Nigeria, Africa’s largest economy, has had to battle continuous threats from multiple headwinds to value of the Naira.
Specifically, numerous headwinds which exert pressure on the Naira exchange rate include Inflationary pressures, Inflation Rate Differential, Balance of Trade challenges, Foreign reserves balances, Interest rate differentials et al.
- Nairametrics’ audience will be aware that these macroeconomic headwinds have been covered in some detail on this platform. You can read some of the articles here, here and here
- Furthermore, many economists would argue that the adverse trends of the macroeconomic indicators noted above are reflective of other underlying factors impacting the country’s productivity (GDP) such as security challenges, high population growth rates, infrastructure gaps amongst others.
Regardless of the debate, Nigeria’s import bill continually outpaces its export bill. Thus, the country’s demand for foreign currencies appears insatiable despite underwhelming productivity rates (i.e., underwhelming GDP growth rates) which results in persistent pressure on Naira’s exchange rate.
Consequently, from a monetary policy perspective, the Central Bank of Nigeria has deployed a plethora of initiatives intended to attract more dollar inflows to the country through official channels.
- The underlying premise (at least from the CBN’s perspective) is to support Nigeria’s outsized import bill whilst combating multiple sources of exchange rate pressures.
Some of these initiatives to attract more dollar inflows over the past 12 months include;
1. “Naira4Dollar Scheme” launched for diaspora remittances
On March 8, 2021, CBN introduced the “Naira 4 Dollar Scheme”, intended to boost the inflow of diaspora remittances into the country.
This program works by paying diaspora remittance recipients an incentive of N5 for every USD$1, received through licensed International Money Transfer Operator (IMTO).
In other words, if you received a diaspora remittance of $10,000 (Ten Thousand Dollars) CBN would simply credit your account with an additional N50,000 (N5 * 10,000).
This initiative was initially intended to expire in May 2021 but was extended indefinitely
As the one-year anniversary of this program approaches, just in case folks were curious how this program is faring, the CBN provided an update that diaspora remittances have increased 1,667% from $6 million to $100million weekly.
2. NAFEX rate adopted as the benchmark rate
On May 24, 2021, CBN adopted the NAFEX rate as the benchmark rate. This initiative simply meant that rather than have multiple official rates (e.g. CBN rate at N379/$ vs. IEFX rate of N410/$ at the time), the CBN simply decided to reduce the number of official rates.
Arguably one benefit of this action was that it reduced the FX subsidy by at least 7.5% (N410/$ vs. $379/$)
However, the jury is still out on the attempt at convergence. Especially as the IEFX rate of N416.5/$ is currently reflecting a 39% premium to average BDC rate of N580/$.
3. Ban of forex sale to BDCs and e-Form ‘A” for Forex Online
On July 27th, 2021, the CBN announced the discontinuation of foreign exchange (forex) sales to Bureaux De Change (BDC) operators.
The governor of the CBN, Godwin Emefiele alleged that some BDC’s actions contravened the agreement with the apex bank, by seeking to maximize profits which he deemed excessive.
- One notable allegation from the governor was that BDCs were contributing to the unsupported demand for foreign currencies, as they sought to rent-seek by demanding more FX than they truly required.
- The directive required that individuals seeking to source forex needed to reach out to the banks to source forex going forward.
Consequently, in furtherance of this initiative, the CBN directed banks to automate the process of customers’ placing orders for FOREX to simply customer experience.
- This directive was further supported by the November 2021 deployment of e-form “A” which simply meant that customers can now place FOREX orders online.
The CBN recently provided an update that the BDC ban has led to the expected outcome of dollar demand migrating to the Banking sector.
This aggregation of dollar demand to the banking sector (rather than BDCs) is critical as it facilitates better oversight by the CBN, as well as helps the CBN better quantify purpose of dollar outflows for planning and matching purposes. Furthermore, sanctions for transgressions can be more easily administered, as witnessed by the recent push to publish non-compliant utilization of allocated forex.
4. Eurodollar borrowing/IMF SDR:
In August 2021, the IMF allocated $3.3 billion to Nigeria in SDR reserves. This initiative from the IMF was designed to boost reserves of poorer economies.
However, this amount was only allocated to eligible nations as reserves with the IMF. (i.e. just paper reserves not pure cash). Thus, any nation wishing to access the newly allocated reserves would need to gain access by borrowing.
In September 2021 Nigeria issued Eurobonds for $4billion.
- Maybe we believe in coincidences or maybe not, but the net effect of the successful $4billion Eurobond issuance was that Nigeria’s coffers were full of dollars for spending.
5. e-Naira and PanAfrican Payment and Settlement System (PAPSS)
In October 2021, the CBN launched the eNaira, the continent’s first digital currency. eNaira acts as both a means of exchange and a store of value, offering improved payment prospects in retail transactions when compared to cash payments.
- The eNaira is intended to (amongst other things) facilitate increased foreign inflows to the country, by simplifying the way Nigerians pay for trade. Specifically, the focus is on intra-African trade whereby Naira account holders can more easily make cross-border payments to other African nations.
However, to fully optimize the functionality of this initiative, there needs to be more African nations available to interact with via the e-Naira. Hence the need for a pan-African clearing system.
Consequently, the CBN has been engaging other African central banks on the need for a pan-African clearing system to help African nations bypass foreign currencies when trading.
- In January 2022, and in furtherance of this effort, PAPSS the pan-African payment and settlement system had its operational launch. The stated aim was to reduce the dependencies on foreign currencies to boost intra-African trade.
- Notably, Nigeria’s CBN is at the vanguard of this initiative and it is in collaboration with other African central banks, as well as key pan-African institutions such as Afreximbank.
6. RT200 Programme: CBN to pay N65 for every $1 repatriated and sold at the I&E Window
In February 2022, the CBN extended the Naira for Dollar scheme from the IMTOs to the IEFX window.
Specifically, the CBN released instructions that outline that it will facilitate a payment of N65 for every US dollar repatriated and sold at the Investors and Exporters Window.
- In other words, similar to the Naira for Dollar Scheme, eligible participants who bring in dollars will receive a N65 incentive payment for every $1 brought via the IEFX window.
- E.g. if an eligible participant brings $100,000 via the IEFX window, that participant gets N6.5 million naira.
The CBN’s stated goal with the RT200 Program is to raise $200 billion in non-oil foreign exchange earnings over the next 5 years.
For Savvy investors, you will note that this is actually a devaluation from N415/$ to N481/$. However, the CBN has just avoided fanfare that comes with a devaluation announcement.
Furthermore, by creating this incentive via the IEFX window, this arguably is a market-driven approach whereby willing seller meets willing buyer albeit with a N65 sweetener.
- Nonetheless, this N65 sweetener (i.e., a net exchange rate of N481/$) also serves to reduce the premium between the parallel market and official rates.
The CBN’s persistent efforts to attract dollar inflows are commendable and very welcome. However, as most economists will argue, monetary policies alone cannot attract sufficient inflows to counteract the barrage of economic headwinds.
Thankfully, the CBN itself realizes this as acknowledged in its latest Communique thus these are temporary measures at best, whilst pending a turnaround in the underlying macroeconomic factors.
Till then, the CBN continues to attempt to manage the FX quagmire by deploying various incentives in an attempt to find which initiative buys it the most time to hedge against the threats facing the Naira.