EXCHANGE RATE UNIFICATION

EXCHANGE RATE UNIFICATION

                                       By:

                            Nurudeen Dauda

                            June 17, 2023

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To start with, it is a welcome development that our exchange rate has finally been unified from its years of "dual" and or "multiple" exchange rates regime. Some people might argue that the exchange rate unification will further "devalue" the "Naira" against the "Dollar". It is , however , erroneous to think that the "value" of "Naira" or any "currency" is kept "strong" against other currencies by an executive"fiat". It is apt to state that, the real "value" of any "currency" is a "function" of "productivity"and not what the country "wishes" or "wants" its to be. In an import dependent economy like ours the "demand" and "supply" for foreign exchange (FX) is the real determining factor of the "strength" or "weakness" of our currency. The real exchange rate value of the "Naira" to the "Dollar" is the rate determined by "demand" and "supply" and not the "overvalued" official fixed exchange rate by the government.

We have for decades operated more like a "dual" FX rates regime with both "fixed" and "floating" rates. A "fixed" or "pegged" FX rate is entirely determined by the government in question. A floating FX rate, on the other hand, is a rate determined by "demand" and "supply" factors relative to other currencies. The "main" argument for "fixing" or "pegging" "official" FX rate is to safeguard the "value" of the "Naira" in order to ensure price stability (low inflation rate) which is a core mandate of the Central Bank of Nigeria (CBN). The system has in my thought hurts the economy for too long. It opens a lot of rooms for arbitrage. Arbitrage is a market activity in which a commodity or currency or other tradable item is " bought " in one market and " sold " simultaneously in another in order to "profit " from price " differences " between the markets.

There are widespread allegations on the previous multiple FX rates regime where only very "few" privilege Nigerians who are very close to the people in power who are not even genuine "businessmen" or "importers", but hiding under the guise of businessmen or importers and access the official FX. It is alleged that these privilege "few" often make "billions" of Naira for doing nothing or adding any value to economy. It is further alleged that all they do is to get the FX at an official rate and sell it to a Bureau De Change agent at the parallel market rate and make their billions quietly. Before the recent FX rate unification the current official selling price of our FX rate is N447.13 to 1$ while the parallel market rate is N743 to 1$ (Daily Trust 14 June, 2023). From the said rates one could note a difference of about N295.87 per one Dollar to one Naira. 

The system has more or less succeeded in enriching few privilege Nigerian's for doing nothing or adding any value to the nation's economy. There are widespread allegations that under the previous system the real importers or businessmen and our local manufacturers who are the engine room for local production hardly get the FX at official rate. However, the new decision means the CBN will no longer have any “official” foreign exchange. Before now we have had a “Dual” FX exchange regime where the CBN funds some “critical sectors” of the economy with official Forex which is “cheaper” than the “parallel” market rate. It, therefore, means we will now have “single” market structure through Inter-Bank autonomous window driven by the market forces. More so, the new policy states that the Inter bank funds shall not be sold to Bureaux-de Change.

The new unified FX regime will definitely stop arbitrage. It is a liberalization of the Naira which will help the federal government to balance its books. It will increase the monthly FAAC allocation to the federal, states and local governments. The previous Forex restriction is one of the biggest impediments to investing in Nigeria. The free floating of the Naira and or the unification of FX rates will hopefully attract forex inflows, especially from portfolio investors, foreign direct investors (FDI), and exporters’ proceeds and diaspora remittances. The capital market will most likely benefit from the unification of exchange rates as the market will hopefully appreciate as foreign investors move in. The new policy is expected to stop Dollar market speculation, it will encourage openness and transparency in the Forex market, It will boost confidence of portfolio investors, It will likely increase Forex availability , Nigerians that have hard currency abroad might return it in order to gain, and foreign portfolio investors and managers might return to the market as Naira will be appropriately priced by the market forces. The real value of the Naira against other currencies will be determined.

We have for decades "wasted" our "hard" earned FX depleting our Foreign Reserves with little or nothing to show for it. It worries me to note that, our hard earned FX are often given for medical, and educational tourists at official rate instead of strictly for importers of raw materials. Serious nations use it for the procurement of war and medical equipment in case of emergencies. They also use it for the Importation of raw materials for local production not the importation of finished goods that could even be produced locally with comparative advantage. Allocating official forex for school fees , medicals and mortgage abroad etc., is sadly a subsidy for the rich. 

 “It is important to reiterate that this is not a devaluation policy, it is a normalization of the foreign exchange policy regime and an adjustment of rate to reflect the fundamentals of demand and supply." It would be dynamic, and the naira will appreciate or depreciate depending on the fundamentals. “In the short term, we expect a depreciation of the currency in the official window because of the huge demand backlog. But as the market condition normalizes and moves towards equilibrium, the rate would moderate" (Dr Muda Yusuf).

Serious nations apart from security and medical equipment they only use their "hard-earned" FX for the importation of "raw materials" for local production of "finished goods". This will often facilitate local production of finished goods. It is an open secret that any country that uses its hard earned "FX" to import finished products is just exporting jobs meant for its citizens to "foreigners". Let us prioritize our hard earned FX strictly for the importation of raw materials for our local industries and not finished products.

It is laughable to say that the value of Naira will be equal to dollar when we produce little or nothing, but almost 90% of what we consume is imported from abroad.On the other hand, a monoculture as well as an important dependent economy will hardly have a strong “currency” this is because almost everything the country needs requires foreign currency to be imported and it has little or nothing to sale in its local market that will attract foreign currency to its local economy. The only thing that will make our currency strong is diversification of our economy which will improve local productivity. 

May God bless Nigeria;