The sudden rise in the nation’s foreign reserves to $25.36bn and improving oil prices could help close the country’s multiple exchange rates which have been the subject of criticism by analysts and investors in recent times.
BusinessDay reports that Nigeria is believed to, currently having, at least ten Naira/Dollar exchange rates for transactions in its economy, a situation that has continued to put the local currency, the naira, under pressure and continued volatility in the Foreign Exchange (FX) market.
Metrobusinessnews reports that some of the different exchange rates applied at one time or the other in the past year and include a pilgrims rate of N197/$, 2017 Budget rate N305/$, interbank rate N315/$, fuel imports rate N316/$, International card rate N319/$, Travelex N345/$, Western Union rate N375/$, Bureau Du Change at N399/$ and Parallel Market rate near N488/$.
Analysts say the multiple exchange rate mechanism is causing a lot of damage and uncertainty in the economy, as well as encouraging round tripping and rent seeking.
“It is indeed a mess. The way out is obvious – government’s control and arbitrary determination of FX rate should be eliminated, so we can have a transparent market-determined rate that will encourage foreign investors to put money in Nigeria,” Tosin Ojo, Head of research at investment firm, Cardinal Stone Partners Limited said.
“One step in the right direction has been proposed in the ten-point economic agenda released two weeks ago – which is to remove the currency control on the 41 ban list and make use of fiscal control measures. This should be implemented speedily. In addition, we need to scrap concessional rates to different sectors – while this may lead to some inflationary pressure, fragmenting the country’s exchange rate is doing far greater harm,” Ojo said.
Africa’s biggest economy is facing its first recession in 25 years.
The economic crisis has kept the naira under pressure against the dollar, and the Central Bank of Nigeria (CBN) has struggled to support the local currency as foreign investors bail on the unorthodox policies being pursued by the Nigerian Government.
The CBN’s gross dollar reserves which are down 15 percent in the past year, stood at $25.04 billion as at Dec 15, 2016 and is now up to a four-month high of $25.36bn.
It is unclear if the recent reserve accretion will be sustained but analysts believe that the rise in international oil prices and the healthy jump in production volumes offer Nigeria a chance to close the multiple exchange windows and bring some flexibility to the market.
The International Monetary Fund (IMF) estimates that net inflows into reserves from foreign exchange swaps were in the region of $4.8 billion in 2014 and 2015, meaning the CBN net reserve position is much lower than the gross levels.
Investors have been advocating more reforms in Nigeria.
“No investor we spoke to will put money into Nigeria, unless it copies the currency reform story that Egypt and Russia have both done,” Charles Robertson, global Chief Economist at Investment firm, Renaissance Capital, said in a recent note to investors.
“Among 13 sub Saharan Africa (SSA) credits, we saw six suffer sovereign rating downgrades in 2016. W expect just Angola to be downgraded in 2017 and Nigeria too, if it does not move on the FX.”
The splintering of the FX market and collapse in liquidity at the interbank market have led to market failure and a build-up of backlogs of FX demand.
Nigeria’s Central Bank on Monday asked banks to submit bids for a “special currency auction” to clear the backlog of matured outstanding dollar obligations for selected sectors of the economy.
The CBN instructed commercial lenders to submit backlog dollar demand from fuel importers, airlines, raw materials and machinery for manufacturing firms and agricultural chemicals.
Analysts however say adhoc interventions in the FX markets will not boost confidence and improve dollar liquidity.
For many years, Nigeria had just two rates, the interbank FX rate and the black-market rate which closely tracked it.
The black market rate started to diverge from the interbank rate in mid 2015 as the collapse in the price of oil that makes up 95 percent of Nigeria’s exports accelerated.
More rates/FX segments were then created once the new President, Muhammadu Buhari ,took over and signaled his intention to control the exchange rate, rather than let market forces send it lower.
The different rates highlight or call to question if Nigeria is truly operating a flexible FX regime or a managed float, according to Abiodun Keripe, Head of Research and Strategy at Elixir Investment Partners Limited.
“While the need to have different rates for some sectors or markets is understandable, or can be pardoned from an economic or social point of view, others are more contentious, for instance having a different rate for pilgrimage.
Getting out of this mess would mean having a fully flexible currency market, where prices are determined by demand and supply forces. Another way out would be to boost non-crude export earnings and remittances from the Diaspora