On June 20, the Central Bank of Nigeria (CBN) formally replaced the 16-month fixed regime with a floating exchange regime. For the most part of last week, the naira hitherto pegged at N197 to the United States dollar, averaged N283 at the interbank market.
And just as was predicted, the development came with the narrowing of the gulf between the official and the black market with the latter – which had hit an all-time high of N370 – coming down to N325 to the dollar.
For the operators in the finance and the real sector who had argued all along that the naira should be left to float, it was therefore victory of sorts.
Sixteen months after, we must admit that the tribe of those who argue that the operation of the fixed regime deserved a second look has continued to grow. First, it was the Organised Private Sector that initially complained that the gap between the official and parallel markets would encourage round tripping; that fixing the exchange rate administratively will encourage corruption. The list would later grow to include nearly every actor of note in the economy in the event of the failure of the apex bank to live up to its oft-stated assurances that the needs of all genuine importers would be met. We refer here to the manufacturers, small and medium scale operators, airline operators and players in the services industry – all of whom access to forex through the official window became almost impossible.
Just as well are the statistics that can no longer be ignored. Again, we refer to the backlog of forex demand which had reportedly hit $4 billion; the contraction of the economy by minus four percent in the first quarter, and the projection by the National Bureau of Statistics (NBS) of a grimmer outlook for the rest of the year. This is aside the nefarious activities of black market operators over whom the regulator has been utterly helpless. Surely, all of these called for a rethinking of the forex regime.
Inevitable as it may seem, what the floatation of the naira bodes for the economy in the long run is certainly open to debate. Indeed, to the extent that the debate has tended to focus more on how best to manage the limited forex, we find it rather misplaced. Clearly, we know all that is wrong with the economy. It is the absence of any serious manufacturing activity that has meant our huge reliance on forex to import everything – from raw materials, to machineries and spares, to finished products. This is what the slump in oil prices and latest cycle of disruptions of oil production in the Niger Delta has brought out in bold relief.
Barring a possible rebound in oil price (unlikely in the short term); a dramatic ramping of production (also highly unlikely, particularly as production is set by OPEC quota); the only enduring option to get the nation out of the woods is to boost non-oil exports. Whereas the former fixed forex regime may not have helped the cause of the manufacturers and other operators in the real sector any bit; it would be overtly over-optimistic to expect a dramatic turnaround only because access to forex has been liberalised. With power and other infrastructure still missing in the equation, it is clearly a long way ahead to competitiveness.
Three more things that the new forex regime will not do: first, it will not curb Nigerians’ unbridled appetite for foreign items; second, it offers no guarantee that players will play by the rules – in this case, there is no guarantee that the forex obtained through the interbank window will not be used to import any of the 41 items precluded from the official window. Finally, it would not make the black market to disappear either now or in the future.