Over a week ago, Nigeria’s finance minister, Zainab Ahmed, stirred controversies when she said that Nigeria had adopted a new flexible exchange rate policy for official transactions.
“The government will start to use the flexible rate, that has until now applied to investors and exporters, for government transactions too,” a report by Bloomberg quoted Mrs Ahmed as telling journalists at the State House in Abuja.
“Within the government and the central bank, there is only one official rate and that’s the Nafex rate.”
The minister, by implication, suggested that the government had effectively devalued the naira yet again, just barely a year after the local unit was devalued twice. But the Central Bank of Nigeria swiftly denied the claim.
Speaking at the end of the Monetary Policy Committee’s meeting last Tuesday, the CBN governor, Godwin Emefiele, said the report suggesting the bank had embraced a flexible exchange rate regime and harmonised the different rates was false. Mr Emefiele said the central bank still maintained ‘managed float’, which allows it to intervene in the market occasionally.
“Let me repeat that Nigeria had not changed from its foreign exchange management policy. Nigeria remains on a managed float,” he said.
“What the managed float regime means is that the CBN, being the institution that has the core mandate for forex administration in the country would watch the market and see how the market operates. Depending on its reading, it would come from time to time to intervene in the forex market.”
Within the same period, Vice President Yemi Osinbajo was also quoted to have said that payments made as part of the federal allocation would use the market foreign exchange rate.
“To the questions around whether we’re just going to float the currency, what the finance minister said is that payments for federal allocation will use the … market rate,” Mr Osinbajo said.
In the middle of the contradictions in policy statements on the part of the CBN and finance ministry, here are eight things to note about the nation’s foreign exchange regime:
- CBN won’t disclose the official rate it now operates: The first takeaway from the controversy is that the CBN appears to be concealing the exchange rate it now operates as the official rate. At the press briefing on Tuesday, the CBN governor, Mr Emefiele, merely implied that the apex bank still maintains the “official rate” of N379 as listed on its website, while the NAFEX rate of N410 is adopted for certain government businesses as claimed by Mr Osinbajo.
When the media reached out to the CBN spokesperson, Osita Nwanisobi, for clarity on the actual rate the apex bank now adopts for its businesses, he insisted that the CBN governor had done the “clarification”. This newspaper’s review of the CBN governor’s speech showed that no specific rate was mentioned in the briefing, yet Mr Nwanisobi claimed otherwise.
What Mr Emefiele spoke about was the CBN operating a “managed float” policy, which allows it to watch market dynamics and intervene in the market whenever necessary. He effectively denied that it had adopted the flexible rate, NAFEX (Nigerian Autonomous Foreign Exchange Rate Fixing).
- Nigeria attempting to harmonise multiple rates as part of World Bank’s conditions for $1.5 billion facility
Despite the apex bank’s stance that it has not officially migrated to NAFEX, it is clear that the government is trying to harmonise its multiple exchange rates. This is no surprise, given what is essentially at stake for the nation.Nigeria typically runs multiple exchange rates, beginning effectively in 2017, in the wake of the oil crash of 2014/15. There is the official rate, listed by the CBN as N379/N380; there is the NAFEX, a market-determined rate for investors and exporters which hovers around N410; and there is a “black market” rate, typically ignored by the government, which moves around N480.
The Nigerian government is seeking a $1.5 billion loan from the World Bank, as part of measures to bridge its huge budget deficits. However, the World Bank has called on Nigeria to fix its multiple exchange rates, including the official rates and NAFEX, as part of the conditionality for the facility.
With a budget deficit of about N5.6 trillion in 2021, the new move toward NAFEX by the government shows an attempt to harmonize these multiple exchange rates, ostensibly to resume talks on the World Bank facility. The finance minister, Mrs Ahmed, confirmed that in February when she said the government had taken steps to meet World Bank’s conditions. She said the bank should understand that adopting the NAFEX is progress and it would take time to unify the rates. “Their view is that despite the fact that we have adjusted the official exchange rate from N305 to N360 and we further on moved to I&E or the Nafex window, and as we speak, federal government inflows and outflows are monetized at the Nafex window rate. So, we feel we have met that requirement but the World Bank is saying that we have to close that gap between the black market and Nafex window.”
- Government appears ready to use selective adoption of NAFEX, which would be ‘net positive’ for it
The movement towards a weaker NAFEX is to some degree a devaluation, but its selective adoption means there would be positive effects on government records. Adoption of NAFEX for conversion of dollar inflows and outflows will be ‘net positive’ for the government and this will help boost government revenue.
Nigeria essentially relies on crude for a significant chunk of its foreign exchange revenues, even though at about 9 per cent, the nation’s mainstay contributes not so much to its GDP.
The sale of Nigerian crude is done in USD and the revenue is converted to naira, for local use. Should such USD inflows be converted using a weaker NAFEX, it means the government would have more money to fix its budgetary (deficit) concerns.
- Nigeria’s debt shows the government may be hoping to have its cake and eat it
On the flip side of the NAFEX adoption for USD inflows conversion, however, is that there are indications that Nigeria’s debt figures would still be calculated using the CBN’s “official rate”. Checks by the media Monday showed that as of its last publication, the nation’s Debt Management Office adopted an exchange rate of 380 naira to the dollar in its calculation of debt.
To be sure, if the NAFEX is adopted in debt calculation, interest costs on the dollar component of the nation’s debt would shoot skywards in naira terms, and this may erase some of the gains garnered in its adoption for calculation of USD inflows.
By choosing not to adopt the NAFEX rate in other businesses like calculation of debt figures, while adopting it for USD inflows, the Nigerian government may be planning to have its cake and eat it.
There are indications that such opacity may erode confidence in the financial system, and the ability of CBN to instill confidence in the market.
- Naira stability still hinged on oil revenues
About 90 per cent of Nigeria’s foreign exchange earnings come from oil export, which is tied to the vagaries of international politics. Last year, amid turbulence in the global economy and a crash in the price of oil-induced by Covid-19, the media reported how Nigeria devalued its currency twice. The government is also making efforts to improve its diaspora remittances, another significant source of foreign exchange. But analysts opine that the ability of the government to manage naira is tied to the revenues from oil, which remains largely unpredictable.
Last month, this newspaper found that Nigeria’s foreign reserves depleted despite oil price rally. This happened at a time the nation settled a major debt obligation. In essence, Nigeria’s dollar reserves would continue to nosedive amid the settlement of debt except there is a significant rally in oil prices.
In a “managed float” system, all of these would impact the ability of the apex bank to intervene in the market, and ultimately, ensure stability.
- Liquidity Vs. Inflationary risks
It remains unclear whether the Nigerian government would indeed toe the path of adopting a flexible exchange rate. One thing the controversies surrounding the exchange rate kerfuffle thrown up is the seeming incoherence in government’s policy, especially on the fiscal and monetary sides of economic management. While those in government appear open to the adoption of a flexible exchange regime, the CBN seems laid-back in its own adoption of the option. The enthusiasm shown by the ministry and the government may not be unconnected to the fact that its adoption would help address the challenge of low liquidity, but the CBN is concerned that it may also worsen Nigeria’s inflation rate, which peaked at 17.33% in February according to the nation’s statistics bureau.
- Conflicting signals and Power play
Another major takeaway from the developments is the subtle “power tussle” among managers of the Nigerian economy. The result is the conflicting signals investors and other concerned stakeholders get from policymakers and how that may impact the frail economy.
In his intervention last Tuesday, the CBN governor suggested that the media and other market watchers should rather listen to the CBN, and not any other entity.
“When Bloomberg begins to conclude statement of the Minister, which I doubt because I have not heard the audio, that we have moved into the flexible exchange regime, I will just try to appeal to members of the press community to seek clarification, particularly from the authority,” Mr Emefiele said.
“Section 4(2) of the CBN Act places the authority of forex management on the CBN.”
Interestingly, the finance minister has not spoken publicly again on the matter ever since the controversy began. She has neither come out to defend her earlier position or align with the CBN’s new position.
- Nigeria foreign exchange policy remains fuzzy
For now, it does appear that the policy direction with respect to the exchange rate remains fuzzy, given the CBN’s taciturnity. If the nation’s talks with the World Bank turn out well in the coming weeks/months, it is safe to aver that Nigeria may be heading toward adopting a single exchange rate, as Mr Osinbajo recently said.
In a nutshell, foreign investors can only hope that there is some harmony in policy appreciation, and, ultimately, implementation––on the parts of the CBN on the one hand, and the finance ministry/government on the other hand.
