Former CBN Director: Regulatory control, not intervention, is to blame
· Rate harmonization is still an illusion three years later
The Central Bank of Nigeria (CBN) continued to put off the convergence of the currency rates three years after promising to do so.
Nigeria’s FX stability has been unstable since the 1980s due to a variety of rates, rent-seeking, and other market manipulations.
When the black-market rate skyrocketed to N880/$ last year, the market arbitrage—the differential between the official and parallel markets—rose from N100 per dollar in 2020, or approximately 30%, to over N400 per dollar (over 100%). The International Monetary Fund (IMF) are cautious about exchange rate differences over 5% and caution that doing so could lead to unhealthy manipulation that could undermine other efforts at market stabilization.
The CBN intervened in the FX market for around $42 billion between 2020 and 2022 to stabilize the naira. The amount was sold to final customers at official rates below the effective exchange rate of the naira, including students and tourists.
The CBN’s Financial Stability Report states that the central bank sold $9.2 billion worth of securities on the market during the first half of 2017. Although complete data for the second half are not yet available, it is expected that the annualized value has exceeded it, especially given the volume of social and economic activity that the second half is known for.
While the black-market rate typically closed at N650/$, the Investors and Exporters (I &E) window rate averaged a suppressed N447/$. The arbitrage now stands at N203/$, bringing the CBN’s FX subsidy for the year to nearly N3.65 trillion.
Similarly, the country’s foreign reserves were reduced by 17.5 trillion Nigerian Naira as a result of the 2021 FX intervention. The country wasted almost N2.62 trillion that end users would have paid if they had purchased in the more accessible parallel market, at an average arbitrage of N160 per dollar.
The COVID-19 situation, that had lots of significancy in the nation’s foreign earnings, forced the CBN to change the official rate three times in 2020. It was around N307/$ at the year, but three months in, it was raised to N361/$ and increased by an additional N20 as the year came to a close, bringing the average official exchange rate to N350 per dollar.
The price on the parallel market fluctuated at N450/$, translating to an arbitrage of N100 per dollar. The CBN sold $17.5 billion worth of foreign currency in total in the COVID-19 year, hence the amount realized from the sale was N1.75 trillion less than the market value. Dr. Muda Yusuf, a proponent of free markets and private sector, said that the effects of FX subsidy that was shared yesterday that a realistic exchange rate regime would add N4 trillion to the Federation Account. He criticized the CBN FX selling program on the economy and public finances.
Nigeria is dealing with an unprecedented financial squeeze. Even in the face of fictitious revenue estimates, the budget for this year is loaded with an over 50% deficit. The PMS subsidy has burdened the government, according to Yusuf, the director of the Centre for Promotion of Private Enterprise (CPPE), and FX sale is the next burden. The PMS subsidy is anticipated to be N3.36 trillion in 2023, or 15.4% of the overall spending envelope.
The gasoline subsidy regime and the Fx subsidy regime are two significant subsidy regimes that place a significant burden on the Nigerian economy. If the right reforms are put in place, enormous quantities of money can be generated from these subsidy systems.
A strategy is already in place, which is a good development. The federation account would get at least N6 trillion in annual revenue as a result of this decision. Additionally, the subsidy regime’s long history of robbing the country of its resources would come to an end.