
Chief Tunde Adetunji, CEO, President Africa Heritage Foundation, Marietta, Georgia, United States, in chats with Daily Independent, advised the apex bank to guide against scarcity of foreign exchange as a result of bureaucratic processes in the commercial banks.
He said: “If the CBN is not careful, that decision will actually worsen the naira value because the BDCs, you could walk into any of them anywhere and within five minutes, they will attend to you, but as for the banks, the challenges to drive to the nearest bank, queue most of the time to get the required FX, may make it difficult for people to access their needed currency; what it means is that the bureaucracies, obstacles and bottlenecks are likely to put pressure on supply and pressure on supply may mean an increase in demand for the FX and greater fall of the naira, if apex bank don’t play the cards well with the commercial banks.
“So, at the end of the day, the nation’s economy may end up in a scenario where there is scarcity and the simple economics of demand and supply tells you that where there is increase scarcity, price is likely to shoot up”.
Dr. Timothy Olawale, Director General of Nigeria Employers’ Consultative Association (NECA), in an exclusive interview with DAILY INDEPENDENT on the decision of the apex bank to stop sales of foreign exchange (FX) to Bureau De Change (BDCs) operators, advocated the need for caution on policies formulations of the monetary authority on the nation’s fragile economy.
He said: “Banning foreign exchange allocation directly to the Bureau De Change and channeling the supply to the commercial banks without addressing the supply side of foreign exchange market will not address the availability and huge demand of the product.
“There is a need for the CBN to develop strategies in addressing the exchange market by reviewing the fixed market regime and allow the market to find its balance, as fixed market regime is disincentive to inflow of FX and diaspora remittances.
“An exchange management posture that features multiple official rates, distorts the market, denies foreign exchange to critical productive sectors and facilitates illegal arbitrage.
“As we are optimistic that the policy direction by the CBN might be beneficiary to the economy in the long run, as no Central Bank in the world sells FX directly to BDC, except ours”
He reasoned that: “making FX available at the right price will help our productive sector to bounce back economic activities, if the management is well tought out and monitored, else, the commercial banks could become another conduit for illegality and fosters patronage of the BDC”.
He added: “With this ban, we expect a knee jerk reaction from the market; however, a lot depends on how CBN handles the official market going forward.
“There is urgent need for organised businesses champions for a market regime that will ensure and promote stability of the FX market, while we appealed to the apex bank to develop policies to further open-up the export potentials of the economy, especially in the solid mineral and extractive sector, agriculture and manufacturing beyond exporting primary products, which will further reduce the growing depletion of the external reserves while stimulating the value of our currency”.
Friday Udoh, Chief Coordinator, South-South, and Institute of Chartered Economists of Nigeria (ICEN), expressed optimism that the apex bank’s decision to channel foreign exchange allocations to commercial banks would strengthen the nation’s currency and reduce the prices of imported raw materials.
He advised commercial banks to assist the CBN in the implementation of the policy by not being involved in “sharp practices.
He said: “We urged the banks to keep to their own obligations because we don’t want situations where the banks will hoard the foreign currencies and say they are yet to receive supply from the CBN
“We call on the CBN to provide more funding to local producers of the now 44 items restricted from accessing FX at the official rate, to mitigate the likely pass-through effect of higher costs to consumers”.
Afrinvest in its Weekly report on ban on foreign exchange sales to BDCs: Reminiscent of the 2016 episode stated that: “As the apex monetary policy authority saddled with the responsibilities of ensuring price & exchange rate stability, we see no ills in the CBN performing its regulatory function.
“We, however, believe that five things must be holistically addressed by the CBN concerning the latest ban on BDC operators, to avoid a repeat of the negative consequences that followed similar suspension for six months in 2016″.
According to Afrinvest analysts, although the GDP (Q1:2021 +0.5%) and foreign reserves ($33.3bn) position in H1:2021 are relatively stronger compared to 2016, we are of the view that the sharp 61.1% y/y contraction in foreign capital flows to $2.9bn (in H1:2021) reflects renewed loss of confidence in the Nigerian market by foreign investors.
“This by implication could hurt the foreign reserves and the recovery drive of the economy over the medium-term.
“Hence, to avoid a repeat of the 2016 episode, first, we posit that the CBN provide better clarity on its exchange rate policy to gain the confidence of foreign portfolio investors”.
“We suggest that the CBN intensify public awareness on the need to embrace the latest development, to prevent unfavourable reactions that could further promote speculative trading”.
Source: independentng.com
