The Chartered Institute of Stockbrokers (CIS) has called on the incoming administration of President-elect Senator Bola Ahmed Tinubu to address the issue of the exchange rate of the naira to help ginger more international investors’ participation in the local bourse.
The President and Chairman of the CIS, Mr Oluwole Adeosun, stated this in an interview while identifying some key areas that the incoming administration of Senator Bola Tinubu should address to strengthen the Nigerian capital market and reposition it for accelerated growth.
Adeosun explained that the incoming administration should pay close attention to the capital market to maximize its array of opportunities.
Exchange rate harmonization: He noted that both the capital and money market should receive balanced attention from the federal government and promote a unified exchange rate of the Naira to encourage the participation of foreign investors in the market. He said:
- “The fundamentals of the market are getting stronger day by day as a result of so many reasons. The elections excite the market, because of the imminent positive changes we expect, irrespective of which of the top candidates wins. It signals great expectation and trust.
- “We expect the new president and his government to hit the ground running before the inauguration by immediately opening engagement with the capital market community, as that will help craft an effective plan of action for the administration. We expect a stable and unified exchange rate which will increase the level of foreign investors’ participation in our market. We also expect policy and optimistic pronouncements that will boost the confidence of stakeholders.”
Balanced attention to Capital and money market: According to Adeosun, to properly situate the capital market in the scheme of things in the Nigerian economy, the capital and money markets must receive balanced attention for the economy to grow maximally, even optimally as the capital market provides the barometer that measures the state of the economy.
- “Second is to address the issue of trading liquidity. Get the banks and CBN to give more support to Capital Market Operators. We have to revisit margin lending /trading in the financial markets. Furthermore, persuade the pension funds to invest a lot more in equities, to create that stability that will motivate other high net-worths to invest. Also to make the exchange rate stable to spur foreign investments. He said that the government should lend more support to investor literacy and specifically support CIS with annual grants to enable it to perform and widen its work in this area,” he said.
Three frontline candidates: Adeosun explained that last week, the Nigerian stock market gained over, N600 billion adding that the reality was that all the three frontline candidates for this election are pro-market activists, so the capital market is excited that there will be a positive transition in leadership, from a market policy point of view.
- “Investors are also positioning in expectation of good dividends, especially from banking stocks, whose corporate actions are being expected. Based on historical records, competitive dividend yields may be in the offing. In addition, high-cap stocks like MTN, Geregu and Dangote Cement are majorly responsible for the upswing,” Adeosun said.
Lack of foreign investor participation: Foreign portfolio investment participation in Nigeria’s stock market has fallen over the last three years as central bank’s policies focused more on capital controls.
- Foreign investors participation in the stock market was just 16% in the whole of 2022 contributing only N379 billion in market compared to N1.945 trillion recorded by domestic investors.
- To put this into context, foreign portfolio participation in Nigeria’s stock market was about N1.2 trillion in 2018 when the exchange rate between the naira and dollar was stable at N360/$1 and the Investor and Exporter Window was the official go to market for trading forex in volumes.
- Since the re-introduction of capital controls in 2020, foreign portfolio investor participation in the stock market has dropped drastically.
Exchange rate unification: Investors have been calling for exchange rate unification in Nigeria for several reasons.
- Nigeria currently operates a multiple exchange rate system, with different exchange rates for different types of transactions.
- This has created a situation where the official exchange rate is much lower than the black market rate, which has led to currency speculation and capital flight.
- By unifying the exchange rate, investors believe that this will help to promote greater transparency and reduce uncertainty in the economy. This would provide a more stable business environment, which is crucial for attracting investment.
Investors also believe unifying the exchange rate would also help to reduce the incentive for currency speculation, which can lead to a drain on foreign exchange reserves.
- This would help to boost investor confidence in the economy and could lead to increased investment.
- Exchange rate unification would also help to reduce the impact of inflationary pressures caused by a fluctuating exchange rate.
- When the exchange rate is unstable, it can lead to imported inflation, which can cause prices to rise. This can be especially problematic in Nigeria, where the economy is heavily reliant on imports.
Tinubu’s Manifesto on Forex
In his manifesto, Tinubu highlights the importance of a more effective exchange rate regime that aligns with the goals of optimal growth and job creation, driven by industrial, agricultural, and infrastructural expansion.
He also recognizes that the current regime of multiple exchange rates is ineffective, leading to financial dislocation and currency speculation, which divert much-needed funds away from productive endeavours.
- “The recent dip in our exchange rate is primarily due to global supply and production shortfalls caused by global factors well beyond the scope of our control. Our diminished levels of oil production and the modest capacity of our manufacturing sector to expand production both serve to compound the pressure on the naira.”
To address the issue, Tinubu proposes working with the Central Bank and the financial sector to carefully review and optimize the exchange rate regime. This, he believes, will help ensure that exchange rate policy is better aligned with the goals of optimal growth and job creation.
- “To ensure that exchange rate policy harmonises with our goals of optimal growth and job creation driven by industrial, agricultural and infrastructural expansion, we will work with the Central Bank and the financial sector to carefully review and better optimise the exchange rate regime.”