• A realistic exchange rate will add N4tr to the federation account by 2023, Yusuf said
• Ex-CBN Director: It is not an intervention but a result of regulatory control
• Three years later, the level of harmonization is still illusory
• FX inflows decrease as dollar demand pressure continues
From 2020 to last year, Nigeria lost, at least, N8 trillion to hire seekers who explore various rates in the foreign exchange (FX) market to rip off the country, data obtained by The Guardian yesterday has shown.
This comes as the Central Bank of Nigeria (CBN) continues to disrupt exchange rate convergence, three years after the same promise.
Since the 1980s, Nigeria’s FX stability has declined in many rates, a challenge that has led to speculative trading, rent-seeking and other market manipulation.
Market arbitrage (the difference between the official and parallel markets has widened in the past three years from N100 per dollar or about 30 percent in 2020 to over N400 per dollar (more than 100 percent) last year while the black market rate rose to N880/$.
Development institutions, including the International Monetary Fund (IMF), are wary of exchange rate differentials of more than five percent and warn that they can lead to unhealthy manipulations that could affect other efforts to stabilize the market.
From 2020 to 2022, the CBN spent about $42 billion to intervene in the foreign exchange market to stabilize the naira. The amount is sold to end users, including students and tourists, at the official rate, which is far from the effective naira exchange rate.
According to the Financial Stability Report, a publication of the CBN, the top bank sold $9.2 billion in the market in the first half of last year. Full data for the second half is not available, but the annual value is considered to have exceeded, especially with the level of social and economic activity associated with the second half.
While the black market rate averaged N650/$, the pseudo official window rate (Investor and Exporter (I&E) Window) ended at a suppressed average of N447/$. That made the arbitrage at N203/$, pushing the CBN FX subsidy in the year to about N3.65 trillion.
In the same way, the 2021 FX intervention left a hole of N17.5 trillion in the country’s external reserves. At an average arbitrage of N160 per dollar, the country frittered about N2.62 trillion end users will pay if they buy in another parallel market accessed. Then, the moving average of the exchange rate is N400 as opposed to N560 exchanged in the parallel market.
Although the CBN has eliminated the parallel market as a reference point of the true value of the naira, some experts see it (being the most accessible to end users) as the closest to the true market.
The CBN has to set the official rate three times in 2020 as the country battles the impact of the COVID-19 crisis, which has created a gaping hole in foreign earnings. The year arose at N307 / $ but three months into the year, the rate has been set to N361 / $ and moved up by plus N20 towards the end of the year, putting the average official exchange rate at N350 per dollar.
For the parallel market, the price oscillated around N450 / $, which translates into an arbitrage of N100 per dollar. With the total sale of FX by the CBN pegged at $17.5 billion in the year of COVID-19, it seems, the difference between what the CBN realizes from the sale and the market value is N1.75 trillion.
In an analysis prepared on the impact of FX subsidies, shared with The Guardian yesterday, Dr. Muda Yusuf, a private sector thought leader and free market advocate, said a realistic exchange rate regime would add N4 trillion to the Federation Account. . He rejected the CBN FX sales program, saying it was a huge burden on the economy and public finances.
Nigeria is facing a tight fiscal space. This year’s budget is full of deficits of more than 50 percent, despite false revenue projections. The Federal Government is considering an additional loan of N8.8 trillion to support budget financing, which could raise the outstanding debt to nearly N80 trillion.
Yusuf, the Director of the Center for the Promotion of Private Enterprises (CPPE), said that the sale of FX is the next burden for the PMS subsidy burdening the government. In 2023, PMS subsidy is projected at N3.36 trillion or 15.4 percent of the total spending envelope. Unless the social safety net is removed at the end of the first half, as imagined, it could double this year.
“Nigeria’s economy is heavily burdened and burdened by two major subsidy regimes: the fuel subsidy regime and the foreign exchange subsidy regime. A significant amount of revenue can be unlocked from these subsidy regimes if appropriate reforms are implemented.
“Yes, there is a plan to end the fuel subsidy, this is a positive development. This action will release a minimum of N6 trillion revenue into the federation account every year. In addition, it will end several years of looting of the country’s resources through the subsidy regime.
“The next government must show the political will to stop this predatory practice,” Yusuf said.
He identified FX intervention, which is allocative and creates room for inefficiency, as the second major subsidy regime where large profits can be locked in as the country grapples with policy options to survive the impending fiscal knife.
He said the negative impact of FX subsidies has been grossly underestimated in recent years, leading to losses of trillions of naira to be accrued in the Federation Account.
“This is a big loss for foreign exchange subsidies that destroy the economy like fuel subsidies. But strangely, the National Assembly and the CBN have seriously, grossly and inexplicably underestimated the benchmark exchange rate in the appropriation bill some years ago.
“For an economy burdened by huge fiscal deficits and unsustainable debt obligations, this should not continue in 2023. The reality is that end users of forex pay more than N700/$ for business transactions. Selling government forex for less than N500/$ is not possible be blamed.
“The exchange rate assumption in the budget should be reviewed immediately to reflect the reality of the exchange rate and increase revenue to the federation account. This can be done within the framework of the Finance Act, which, fortunately, is under review. A realistic exchange rate benchmark will increase the revenue of the federation account by about N4 trillion in 2023, “said the economist.
The 2023 budget benchmark exchange rate is N435.7/$, which is a discount of N11.52 from the current I&E window. It is almost N300/$ behind the parallel market rate.
Yusuf said a more realistic benchmark would not only benefit the Federal Government but sub-national and local governments drawing from the Federation Account.
He added: “Unlocking revenues from forex subsidies will be an important step towards achieving the government’s fiscal consolidation goals.
“It will also reduce the current tendency to impose additional tax burdens on businesses and moderate macroeconomic pressures.
“It must be stressed that this is not a devaluation proposition. It is a strategy intended to correct distortions in the forex ecosystem, boost government revenues, prevent corruption in forex transactions and increase liquidity in the forex market. This will also increase the efficiency of forex allocation, improve transparency in the forex environment and increase investor confidence in the Nigerian economy.
Currency brokers, intermediaries and other rent seekers are the main beneficiaries of the unnatural arbitrage opportunities, as the CBN, two years ago, excluded BDCs from weekly funding. Historically, these loopholes have created room for loophole manipulation and other official manipulation.
Former deputy director of the apex bank, Stan Ukeje, is one expert who has taken a firm stand against the exchange rate regime several times.
Yesterday, he told The Guardian that there is nothing in the allocation of dollars that is considered to be an intervention in other climates.
He emphasized that the CBN, which has stressed its commitment to the level of harmonization, is a victim of “regulation capture”, a problem similar to other institutions, including the NNPC Limited and the National Insurance Commission (NAICOM).
In an ideal system, he said, the monetary system sells or buys dollars to prevent extreme volatility instead of a system where the regulator continuously suppresses the direction of the market with resources. He also decried wide arbitrage, saying it is a major distortion and causes a lot of manipulation.
“In our case, we always supply but never buy. Even monopolies do not control supply and prices. It does not end anywhere. But if left alone, the CBN knows what to do. But it is clear that there is regulatory capture, and this affects all institutions arrangements in the country,” Ukeje said.
The former central banker has said the current structure of the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) cannot restore sanity and act as a market clearing, unless it is liberalized to accommodate other traders.
Also said, the investment bank, David Adonri, described the arbitration as a big loss and leakage. With the CBN always using external reserves to fund its interventions, he said the Federal Government and Nigerians are the main losers.
He also said that the CBN should be a buyer and a seller when the market is liberalized so that it can operate like a stock market to achieve sanity.
While some beneficiaries are involved in the rotation, thus generating profits, some end users, such as students, use subsidized FX to pay for tuition and other expenses just to stay back in Europe and America after school and contribute to building the rest of the economy.
Officials and the top council of the CBN, at some point, thought of stopping or limiting some categories from the end-user window to preserve the country’s FX but backed off because of the possibility of withdrawal. Some industry experts have attributed the current ordeal facing the governor, Godwin Emefiele, to his audacity to exclude BDCs from the retail market.
In other countries, currency trading institutions play a clearing role – buying and selling in almost equal proportions. But with the majority of sellers opting for more rewarding black market offers, Nigeria is an exception.
For example, the CBN’s total purchases in 2020 were $3.468 billion instead of $17.51 billion sold, creating an outflow of $14 billion. In the first half of last year, the apex bank received a total inflow of N1.33 billion from international oil companies (IOCs) mainly; this figure is 14 percent of the total allocation (N9.23 billion) in two quarters.