As the Central Bank of Nigeria launched fresh initiatives to relieve pressure on the naira, the need to manage the foreign exchange market for greater efficiency has gained renewed momentum. The injection of $370.9 million into the inter-bank forex mart in the last week of February led to a rally by the battered national currency and raised hopes of better days ahead. Firming it up and on a sustainable basis is the major task ahead for the CBN and the federal economic team.
Naira’s rally has come as a soothing balm to the harried business community and Nigerians confronted with rising costs and general economic adversity. A four-day streak saw the naira exchanging at N455 to the US$1 at the parallel market on February 28, down from an alarming N535 to the dollar a week earlier. Months of clamour and distress had prompted the CBN to act once more to intervene in the market. For an import-dependent and mono-export economy, the plunge of the naira since it was devalued officially in 2016 has been devastating.
The CBN’s fire-fighting arsenal is hinged on the provision of a $500 million Special Wholesale Intervention Forward sales platform to the deposit money banks to boost liquidity in the inter-bank market and the release of an initial $370.9 million into the market. Its directive that the banks open forex retail outlets at major airports and new guidelines giving greater control of the retail end of the market are expected to ease the pain of access to forex for business and personal transactions.
The CBN has been particularly solicitous towards those seeking forex for school fees, personal overseas travel and medical treatment. Some $80 million of the extra $180 million it injected in the first week of the new move was set aside for these purposes.
Reactions have been instant. Some in the organised private sector were quick to applaud, gratified at the easing of the forex bottleneck that had headlined the country’s slide into recession. According to the National Bureau of Statistics, inflation hit 18.72 per cent in January, up from 18.55 per cent in December 2016, when unemployment was 13.9 per cent, a figure that excludes the 19.7 per cent underemployment rate recorded in the third quarter of that year. For the manufacturing sector, however, there is little to cheer. The reversal of the policy reserving 60 per cent of CBN-supplied forex sales to manufacturers, said the National Association of Small and Medium Scale Enterprises, is “like moving from frying pan to fire.”
We agree. While 60 per cent of forex is rather high for a sector that contributed only 9.33 per cent to nominal GDP in the first quarter of 2016 compared to agriculture’s 19.17 per cent, it is crucial to continue to give incentives to industries like electricity, pharmaceuticals, property, automobile and printing and packaging whose costs reportedly rose by 200 per cent, according to operators.
We are not persuaded by the overriding need to, instead, favour those embarking on personal travels, medical trips and paying school fees abroad. At a time of recession and acute scarcity of forex for productive activities, such customers should seek forex from autonomous sources. Though the argument of proponents that this segment is large and, therefore, exerts much pressure on the market has some merit, such preference at this time panders to the elite and erodes the sense of urgency that CBN’s tight guidelines suggest.
The greatest challenge, however, will be the enforcement of the regulations. Lack of capacity to monitor, control and punish infractions is partly responsible for the haywire the forex market has gone. Has the CBN mustered the will and capacity to enforce compliance with its reporting and disbursement rules? Past experience is not encouraging and, under Godwin Emefiele, there is a strong perception of a weak regulator in a banking system where abuse of forex market is rampant and non-performing loans spiked to N1.85 trillion in 2016, 40 per cent of which was attributed by the Nigerian Deposit Insurance Corporation to insider abuse, the same trend that nearly brought down the financial markets in 2009 and prompted strong regulatory intervention. Indeed, the forex market is fraught with sharp practices and banks routinely sabotage every effort to have a strong naira while they make huge profits from their brinksmanship. By this week, the manipulators were already fighting back, sending the naira back upwards to N455+ to $1. Only a strong, resolute CBN can rein in the saboteurs.
The Federal Government needs to work closely with the CBN to raise reserves whose recent rise to $29 billion provided the muscle to “defend” the naira. But this should be temporary. Apart from planned new foreign currency-denominated bond flotation and asset sales, the government should heed long-standing advice to privatise and liberalise the steel, downstream oil and gas and railway sectors to draw in foreign direct investment, boost exports and reduce the huge import bill. Higher import duties should be imposed on luxury items and some food, cosmetics and household products to protect and boost domestic production and create jobs.
The government and the CBN should be guided at all times by the need to reduce the 31 million figure of unemployed Nigerians, build fiscal buffers and stimulate agriculture, mining, manufacturing and infrastructure.
