The foreign exchange rate unification being implemented by the Central Bank of Nigeria (CBN) is going to have negative impacts on the economy in the short run but after normalcy is restored, the expected positive impacts will ensue.
Yesterday, the apex bank abolished segmentation in the foreign exchange (forex) market and announced sweeping changes, collapsing all segments into the Investors and Exporters (I&E) window.
The CBN had intended to ensure that essential needs like medicals, school fees, Business Travel Allowance/Personal Travel Allowance (BTA/PTA), and SME transactions are not disrupted and can be smoothly processed through the deposit money banks.
This would allow individuals to access the necessary foreign exchange for these specific purposes without major changes or disruptions in the process. But all these are gone as CBN instituted operational changes in the forex market.
Listing the expected impacts the sweeping changes are likely to trigger, analysts at PriceWaterhouseCoopers (PWC) foresee a significant rise in the government’s external debt of $42 billion in naira terms by about N12 trillion to N90 trillion.
This implies that the “government’s external debt of $42 billion will increase by the difference between the old and new rates. As a result of the above, debt to GDP ratio will increase by about 5 per cent,” said Mr. Taiwo Oyedele of PWC.
The Africa Tax Leader at PricewaterhouseCoopers also pointed out that there will be a corresponding increase in debt service cost concerning foreign debt service.
However, the tax expert sees the government’s revenue increase in naira terms resulting in a higher tax/revenue to GDP ratio but noted that corporate tax collection may however decline as many businesses crystallize forex losses due to the higher exchange rate.
He hinted at a possible reduction in the budget deficit if the government’s forex revenue exceeds foreign currency obligations, but added that an increase in the budget deficit will arise if otherwise.
Furthermore, Oyedele predicted a possible impact on the pump price of petrol inching closer to the current pump price of diesel with a pass-on effect on transport hike.
The good news is that there would be some cost savings as government discontinues with the various forex interventions such as the Naira4Dollar scheme, and the RT-200 scheme which cost tens of billions of naira.
Moreover, it is expected that the country will attract forex inflows, especially from portfolio investors, foreign direct investors (FDI), and exporters’ proceeds and diaspora remittances.
Furthermore, the capital market is expected to benefit from the unification of exchange rates as the market which has been rising significantly is likely to appreciate further as foreign investors move in to take position.
“There should be negligible impact on the general prices of goods and services as products are already factored inparallel market rates to a large extent,” Oyedele concluded.
However, the Promoter of the Centre for Promotion of Private Enterprise (CPPE), Muda Yusuf, has pointed out the most likely positive impacts as he lauded the development as a step in the right direction.
According to the former Director General of the Lagos Chamber of Commerce and Industry (LCCI), “In the short term, we expect a depreciation of the currency in the official window because of the huge demand backlog. But as the market conditions normalize and move towards equilibrium, the rate would moderate.”
He is of the view that the new policy regime will boost inflows and strengthen the supply side amidst elevated investors’ confidence.
Most importantly, 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 stabilize 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,” Dr. Yusuf advised.
