With the unification of the foreign exchange (FX) market, foreign investors of all categories can now come in with their money to invest in Nigeria, said Ayodele Akinwunmi, relationship manager, of corporate banking at FSDH Merchant Bank Limited.

He said exporters will now earn more money on their exports. Government can now speak with Nigerians in the diaspora to invest in Nigeria. In the short term, prices of goods will increase until a new equilibrium will be attained,

FX liberalisation is expected to unlock the huge potential for investment, jobs and capital flows, and investors’ confidence would be positively impacted, said Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise.

The Central Bank of Nigeria (CBN) on Wednesday collapsed all segments of foreign exchange markets into the Investors and Exporters (I&E) forex window.

According to Yusuf, a unified exchange rate regime offers other benefits for the economy, such as it enhances liquidity in the foreign exchange market, reducing uncertainty, enhancing the confidence of investors, and showing more transparency as a mechanism for forex allocation.

It minimizes discretion in the allocation of forex and reduces corruption vulnerabilities.

It reduces opportunities for round tripping and other sharp practices.

It would increase disclosures with respect to export proceeds and compliance with non-oil export declarations, especially the non-oil export documentation (NXP).

It would boost government revenue by a minimum of N4 trillion through additional remittance of exchange rate surplus to the federation account by the CBN.

The use of naira cards for limited international transactions would be restored in the short to medium term.

It would facilitate the mopping up of naira liquidity in the economy in the short to medium term. This would impact positively on the inflation outlook.

It would deepen the autonomous foreign exchange market through the liberalization of inflows from export proceeds, Diaspora remittances, multinational oil companies, diplomatic missions, among others, said Yusuf.

On the other hand, Nigerians should expect two to three months of difficult moments and a slight rise in inflation of up to 30 percent, following the liberalisation of the FX market, according to Olisa Agbakoba, Nigerian human rights activist, maritime lawyer.

“Nigerians should prepare for difficult moments in the next two to three months after which there will be normalcy.

“The Nigerian economy is structurally defective. Structural defect is what economists call asymmetry. Asymmetries are like police checkpoints from Onitsha to Enugu so that you can’t travel effectively. Nigeria has had economic asymmetry in the last six years, which means you have rent seekers who use information they get because they are close to the government.

“For me, removing the checkpoint between the CBN dollar control and the street dollar control is brilliant news because it could make dollar and naira flow effectively.

Read also: CBN publishes operational guidelines for deregulated FX market

“In all, removal of fuel subsidy, and correction of naira/dollar value is good news for the Nigerian economy,” Agbakoba said.

Uche Uwaleke, professor of capital market at the Nasarawa State University Keffi, said, “I support the unification of exchange rates which makes for a more transparent forex market.

“But I think that the CBN should implement that in a way that does not cause massive distortions in the general price level.

“In this regard, a sudden free float of the naira is not advised given that the economic fundamentals required to support a naira float are still very weak especially in relation to sources of forex.

“It’s rather early to bank on sustainable capital inflows from foreign direct investments due in part to insecurity and the overall unconducive environment of doing business in Nigeria.”

He said the sudden naira devaluation may draw foreign portfolio investments which is part of the reason the stock market is surging.

“But we also know that portfolio investments are hot money and do not represent a sustainable source of forex inflows.

“In consideration of this therefore, I would advise that the unification of exchange rates should not be a one step process but should be implemented over a period of time however short it may be,” Uwaleke said.

According to him empirical evidence suggests that reforms are more successful when they are sequenced and implemented in phases. This is against the backdrop of the oil subsidy removal which, taken together, can result in galloping inflation and rising poverty level.

“”So, while fiscal and monetary policy reforms are welcome, absolute care should be taken to strike the right balance and minimize their unintended consequences.”

10 major implications of Naira exchange rate unification, by Taiwo Oyedele, head of tax and corporate advisory services at PwC Nigeria

With the Nigerian Naira now exchanging in the official forex market at market determined rates, a significant market distortion has been removed. Expectedly this will come with both positive and negative implications.

The major impacts will include:

1. Significant rise in government debt in naira terms by about N12 trillion to N90 trillion, that is external debt of $42bn will increase by the difference between the old and new rates.

2. As a result of the above, the debt to GDP ratio will increase by about 5 percent.

3. There will be a corresponding increase in debt service cost with respect to foreign debt service

4. Government’s revenue will increase in naira terms resulting in a higher tax/revenue to GDP ratio. Corporate tax collection may however decline as many businesses crystallize forex losses due to the higher exchange rate.

5. Possible reduction in budget deficit if government’s forex revenue exceeds foreign currency obligations, an increase in budget deficit will arise if otherwise

6. Possible impact on the pump price of petrol which could inch closer to the current pump price of diesel

7. There should be some cost savings as government discontinues with the various FX interventions like Naira4Dollar, RT200, and others which cost tens of billions of naira

8. The country will attract FX inflows especially from portfolio investors, foreign direct investment, and exporters proceeds. Impact on diaspora remittances would be marginal.

9. The capital market will benefit as it is likely to appreciate further as foreign investors take position

10. There should be negligible impact on the general prices of goods and services as products already factored in parallel market rates to a large extent.

Overall, this is a positive move. However, the government needs to manage the dynamics to restore confidence. The backlog of forex demands need to be addressed and the government should be ready to supply forex to stabilise the exchange rate in the short term.

Also relax capital control and administrative bottlenecks including unbanning the list of items prohibited for fx (and complement with higher import duties), remove the need for certificate of capital importation etc to prevent the parallel market rate from simply moving further away from the official market rate.

Stop the demand for certain taxes and levies in foreign currency, it creates unnecessary FX demand without adding to supply.

The aggregate demand for FX across markets should reduce as round-tripping incentives are removed, for instance people who fake foreign travels just to get FX at discounted rates. Also, Nigeria’s sovereign credit rating should improve if this is complemented with the right fiscal and monetary policies thereby attracting more FX inflows and lowering the cost of borrowing.

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