By Jeph Ajobaju, Chief Copy Editor
Again, the twin sister of global monetary policy surveillance, the International Monetary Fund (IMF), has urged the Central Bank of Nigeria (CBN) harmonise the naira exchange rate, echoing the World Bank in less than a week.
And IMF the repeated its call for Nigeria to sell fuel at a pump price based on market forces, saying subsidy distorts the market and wastes funds that should be invested in infrastructure, a point the World Bank has also pressed.
The IMF called for the adoption of the Nigerian Autonomous Foreign Exchange (NAFEX) window for official transactions as well as the unification of all rates to achieve a market-clearing rate.
But in a statement issued after a virtual meeting with Nigerian authorities, the IMF clarified that the positions “do not necessarily represent the views of the IMF’s Executive Board,” according to Jesmin Rahman, who led the IMF executive team.
“The recent removal of the official exchange rate from the CBN website and measures to enhance transparency in the setting of the NAFEX exchange rate is encouraging.
“The mission recommended maintaining the momentum towards unifying all exchange rate windows and establishing a market-clearing exchange rate.
“To strengthen the monetary targeting regime, the mission recommended integrating the interbank and debt markets and using the central bank or government bills of short-maturity as the main liquidity management tool, instead of the cash reserve requirements,” she added, per The Guardian (Nigeria).
The IMF also urged the CBN to keep overdrafts for deficit financing within legal limits while Abuja “continues to make efforts to strengthen budget planning and public finance management practices to allow for flexible financing from domestic markets and better integration of cash and debt management.”
It noted that the fiscal deficit of “the consolidated government is expected to remain elevated at 5.5 per cent of the Gross Domestic Product (GDP)” with downside risks to the near-term that may arise from further deterioration of security conditions and the uncertainty caused by the pandemic.
The IMF team expressed concern about resurging fuel subsidies and called for a “market-based fuel pricing mechanism” to reduce the fiscal deficit, which puts pressure on Abuja and intensifies reliance on ways and means (W&M) advances.
It confirmed the gradual recovery of the Nigerian economy but warned that rising unemployment and high inflation posed enormous risks to the economy. Growth, the group stressed, is expected to reach 2.5 per cent this year.
“The Nigerian economy has started to gradually recover from the negative effects of the COVID-19 global pandemic.”
Following sharp output contractions in the second and third quarters of 2020, GDP growth turned positive in Q4 2020 and growth reached 0.5 per cent year-on-year (YoY) in Q1 2021, supported by agriculture and service sectors.
“Nevertheless, the employment level continues to fall dramatically and, together with other socio-economic indicators, is far below pre-pandemic levels. Inflation slightly decelerated in May but remained elevated at 17.9 per cent, owing to high food price inflation.
“With the recovery in oil prices and remittance flows, the strong pressures on the balance of payments have somewhat abated, although imports are rebounding faster than exports and foreign investor appetite remains subdued resulting in continued FX shortage.”
The IMF team reiterated that the banking sector is adequately capitalised and non-performing loan (NPL) reasonably low.
But, it stressed, “it remains to be seen what share of forborne loans may turn non-performing as the impact of the pandemic abates,” adding that regulatory oversight is critical to safeguarding financial system stability.
World Bank blames CBN for naira travails
Before the IMF made its call at the weekend, the World Bank had blamed the travails besetting the naira on the CBN, repeating its criticism of Nigeria for fixing exchange and paying fuel subsidy, even though the European (EU) pays subsidy to farmers.
Essentially, the World Bank criticised CBN Governor Godwin Emefiele a week after Peoples Democratic Party (PDP) governors expressed “deep concern” about the operational system and methods of the CBN.
The CBN operates as “an independent government within a government, which is a pervasion of the autonomy of the bank” and “creates money, decides how much of it to spend and on what to spend it on without any form of control or supervision patently subverts constitutional order,” they said.
“The CBN should take immediate steps to halt the depreciation of the naira,” PDP governors stressed in a communique issued on June 7.
The World Bank blamed the way the CBN handles foreign exchange (FX) for the current FX crisis in which naira exchange rate fluctuates widely daily. Officially, it sold for N411 to the dollar on Thursday, but N490 in the black market.
Impact of gap between two exchange rates
The World Bank made its remark in its Nigerian Development Update, which is published twice a year.
It said the CBN’s FX policy reduces supply in the market thus affecting investor confidence and leading to a ditch of the official market for the black market.
“The way the exchange rate was managed limited access to FX and thus adversely affected investor confidence and investment appetite,” the report said.
The disparity between the official I&E Foreign Exchange Window (IEFX) and the parallel market has widened to as high as N90 in recent weeks due to speculation, demand, and fear of devaluation.
“Significant spreads between the official, the IEFX, and the parallel exchange rate persisted throughout 2020 and as of April 2021, the spread between the official and the IEFX rate was estimated at 8 per cent and between the IEFX and the parallel rate, reached 18 per cent (the spread between the official and the parallel rate was 27 per cent),” the World Bank noted.
Last month, the CBN made its biggest move yet in unifying the exchange rate after it dumped its long-held official rate for the IEFX rate published by the FMDQOTC.
It has also extended the Cash4Dollar scheme introduced in March to drive more diaspora inflows into the banking system.
According to Nairametrics, most critics believe the moves came too late and would have been avoided if the CBN had been more pragmatic. The World Bank also blamed it for not going all in with its policy changes.
Recommendations for improvement
The World Bank recalled that “in May 2021, the CBN formally took concrete steps towards rates unification between the official and IEFX rates.
“However, the IEFX rate continues to be managed and is not fully reflective of market forces. Furthermore, there remains a 20 per cent premium between this unified rate and the parallel market rate.
“The two-month naira-for-dollars scheme introduced by the CBN in March 2021 to serve as an incentive for increased remittance inflows through formal channels was extended indefinitely in May and was preceded by regulatory directives in December 2020 – that mandated all licensed operators to pay remittances in dollars.
“While this may indeed encourage the use of the formal channels, it is not clear that incentive payments will increase remittances to the country.”
The World Bank recommended how the CBN address FX shortages and exchange rate disparity.
It urged the CBN to
· Allow the IEFX market function as it should by allowing a more market-friendly approach for exchange rate transaction.
· End an unreliable way of reporting exchange rate prices and adopt a two-way quote which enables banks to quote for their bid and offer prices just the way it is done in the stock market.
· Stimulate greater participation of oil companies in providing FX supplies, which can be achieved if the market is more transparent and flexible.
The World Bank believes a return to a flexible exchange rate (post-2015 and pre-2020) will allow for limited interventions by the CBN.
It explained that “while the CBN has taken steps towards operationalising unification of exchange rates, greater flexibility will be necessary to support the recovery.
“Until oil companies are allowed to sell FX receipts to IEFX bank participants, CBN would still have an important role to play as supplier of FX.
“In this scenario, participating banks in the FX market will start to play an expanded role that goes beyond just executing buy/sell orders of its clients to start acting as market makers, meaning that they start to quote two-way prices buying and selling on its own behalf and carrying a stock of FX.
“With increased flexibility, the CBN could start intervening only to smooth large fluctuations and work toward ensuring a single, market-driven rate. Keeping market stakeholders fully informed of such efforts would help attract both domestic and foreign investment.
“The right mix of exchange-rate flexibility and expanded supply (e.g., through banks and FX agents) would enable the FX market to efficiently allocate resources, which would allow the CBN to focus its interventions on smoothing large and disruptive FX fluctuations.”