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Wednesday, October 27, 2021

Is CBN on right path concerning its exchange rate policy?

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By Oludare Mayowa

 

The Chief executive of a multinational firm in a recent chat with this writer narrated how difficult it was to source foreign exchange to finance his company’s operations since the beginning of the year as dollar shortage continue to bite hard.

“We have so far spent over $50 million as of June 31st, out of this amount we were only able to get just below $2 million from the official sources despite all efforts.

“We have been able to remain in operations as a result of foreign exchange sourced from our other subsidiary companies across the world by our parent company,” the CEO who craved anonymity said.

He also revealed that many of the company’s foreign shareholders have not been able to repatriate their dividend in the last two years due to the issue of dollar shortage in the country. 

Another senior official of a local firm said the bulk of the forex deployed by his company for their operations this year was sourced from the autonomous market after waiting patiently but futilely for allocation from their banks.

“The forex came at a premium to our operations because they were sourced at higher exchange rate compared with the official rate. But we cannot afford to wait endlessly for foreign exchange from our bankers which may never come,” the chief financial officer of a manufacturing company said.

In the last couple of months, the Central Bank of Nigeria (CBN) has taken measures to curb speculations on the forex market and provides some support for the local currency.

Among such policy switch was the suspension of dollar sales to the bureau de change in July as the regulatory bank accused the forex retailers of sabotaging its foreign exchange policy.

Prior to the suspension, the CBN sold about $100 million weekly to over 5,000 operators of the BDCs for onward sales to individual customers who require foreign currencies for travel allowance, medicals and school fees.

With the cutoff of dollar sales to BDCs, the naira assumed a new record low each week and selling as of last week, at N580 to the dollar on the parallel market.

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The CBN had also threatened to shut down the web platform, AbokiFX which provide information on foreign exchange movement on the parallel market, a decision that could drive underground pricing for the exchange rate at the autonomous market.

The CBN had on September 24 accused the online platform of criminal manipulation of exchange rate at the parallel market and alleged that the founder of AbokiFX was also trading in the market.

Though the web platform has since stop publishing parallel market exchange rate, the exchange rate of the naira has continue to respond to the tightening measures by the CBN on parallel market.

Nigeria has, since the advent of Coronavirus pandemic and its attendant impact on global supply chain; continued to struggle to balance its foreign exchange account in the face of dwindling inflow due largely to initial drop in global oil prices and later the decline crude oil production quota.

The nation’s foreign exchange reserves have seen increase by 1.93 percent year-on-year as of September 28, 2021 to $36.41 billion. The forex reserves closed at $35.72 billion a year ago, according to data sourced from the CBN website on Monday.

The growth in the forex the reserves is not significant and commensurate with the level of need by the country and recent inflow from the $4 billion Eurobond.

Prior to the advent of Covid-19, Nigeria was already experiencing decline in foreign exchange inflow, especially from foreign portfolio investors who hitherto played heavily in the local debt and equity markets due to attractive returns.

Rate on treasury bills has fallen to single digit rate from around 18+ returns at some point and about 16 percent on bonds as the CBN gradually adopt deliberate plan to cut its huge liquidity management cost.

In the wake of the decline in debt rate, many FPIs sold down their local debt and equity holdings and move to repatriate their fund, but could not do so due to measures adopted by the CBN to ration dollar to conserve forex reserves.

However, in spite of efforts by the regulatory bank to realign the exchange rate, by officially devalued the currency to stem demand and its later decision to narrow the multiple exchange rates in the system, demand for the dollar remains high.

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The measures taken on July 27, 2021 to prevent the naira from depreciating further and stop currency arbitraging may have had little effect on the value of the naira as the local currency continue to struggle against the dollar on the parallel market due to demand pressure in the face of short supply.

Was the CBN right to cut off the BDCs from its official forex window? Would the banks be able to meet all demand for retail users and keep away pressure from the parallel market? What happened to those businesses that source their forex need from the parallel market in the face of their inability to access official window?

Feelers from major foreign exchange users indicated that sourcing dollar from official channel has not improved despite the hype by banks on their ability to meet demand by retail forex users.

Analysts said the challenge with forex in the country is mainly of short supply and as long as that situation persists, users will continue to look for alternative channel to meet their needs.

Analysts and economists attributed the present crisis in the forex market to the wrong pricing of the foreign currencies by the regulatory bank.

By not allowing the exchange rate to be determined by the forces of demand and supply, the CBN had unwittingly encouraged speculations in the market.

Many privileged Nigerians are taking advantage of the premium between the official window and parallel market to arbitrage, and this equally put the CBN under pressure on the supply side, which it cannot meet with the level of forex reserves.

Another reason for the rapid depreciation of the currency is the CBN policy which compels exporters to repatriate their proceeds through the official window, without considering the possibility of diversion to the autonomous market.

Most exporters would rather prefer to repatriate their export proceeds through the open market where they can get commensurate exchange rate for their funds.

Equally, the intervention programme of the CBN to support the nation’s economy did not make provision for the foreign exchange component of the projects being supported. The huge injection of liquidity into the system through the intervention scheme continues to put pressure on the forex market.

The stoppage of dollar sales to the BDCs has equally impacted negatively on supply in the parallel market, which means more of the dollar supply in the parallel market comes from the official source and the absence of that has caused short supply and expectedly, the naira depreciated in tandem with demand and supply. 

The CBN must therefore go beyond chasing shadow and focus on how to improve the monetary environment and address the fundamental issues around pricing in the foreign exchange market.

In the real sense, the premium between the official and autonomous window should not be more than five percent at every point in time to discourage speculations and arbitraging by players in the market.

The regulatory bank should also improve on its regulations of players in the system, granting over 5,000 licences for Bureau de Change operators is outrageous and should be reviewed to the barest minimum and weed out those portfolio owners who are merely taking advantage of the system to exploit the market.

On the fiscal side, the government should tackle insecurity more decisively in order to boost agricultural productions, reduce cost of importing foods and other commodity that can be produced locally.

The government should also put in place policy to encourage local refining of oil, increase domestic supply of Liquefied Natural Gas (LPG) to save the country foreign exchange expended on importing such commodities.

 

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