Nigeria’s long-standing multiple FX rate puts it in unwanted company - BUSINESSDAY
…As window of opportunity opens for CBN Governor Emefiele
Nigeria is one of the very few countries in the emerging and frontier world that still has multiple official exchange rates, along with Venezuela and Iran.
Major oil producers, Venezuela and Iran, are two prominent and negative examples of multiple exchange rate practice, even though the former is in worse straits than Nigeria.
The Venezuelan exchange rate system offers six different rates, depending on who is buying. But after creating a false sense of hope for Caracas, which introduced the several rates to soften the blow of a dollar crunch after oil prices hit a bottom in 2016, it has quickly backfired.
The multiple rates not only worsened the dollar crunch and created anti-economic growth arbitrage opportunities, it contributed to pushing inflation to quadruple digits and deterred foreign direct investment. The practice has also done Iran, already ailing from US sanctions, little favours.
While good progress has been made in unifying the multiple rates in Nigeria which were as many as five in 2017, the elephant in the room is the Central Bank’s de facto N306 per US dollar rate which has a N54 spread compared to the more market-reflective rate of around N360.
The CBN has shrugged off the counsel of several analysts to dump the three-year-old practice which they say has stayed longer than necessary, after it helped ease the impact of a sharp decline in petrodollars.
The CBN governor, Godwin Emefiele, who was nominated last week by President Muhammadu Buhari for a second five-year tenure as chief of the apex bank, has often argued that ditching the subsidised N306 rate would fan inflation which has stayed outside the bank’s preferred 6-9 percent band for four years. In the latest report by the National Bureau of Statistics (NBS), annual inflation accelerated by 11.25 percent in the month of March.
However, the fact that state oil company, Nigerian National Petroleum Corporation (NNPC), is now the sole importer of fuel into Nigeria has been chipping away at arguments that the CBN is maintaining an artificial rate to keep retail petrol prices stable, thereby guarding against inflationary pressures.
Before the oil marketers left the responsibility of importing petroleum products into the country to the NNPC, the CBN would hold special interventions weekly where it sold dollars to the marketers at an artificial rate that was around 30 percent stronger than the market rate in order to keep petrol prices at N145 per litre.
The wheels would come off the unsustainable practice after petrol landing costs, in response to higher crude oil prices and a weakening exchange rate, made it nigh impossible to sell at N145, the marketers said at the time.
The marketers were further squeezed and downed tools when the government halted subsidy payments made to the former to make up for pricing shortfalls.
To avoid another of the many fuel shortages that had pressured economic activity in the past, the NNPC took it upon itself to import all the petrol needs of the country, a task the state-run oil company was never built to handle.
The new responsibility of the NNPC has managed to paper over the cracks to an underlying problem, but many know another economy-crippling fuel scarcity is never far away until Nigeria liberalises its downstream oil sector and allows marketers charge a market price at source for their products. Even richer countries from Saudi Arabia to Kuwait have kick-started reforms to ditch petrol subsidies.
Nigeria’s bad habit of subsidising consumption should also transcend to the exchange rate, which analysts consider a low-hanging fruit to boost economic growth after four straight years of shrinking per capita GDP.
Interestingly, Nigeria is well positioned now to make a success of an exchange rate unification, according to Charles Robertson, global chief economist at Rennaisance Capital.
“The forthcoming change of government and the renewal of the Central Bank of Nigeria (CBN) governor’s term from 2 June could be perfect triggers for that,” Roberston said in an exclusive note to BusinessDay.
According to the IMF Article IV team, the Nigerian authorities are ready to force a unification between the N306 and N360 rate soon.
“If the CBN unifies the exchange rates, it could unlock business growth and potentially increase the FDI flow, which is so much needed to drive overall economic growth. This could then help lift the share of total investment in the economy, which needs to double from 13 percent of GDP in 2017 to at least 25 percent if Nigeria wants to sustain high single-digit GDP growth,” Robertson added.
Although Renaissance Capital is more optimistic than most, the consensus estimate is that the economy will expand by 2 percent this year from 1.9 percent in 2018. For a frontier economy with the population of Nigeria, economic growth short of 6 percent is deemed disappointing. Even the United States, as developed as it is, did better in terms of economic growth in 2018 than Nigeria (2.9 percent vs 1.9 percent). High-flying Ghana and Ethiopia are expected to expand 9 percent and 8 percent, respectively.
Nigeria’s weak economic performance makes it less competitive in the global tussle for investment capital and it is heavily reflected in the stock market. Nigerian equities are down some 9 percent year to date and rank among the worst performers since the turn of 2019. The stock market is a proxy for investors’ sentiments towards an economy. So, if there’s one thing the stock market trend suggests, it is that the outlook for the economy is negative.
An average price to earnings ratio of 7 times compared to the frontier market average of 14 times, which shows Nigerian stocks from Guaranty Trust Bank to Dangote Cement are undervalued, has not even been enough to inspire investors’ optimism as the world waits to see if Nigeria can push through crucial reforms, some of which are in the foreign exchange market and downstream oil sector.
Bond investors, who are taking much less risk than stock investors, are the only ones piling into the country. That owes more to the high yields on offer from Nigerian debt than optimism for strong economic performance.