Revelation: This is what the Nigerian economy will turn to before next year

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Isaac Adejumo, an Associate Chartered Accountant (ACA), in this interview with, unveils many advantages of the new foreign exchange policy of Central Bank of Nigeria (CBN), on the Nigerian economy.

The financial expert explains how the new CBN policy will bring the much awaited solution to the Nigerian economy.

Adejumo said that capital control on the remittance has been removed as CBN created inter bank foreign exchange market.

He also discloses what the federal government would need to do so as to make the policy effective.

Nigerian economy has been on a decline in recent time with the naira drastically losing its value against foreign currencies like US dollar, Pound Sterling and Euro. Is this new foreign exchange policy of CBN the much-awaited solution and how does it operate?

Isaac Adejumo: Fundamentally, the new foreign exchange of CBN is called flexible foreign exchange policy. There are two major aspects of it. The first one is the issue of capital control and the second one is the scrapping of the CBN fixed official exchange rate and the reopening of the interbank foreign exchange market (IFEM) in which rate is determined by market forces of demand and supply.

adddddddddddd Under this capital control prior to the new policy, there were restrictions on how capital importation into the country in terms of foreign portfolio investment fund, foreign currency remittances and proceeds from non-oil exports were exchanged which was via the CBN official exchange rate that is much lower than rates obtainable with other exchange platform such as Brudecange DC and parallel market.

 With new the policy, capital control on the remittances has been removed. What it means is that, if your friend or business partner outside the country wants to remit some dollar to you before, you knew of course, that you had to go and exchange it at official exchange rate. But now, you are free to exchange it at the new interbank foreign exchange market that CBN has just created. Also on the issue of non oil proceed; exporters are now free to exchange at the flexible interbank exchange rate. 

The second aspect of it is how the exchange rate is actually determined. It is determined by market forces that consist of the demand and supply, unlike the fixed exchange rate that CBN pegged at official rate between N197 and N198. But now, it is determined by demand and supply which is passing through the interbank market. A platform has been created through the Financial Market Dealer Quotation (FMDQ), foreign exchange trading platform.

Commercial banks have been appointed as primary foreign exchange dealers. Therefore, they can give quote on the volume of the dollar or any other foreign currency that they want to buy and the rate. They also give the volume of the dollar or any other foreign currency that they want to sell with rate. So, trading can be among the various banks as the primary dealer.

The dealers depending on the demand  that is, their customers request like importers that want to import raw  materials into the country and also those who have children schooling abroad need dollar demand those ones could just approach the banks through  the interbank . The forex future was also launched by the CBN precisely on the June 27, 2016.

What the future does is that CBN has given quote say for one month, two months or  the next twelve months the rate at which  a bank wants to buy dollar and the rate at which to sell same  . So, the CBN will give a quote of for instance Dec 21 2016  at N280/$  and  April 26  2017 at N260.00/$. So, these future rates will guide the operation of interbank spot rate. It is very important because it gives a platform for the manufacturers and other end users of the foreign currency to the be rest assured that within the next one to twelve months, there is a certain rate it will get in the market.

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There was a first transaction done between City bank limited and the CBN  specifically on the June 29 in which the City bank on behalf of foreign portfolio investors had already bought $20 million futures rate  in advance for  April 27 2017   at N210/$. So what it means is that, the end user would need that 20 million dollar by April next year with an assurance that he would get it for  N210/$.  If dollar at that time, April next year gets to N245 then the importer can get it also for N210.  Therefore, what the policy has done is that the CBN does not peg the rate at which people can change the currency. It is determined now by the demand and supply in the market. So, that is how the new policy operates.

What would be the impact of the policy on the citizen?

To every policy there is always a positive and negative aspect. Firstly, let me  talk about the positive aspect  to the end users of the dollar or any other foreign currency that were unable to access the dollar is gradually becoming the thing of the past.

Before the new flexible forex policy under the fixed exchange rate regime. What happened was that there were some items that manufacturers and importers of refined petroleum product and some other accessed the official rate at N197/$ but the volume was not enough. So, most of them had to go and complement with the parallel market and the rate of the dollar against the naira then at parallel market was as high as N365/$, N370/$ 0r N380/$. The gap was too wide that many of them could not even access the dollar, because the rate was extremely high.

Buhari is under pressure due to the ailing economy

Buhari is under pressure due to the ailing economy

Take for instance, the issue of manufacturers that were manufacturing items that required imported raw material and were supposed to import the material at the rate of N197 per dollar as the official rate and if they had done their cost benefit analysis based on that N197/$, but eventually end up accessing the dollar at the black market rate of about N360/$. So, at the end of the production exercise, the input cost would have been so high that the manufacturers would not be able to break even.

Another scenario is where the manufacturers are unable to get the dollar at all at the official market hence production is stopped  and job losses would be recorded because when there is no production workers would be laid off.   

Now there is opportunity to access the dollar at the interbank market and the firms that were idle before would go back into production and some of the jobs that have been lost might be recovered as workers would be recalled to work. It will stimulate economic activities. That is one of positive aspect of the new forex policy.

Another aspect is that capital control that has been removed will bring about increase in the inflow of the dollar supply into the economy. For instance the foreign portfolio investors can access the dollar at the interbank rate and also sell same when repatriating the proceed of their investments unlike in the previous policy that they were compelled to utilize only the fixed official rate whereas the parallel market rate is too tempting .

 There is also  non oil export proceed from the manufacturer under the fixed exchange rate regime, there was a capital control on how the export proceed in dollar term could be exchanged  which was only  rooted through the official exchange rate of N197 to N199 irrespective of  whether the manufacturer  is importing raw material  accessing the dollar at  the parallel market but  since that  control has been removed,  So, any manufacturer that exports can now exchange its  proceed at whatever rate  that is operating at the interbank market. So, there is a free entry into the market and there is a free exit.  

Remittances too will be coming into the country unlike before that anybody sending dollar from abroad to Nigeria, the money had to go through the official rate of N195 which is rather too low relative to other means of exchange. Therefore, all those would encourage the inflow of the dollar which the economy has been denied of before.

Definitely there would be increase supply in the market as  the ends users can access the dollar. Therefore, economic activities can begin to move again because there has been positive improvement  in the equity market. Immediately  two weeks after the policy was introduced . Now talking about the negative aspect of the policy, there is no policy which has the positive but does not have the negative. Formally, the naira has depreciated in value from the official rate of N197/$ to N280/$and above.

What advice do you have for the policy to be effective?

Well the major issue is the supply of the dollar. There are two major sources of supply. First is the crude oil export proceeding and second is the non oil. The sources of the crude oil export proceed is from the dollar inflow through the crude oil production. What the government needs to do to make the policy effective and the supply of the dollar to stable and steady is that it needs to increase the crude oil production.

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Although the current rate is far below 2.2 million dollar barrel per day that it has put into the 2016 budget,  but what is in production on the average is around 1.6 million, 1.5 million, 1.4 million barrel per day. So, there is need to increase the crude oil production. And to do that the government of the day needs to restore peace in the Niger Delta so that issue of bombing and destruction of crude oil facilities could be reduced.

The other source of the supply which is non export proceed and issue of capital control which CBN has  removed will  help the dollar inflow and there is need for CBN to ensure transparency in the process to engender confidence of investors about the issue of liquidity of the dollar regarding free entry and exit as well as closing or reducing the wide gap between the interbank rate and the parallel market rate.

The post Revelation: This is what the Nigerian economy will turn to before next year appeared first on Nigeria News today & Breaking news | Nigerian newspapers 24/7.

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