By Charles Abuede  

• Huge shortfall in FX supply
• High import bill
• Huge deficit in account balance

  As uncertainty clouds Nigeria's monetary policy landscape, it is becoming clearer that the Central Bank of Nigeria (CBN) is slowly but surely embracing the long widely clamoured policy of a common rate in the country's opaque multiple foreign exchange markets. And analysts are expressing concerns over the import of this on the economy. A weak demand for oil had led to a fall in prices in the international crude oil market, giving Nigeria's revenues a serious squeeze, the attendant consequence of which was a sharp drop in foreign exchange inflows. The first move by the CBN led to the adjustment of the naira’s exchange rates to the dollar in the official and the Importer’s & Exporter’s windows, effectively devaluing the currency to N380.50 from N360 to the dollar; a move that has been termed "a step by the apex bank to scrap multiple exchange rates in the market, as well as responding to the International Monetary Fund/World Bank conditions to receiving a $3 billion loan," by many. The proposed IMF loan has five years repayment plan at one per cent interest rate, but carries what can be termed "moral persuasion" to unify the FX rates. Along with the IMF, the World Bank also wants Nigeria to unify its FX rates to address the underlying foreign exchange liquidity crisis. In early June, the CBN is known to have asked bidders in the secondary market window to adjust their bidding price to N380/$ and that it (CBN) would not accept anything below that. In a similar manner, Godwin Emefiele, the CBN governor, while addressing investors during a conference, a few weeks ago, declared that the apex bank "will continue to pursue unification around the NAFEX market". Uche Uwaleke, a professor of capital markets at Nasarawa State University and a fellow of the Institute of Chartered Accountants of Nigeria (ICAN), in an email response to Business A.M.’s questions said: "The recent upward adjustment of the exchange rate by the CBN is no doubt largely in response to the conditions for drawing down on the recent IMF RFI facility; it is also consistent with the Economic Sustainability Plan of the government which has made provision for the unification of rates across all the forex windows. But it is at variance with the Medium Term Expenditure Framework and by implication the 2020 budget, which was based on an official exchange rate of N360 to the dollar". According to Uwaleke, "Even the 2021-2023 MTEF is equally predicated on N360 per $1. So, except these are quickly revised in the light of this unification effort, the country's annual budgets in the medium term are literally dead on arrival”. Many analysts have, however, pointed out that the current actions by the CBN could help to drastically dispirit rent-seeking in the foreign exchange market, having shoved the exchange rates in the interbank and parallel windows closer to a junction, after many years. They say the apex bank saw an opportunity to finally pull the plug on the naira, although, they maintained that this is likely never going to be the last stop. In specific reactions to the devaluation of the domestic currency against the dollar at the official window, for the second time this year, by a total of 24 per cent, while the NAFEX rate followed with a six per cent devaluation in value, some analysts say the attendant implication will likely hurt the economy, thus, inflicting pains on citizens, as well as putting more inflationary pressure on an economy already challenged by COVID-19. Bamidele Samuel Adesoji, a senior research analyst and economist posited thus: "The reality is that, Nigeria is faced with a twin shock of oil price and Covid-19. Oil price dropped to as low as $20 on the back of low demand. The weak oil price at $40 per barrel puts Nigeria in a serious revenue squeeze and low FX inflows. Hence, the CBN could not have continued supplying FX to peg naira on N307 or N360 to a dollar, after it saw an opportunity to finally pull the plug on the naira. However, current rate may not be the bus stop". Adesoji further noted that FX rates unification is a step in the right direction if the CBN is able to "effectively" achieve this, adding that having one window with enough liquidity, for businesses to access FX is a step in the right direction. “However, the path ahead may be somewhat rough and businesses must brace up with backward integration strategy," Adesoji told Business A.M.   Pressure in the parallel market On the other hand, recognising the pressure in the parallel market, occasioned by the adjustment of the bid-offer, will show that liquidity providers’ preference for unofficial FX sources has continued to put increasing weight on the naira exchange rate, which currently trades above N470 to a dollar. This is, however, suggestive that investors' preference for unofficial FX sources is due to limitations associated with sourcing for foreign currencies on the official window. In the light of the above, will this move help deepen FX market perfections and ensure transparency? Uwaleke, the capital markets professor, told Business A.M. that the measure will reduce round tripping and other sharp practices in the forex market, made possible by multiple exchange rates, noting that it will also make the FX market more transparent; facilitate planning for businesses for which multiple rates create confusion and uncertainty. "Market transparency will attract foreign investors and so in the long run, the parallel market rate will not be too diverged from the market-determined rate. Presence of foreign investors will be positive for the capital market. Increased forex inflows, especially from Diaspora remittances, will help improve liquidity in the forex market and stabilise it," Uwaleke stated. On the economy-wide implications of the CBN move towards unification of the rates, the financial economist said: "When this happens, the economy will begin to witness a reduction in the inflation rate as the high exchange rate in the parallel market contributes to inflation. Increased business activity will lead to more job opportunities. But all these sunny sides will come about with time, maybe a few years from now and will be enhanced by the government's efforts at tackling insecurity and intensifying infrastructure provision". An economic analyst in one of the leading financial services firms, who spoke anonymously to Business A.M., revealed that the plan by the apex bank would not only deepen the market but will also remove the clog that has hampered the wheel of progress of the market for many years. "Operators in the forex market have long yearned for a market devoid of incessant interference from the CBN. The attempt at collapsing the managed and pegged rates, which have hurt the economy for a long time, and in its stead, establishing a liberalized forex market, would be a welcome development to market participants. However, those who have benefited from the current rot in the system may not be happy," he stated.   Single FX rate way forward? Nigeria, having for a long time practised multiple exchange rate regimes, coupled with how the coronavirus pandemic has brought into ultimate reality a new normal in business and economy, unifying rates across all markets into a single rate is widely seen as the way to go for Nigeria in charting the right course for Africa's largest economy. Many economists familiar with the matter share the view that a single foreign exchange rate will open up the country to a new dimension of foreign investment inflow, boost manufacturing activities and stimulate sustainable, robust and inclusive economic growth. "Single FX rate window is the way forward, although this will take some time for adjustment to effectively take place. It's just a step among many; we have a huge shortfall of FX supply, high import with a building deficit in the current account balance, so the monetary landscape is yet clouded with uncertainty," Adesoji said. For Uwaleke, who holds a similar view as Adesoji, as the IMF had envisaged, the single exchange rate, involving devaluation, has the potential of fixing the country's BOP [Balance of Payment] difficulties through reduced imports. The capital market professor also emphasized that the unification of rates is expected to translate into more naira revenue for the three tiers of government following the conversion of crude oil sales proceeds at a higher exchange rate than the previous N360 to the dollar. Projecting a scenario of possible outcomes as a result of the rates unification action, Uwaleke said: "In response and in a bid to rein in inflation, the CBN will likely raise policy rates leading to further increase in SMEs cost of funds and of production. However, the result will be more inflationary pressure on an economy already challenged by COVID-19 and insecurity issues which have combined to disrupt output, especially in the agriculture sector. This situation leads to more job losses, thereby worsening the unemployment situation. "In the short term, the implication of this devaluation is that it will likely hurt the economy and bring some pains to most Nigerians given the country's import-dependent nature and over-reliance on oil revenue. The cost of importation of critical raw materials for SMEs, including import of petroleum products, which hitherto were subsidized at the official window, will rise. "Another negative side effect of the devaluation is that it will shrink asset values in dollar terms. This will affect the global ranking of banking and capital markets institutions. Banks that have borrowed in dollars from foreign institutions will be in more trouble. Our public debt stock will also rise in naira terms. This should mean improved funding of government budgets if better managed," Uwaleke told Business A.M. An overarching general scenario painted by analysts who spoke to Business A.M. for this story is that in the long run economic challenges may disappear, creating room for a more stable macroeconomic environment