One of the major decisions taken by President Bola Tinubu on assumption of office on May 29, after removal of petrol subsidy, was the suspension of the governor Central Bank of Nigeria (CBN), Mr Godwin Emefiele.
The Secretary to the Government of the Federation (SGF), Sen. George Akume, who announced Tinubu’s decision to suspend Emefiele on June 9, directed the deputy governor, Operations Directorate, Mr Folashodun Shonubi to act as governor.
On June 14, the apex bank abolished the multiple Foreign Exchange (FX) market.
In a statement by Angela Sere-Ejembi, Director, Financial Markets, the CBN announced that all segments of the FX market were collapsed into the Investors and Exporters (I&E) window.
This indicated that the apex bank and its monetary policy functions were integral to economic policy direction of the new president.
Experts are optimistic that the policy decision to unify the exchange rates will sanitise the forex market.
The I&E exchange rate window hit N755 to the dollar shortly after, implying a 21 per cent depreciation of the Naira compared to the previous official rate of N463 to the dollar.
By this development, buyers and sellers of foreign currency in the official FX market were now allowed to quote rates they find comfortable.
This is against previous practice where rates were dictated by the CBN
Some stakeholders, however, interpreted it to imply that the Naira, which has suffered serial depreciation and devaluation over the decades, was being effectively floated.
If floated the value of the currency would be subjected to market forces of demand and supply.
According to the experts, unified and flexible exchange rate regime will help boost investor confidence, increase foreign inflows, reduce import costs, and ease pressure on the Naira.
A financial expert, Uche Uwaleke, Professor of Capital Market at the Nasarawa State University, Keffi, said that it was commendable for the CBN to unify the country’s exchange rate.
Uwaleke, however, cautioned against a sudden free float of the Naira.
According to him, the economic fundamentals required to support a Naira float are still very weak, especially in relation to sources of forex.
“Let me say upfront that I support the unification of exchange rates, which makes for a more transparent forex market.
“But I think that the CBN should implement it in a way that does not cause massive distortions in the general price level.
“It is rather early to bank on sustainable capital inflows from foreign direct investments due, in part, to insecurity and the overall unconducive environment of doing business in Nigeria,” he told News Agency of Nigeria (NAN).
He said that sudden Naira devaluation may draw foreign portfolio investments, which was part of the reason the stock market was surging.
“But we also know that portfolio investments are not money and do not represent a sustainable source of forex inflows,” he said.
He said that the unification of exchange rates should not be a one step process but should be implemented over a period of time, however short it may be.
According to him, empirical evidence suggests that reforms are more successful when they are sequenced and implemented in phases.
“This is against the backdrop of the oil subsidy removal, which, taken together, can result in galloping inflation and rising poverty level.
“So, while fiscal and monetary policy reforms are welcome, absolute care should be taken to strike the right balance and minimise their unintended consequences,” he told NAN.
Some other stakeholders argue that the disparity in exchange rates provided an avenue for people with access to dollars to buy at the official rate and resell at the black market.
They said that many millionaires were created through that distorted system.
According to Dr Chijioke Ekechukwu, Managing Director, Dignity Finance and Investment Ltd., the unification of the exchange rate and floating of the foreign currency market has come as a welcome development.
“With this, Deposit Money Banks can now go source their own funds and sell to users at their own rate and margin. This is going to bring a rate war amongst them, which will force the rates lower.
“Merging the rates will reduce arbitraging, speculation, and curb multiple malpractices in the market ” he told NAN.
Ekechukwu, however, said that rates would remain reasonably high in the short run before they drop; and for a higher supply of foreign currencies is achieved.
“This may affect the cost and prices of imported products, including petroleum products. It may increase hardships and retain a high inflation rate,” he said
Dr Muda Yusuf, Director, Centre for the Promotion of Private Enterprise (CPPE), explained that FX unification was not a devaluation policy.
Rather, he said, it is a normalisation of the foreign exchange policy regime and an adjustment of rate to reflect the fundamentals of demand and supply.
According to him, in the short term, a depreciation of the currency should be expected in the official window.
“This is because of the huge backlog of demand but as the market conditions normalise and move towards equilibrium, the rate would moderate, ” he said.
He said the new policy regime would boost inflows and strengthen the supply side amidst elevated investors’ confidence.
“The component of forex demand driven by arbitrage, rent seekers, speculators and other economic parasites would also fizzle out, thus restoring stability to the forex market.
“It would be dynamic, and the Naira will appreciate or depreciate depending on the fundamentals,” he said.
The CBN Deputy Governor, Economic Policy Directorate, Kingsley Obiora , however, said the apex bank had no plans to set the naira on a totally free float, as no country runs a completely free float.
Clarifying recent monetary policy decisions of the bank Obiora said countries do not usually subject their currencies to free float.
“There is no country in the world, even the U.S. that has a completely free float. We are allowing the market itself to set a price.
“It may be too early to determine if the Naira’s exchange rate to the dollar has bottomed out,” he said.
He added that the CBN had not intervened in Nigeria’s FX markets since the new policies were introduced.
NAN
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