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Five weeks after the Central Bank of Nigeria (CBN) floated the foreign exchange market, manufacturers and labour unions have called for stabilisation of the exchange rate, hence preventing volatility in the forex market.
The CBN had resumed interventions at the Investors and Exporters window as the value of the naira hit the lowest level of N853 to the dollar at the official window and N855 to the dollar at the parallel market. Although the naira had weakened to N870 at the parallel market last week, it opened this week stronger at N830 to the greenback.
This is as small business owners have urged the federal government to urgently address the severe economic challenges that they face, saying they are being suffocated under the weight of unfavourable policies and harsh operating conditions
The stakeholders told LEADERSHIP exclusively that though they supported the Central Bank of Nigeria’s (CBN’s) move to let market forces determine the actual rate of Naira versus other international currencies, especially the dollar, they are however advocating a mechanism to stabilise the rate.
They have now urged the apex bank to position itself for periodic intervention in the forex market, when necessary, to stabilise the exchange rate, saying this should happen not by fixing rate, but by boosting supply to the extent that the reserves can support it.
LEADERSHIP reports that a significant shift to a less restrictive forex policy came into force on June 14, 2023 as the CBN, under the current administration of President Bola Ahmed Tinubu, granted banks the autonomy to determine their foreign exchange trading rates.
At the start of this present democratic dispensation in 1999, the Naira was trading at 101.44 to a dollar but it went up to 110.07 in 2000. By 2001, Naira was being exchanged at N113.01 to a dollar at the I&E window while it was trading at N134.31 at the parallel market
By 2002, it firmed to N127.08 at I&E window and N139.22 at the parallel market. Dollar was trading at N137.22 to a dollar in 2003 and N132.56 in 2004. It jerked up to N138.13 in 2005, N127.06 in 2006, N120.51 in 2007.
In 2008, Naira traded for N117.74, N150.85 in 2009, N150.22 in 2010, N156.24 in 2011 and N157.31 in 2012. It was N157.27 in 2013, N160 in 2014, N196.99 in 2015, N305.18 in 2016, N308.63 in 2017 and 2018. It went up to N312.95 in 2019, N384.17 in 2020, N416.25 in 2021, N450.72 in 2022 and N777.82 in the current year. At the FMDQ I&E window, it closed at N790 to the dollar while it remained around N870 at the parallel market
The decision to float the naira became effective with the collapsing of the existing market segments into the Investors and Exporters window, the reintroduction of the ‘willing buyer, willing seller’ model, two-way based quotes to ensure transparency of orders and seamless trade executions.
The chief executive officer of the Centre for the Promotion of Private Enterprise (CPPE), Muda Yusuf, said the bold step taken by the Tinubu administration towards the unification of the Naira exchange rate would unlock the huge potential for investment, jobs and capital flows, saying investors’ confidence would be positively impacted.
He said, “This is a framework which allows for flexible rate adjustments as and when necessary. It is a model that is predictable, equitable, transparent and sustainable. It is a policy regime that would reduce uncertainty and inspire the confidence of investors. It would minimise discretion and arbitrage in the foreign exchange allocation mechanism.”
Yusuf noted that in the short term, a depreciation of the currency in the official window was expected because of the huge demand backlog, but as the market conditions normalise and move towards equilibrium, the rate would moderate.
He went on: “We also expect the new policy regime to boost inflows and strengthen the supply side amidst elevated investors’ confidence. The component of forex demand driven by arbitrage, rent seekers, speculators and other economic parasites would also fizzle out, thus restoring stability to the forex market.
“However, the CBN should position itself for periodic intervention in the forex market, as and when necessary, to stabilise the exchange rate and prevent volatility. This should happen not by fixing rate, but by boosting supply to the extent that the reserves can support.”
Also, analysts at Afrinvest Limited stated that “moving ahead, the CBN, in tandem with the federal government, has introduced several policies to improve Nigeria’s ability to attract foreign capital and diaspora remittances.
“This, alongside the collapse of the different FX windows into one window and pivot of the FX administration into a managed float, is a laudable initiative given that they are pro-market in nature. We believe these recent measures can help reverse the ugly trends of low foreign capital and remittance into the country.”
The analysts stated that poor business climate stemming from weak infrastructure, policy mismatch, insecurity and increasing poverty are some of the challenges that undermine the attractiveness of capital inflows, especially FDIs and remittances, saying that the introduction of policies to support business growth, increase crude oil production and diversify FX earnings would allow the CBN to reduce its reliance on capital controls to manage FX reserves and, in turn, the free flow of capital would reduce the apathy of foreign investors to Nigeria.
On his part, the director-general of Manufacturers Association of Nigeria (MAN), Mr. Segun Ajayi-Kadir said it expects import costs to rise and that he foresees economic uncertainties and exchange rate volatility due to the difficulty in predicting future exchange rate movements, due to the float of the naira.
On the positive side, Ajayi-Kadir said floating the exchange rate is expected to boost Nigeria’s export competitiveness, improve foreign exchange access, and increase capital flows in the long run. He noted that floating the Naira remains an important step towards resolving the crisis rocking Nigeria’s foreign exchange market as the official exchange rate was almost at par with the market-determined rate.
Meanwhile, Organised labour has disclosed that the current free float of the exchange rate, if strictly implemented, will force more Nigerians into backward integration, whereby they will patronise homemade goods because of the flat rate.
The president, Association of Senior Staff of Banks, Insurance and other Financial Institution, Comrade Olusoji Oluwole, said: “The free float of the Naira has only formalised what had always been in place. You will recall that many people and business owners had complained of their inability to access foreign currency and had been forced to source funds from the parallel market at extremely high costs.
“You will also recall that the CBN continually cut allocations to banks, providing only a fraction of their demands. The free float will however provide a level playing ground for all users. While this may be good for investors and businesses, the impact on the average person will be catastrophic if the government does not take adequate steps to mitigate it. Fiscal discipline needs to be imbibed and unnecessary spending, especially on items requiring forex, should be controlled.”
Moreover the Oluwole stressed that while there is a need to urgently review the minimum wage which has been eroded by the free float and removal of subsidy, there is an urgent need to provide immediate support to the masses in areas such as health, agriculture, education, and transportation.
“Providing free and quality primary health care, free basic education, subsidised transport, concessions to farmers that will bring down the landing cost of food should be considered. Tax concessions should also be considered. This is not the time for the government to increase or introduce fresh taxes on an already overtaxed regime,” he added.
However, the president of the junior staff of banks, National Union of Banks, Insurance & Financial Institutions Employees (NUBIFIE), Comrade Anthony Abakpa, in his reaction, said the floating exchange rate system entails that when the currency’s demand is low, its value decreases, but that due to this, imported goods will become more expensive for the people holding the currency.
According to Abakpa, “with this, people will usually stop importing the goods and start buying domestic goods. This will enhance industrialisation as it will be forced to patronise our local products.”
According to Marvellous Adiele at Parthian Partners Limited, since the free floating of the exchange rate market, “we have experienced foreign exchange instability and volatility. We’ve seen the rate going as high as N805/$ and as low as N768/$. The depreciating naira coupled with the rising inflation poses a threat to businesses as it hikes their costs, especially businesses exposed to foreign currency obligations.
“I am of the opinion that there might not be a perfect time to float the rate as a nation, so the earlier it is done, the better. However, we need to increase our foreign currency revenue to relieve the heavy demand pressure witnessed in the foreign exchange market.” However, the head, Financial Institutions Ratings at Agusto & Co, Ayokunle Olubunmi, commended CBN for the initiative, saying it believes the policy will even pay off over a long time.
“In terms of the exchange rates, I think what the CBN has done is commendable. One thing that we all need to also bear in mind is that we don’t have a free float of the naira. What we have is a managed float…
“The truth is that our economy does not have the fundamentals to actually have a free float of the naira because that means that it can go as low as N2,000 or as high as N200, but what we have is a managed float in which you allow it to float up to a particular level, so you can intervene either to sell Naira or for you to buy.
“The CBN has actually done what they should have done, but because we have held the naira down for a long period of time, we will actually have this volatility in the short term. And now because of the challenges we have had, the foreign investors are scared of coming to the market.
“This is the second time that their funds will be stuck in Nigeria in less than six years. So, everybody is being careful, including foreign direct investors. I think if we can continue with this momentum, by December or January next year, I think we will have a bit of stability in the market,” Olubunmi said.
FG Urged To Address Economic Suffocation Of SMEs
The Association of Small Business Owners of Nigeria (ASBON) and Small and Medium Enterprises (SME) stakeholders have called on President Bola Ahmed Tinubu to take urgent and comprehensive actions to alleviate the economic suffocation of small businesses in the country.
The SMEs and their economic groups further stressed the need to address the worrisome level of inflation suffocating businesses in the country while appealing to the president to take urgent steps to weigh in with sound economic policies to address the hydra-headed monsters creating economic disruptions.
Speaking on the development, ASBON national president, Dr. Femi Egbesola said SMEs are no longer operating at profit levels, but that businesses are shutting down and SMEs are closing shops due to hyperinflation that has shrunk their operational incomes.
Egbesola said: “Many small businesses are no longer running at a profit level, with sales sharply dropping and liquidity decreasing. It is indeed a sorry case. The removal of fuel subsidy, along with reforms in the foreign exchange sector, has also impacted small business operations, leading to losses and setbacks.”
Despite the recent executive orders signed by President Tinubu to reform the tax system, these stakeholders emphasised that more urgent and comprehensive actions are needed to save their businesses from failing.
Speaking on behalf of the concerned parties, the director-general of the Manufacturers Association of Nigeria (MAN), Segun Ajayi-Kadir, stated that “aside the challenges of multiple taxation that may have been addressed to an extent, we stress the need to alleviate economic hardship quickly to make lives better holistically. “The manufacturing sector is particularly affected, with rising inflation and the high cost of energy significantly increasing the cost of operations for manufacturers and MSMEs.”
The CEO of the Centre for Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, also highlighted the need for immediate government intervention.
Also speaking, national president of the Food, Beverage, and Tobacco Senior Staff Association (FOBTOB), Jimoh Oyibo, called for the granting tax holidays to the sector, stating that “this would enable the sector to gather more strength to keep the companies afloat.”
