Free at last

The central bank finally provided details of its new foreign exchange policy which is set to kick off on Monday. Finally the currency peg is gone and, in a positive surprise to almost everyone, the price fixing is also gone.

In summary, the central bank will no longer attempt to directly fix exchange rates and will allow markets, specifically the interbank market, guide things based on the fundamentals. It will still however occasionally intervene in markets to either buy or sell foreign exchange. A necessary caveat seeing as a relatively large chunk of foreign exchange supply comes into the country via crude oil sales on behalf of the government. Its intervention will however be market driven, which basically means it will sell of buy at whatever price the market says. Practically, it will only sell to “licensed” primary FX dealers who will be allowed to bid for amounts starting from $10m and up.

To deal with volatility the central bank is pushing a futures market. This just basically means dealers will be able to lock in prices for future purchases. Typically this helps manage the risk of currecy fluctuations and should reduce volatility.

It wouldn’t be a Nigerian policy if there was no weird angle. BDCs are still banned from participating in the interbank market. The 41 items list is also still banned from the interbank market. This of course means there will still be the market segmentation and price markup in the black market. The size of the markup will depend on a lot of things though and we will have to wait to see how that plays out.

 

All in all though it is a much needed adjustment by the central bank after what has been over a year of a senseless currency peg. They of course tried to save face by claiming to have driven speculators from the market. But a look at the seven per cent change in the black market rates between when the policy change was announced and today says otherwise. We cannot also ignore the reality that the currency peg has so some extent been responsible for the big drop in manufacturing and the recession which will probably be officially confirmed once Q2 GDP numbers come out. Still better late than never.

 

Still Nigeria is not home and dry. A year ago I argued that an adjustment in fuel prices and the exchange rate would have given the country enough leeway to get out of the crisis. Sadly that ship has sailed. The country is probably already in recession. The optimism that was present, but from Nigerians and foreign investors, is gone. The idea that this government doesn’t really know what it is doing is firmly planted in the minds inception style. Finally there is still the small matter of central bank independence. The independence matters a lot because the previous exchange rate policy is but one in a series of bad policies that could have been implemented. Yes the bad exchange rate policy is gone but what guarantee is there that the FG will not strong arm the central bank to implement another from the bad list? There is an easy way to fix the independence problem but I won’t say it here.

 

What else does the FG need to do now? They need to immediately implement reforms that create investible opportunities in Nigeria. Reforms that say Nigeria is ready for business. Reforms that say bring your money to Nigeria. They probably also need to swallow their pride and get an emergence loan from the IMF. We’ve already done everything the IMF advised anyway so we might as well.

 

But at least for today we can give the central bank a round of applause for doing the right thing.

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