As the Naira trades in the N710/$1 range on the black market, it’s easy to forget that the Naira was once worth more than the US dollar.
The beginning point for investigating the forex crisis would be Nigeria’s multiple exchange rates; Nigeria has numerous exchange rate markets, which means that depending on where you buy your US dollars, they may be offered at different values. The official market is governed by the Central Bank of Nigeria (CBN), while the parallel market is governed by supply and demand forces.
Due to the currency rate crisis brought on by this dual market system, the gap between the CBN official market (Investors and Exporters (I&E)window) and the parallel (blank market) has widened by an astounding N290.
The world bank recently stated that despite the CBN’s assertion that it has harmonised the official exchange rate, the central bank continues to provide foreign exchange to at least four windows.
Before Godwin Emefiele era
Everything went smoothly in the post-independence era of Nigeria when the nation used a fixed exchange rate system until the early 1970s, and then starting in 1986, when a market-based exchange rate system was implemented as part of the structural adjustment program.
Second-Tier Foreign Exchange Market (SFEM) implementation in September 1986 marked the beginning of IMF reforms that General Ibrahim Babangida (IBB) was compelled to adopt. This led to the introduction of bureaux de change for the first time in Nigeria.
Before this, the naira was roughly 90 kobo to $1 in the 1970s and early 1980s. By the time IBB left power in 1993, the value of the naira was N17 to $1.
Prof. Chukwuma Soludo was the only Governor in Nigerian Central Banking history to attain the closest convergence of the Forex market rate post-1986. For a short time in his regime, the dollar was trading at N117/$ in the IFEM and N118 with the BDCs based on CBN Data.
This momentum was halted when the unavoidable occurred and oil prices began to decline from late 2008 to less than $50 by the end of the year. When Soludo took office, the naira was trading at N127 to $1, and by the time he left in 2009, it was close to N147.
Given that oil prices remained high throughout Sanusi Lamido Sanusi’s (SLS) time in office, some measure of stability was achieved. The naira was trading at N147 to the dollar when he took office in 2009 and was N163 by the time he was suspended from office in February 2014.
Godwin Emefiele Policy Timeline
The consequences of the epidemic and the events in Russia and Ukraine have caused the oil price to fluctuate greatly, which Godwin Emefiele, the longest-serving CBN governor, has had to contend with.
The first round of naira devaluations took place in late 2014 as a result of the decline in oil prices, which caused the exchange rate to drop from N165 to N187.
By 2016, the exchange rate experienced large volatility specifically falling to about N350/$1 and then N510/$1 before the apex bank introduced the Investor & Exporter window (IEFX), which helps stabilize the rate for the next two years. Specifically, between 2017 and 2021, the official rate oscillated around the N360/$1 range.
According to a CBN statement dated January 2021, exporters who refuse to disclose foreign exchange proceeds in the NAFEX market would face expulsion. Following that, in March 2021, the apex bank announced the “Naira 4 Dollar Scheme” to increase remittances from the diaspora which is still functional to date.
On May 24, 2021, CBN adopted the NAFEX rate as the benchmark rate. This initiative simply meant that rather than have multiple official rates (e.g. CBN rate at N379/$ vs. IEFX rate of N410/$ at the time), the CBN simply decided to reduce the number of official rates.
Another important step was taken in July 2021, when the CBN stopped the selling of foreign exchange to Nigerian BDC operators. This caused Naira to plummet on the black market.
The CBN reacted by charging the owner of the AbokiFX company with manipulative and speculative Naira transactions and declares abokifx.com illegal.
In addition, the CBN indicated in February 2022 that it will cease supplying foreign exchange to banks by the end of 2022. This strategy would be aided by CBN measures to increase export earnings.
The CBN implemented the RT200 Non-oil Export Proceeds Repatriation Scheme to decrease exposure to volatile foreign exchange sources and encourage continuous inflows of foreign money over the next three to five years.
Furthermore, Pan-African payments system (PAPSS) which would do away with the requirement for USD to settle intra-African trade, as a long-term viable solution. so that transactions between a Nigerian trader and a South African shop can be settled without ever having to change into dollars. Consequently, the Naira would be under much less pressure once PAPSS is widely adopted.
State of the Naira Under Godwin Emefiele.
Despite several forex measures by the CBN, which have been tilted toward demand-side management and capital controls, this rapid depreciation over eight years has nonetheless occurred.
Godwin Emefiele took office in March 2014 to date, the Naira official rate compared to the US Dollar has depreciated from N164 to N419 In the parallel market, the situation is even worse, whereby the Naira has weakened from $1/N180 to $1/611.
Furthermore, there has been mounting pressure on the apex bank to give up the multiple exchange rate and let the free market mechanism decide the currency rates.
In a recent report, the World Bank has stated that the Central Bank of Nigeria’s multiple exchange rates, trade restrictions, and the financing of the public deficit continue to damage the business environment.
The World Bank believes that CBN’s persistent intervention would cause weaknesses in revenue mobilization, foreign investment, human capital development, infrastructure investment, and governance.
The International Monetary Fund (IMF) has stated that improving trade balance is having a limited impact on Foreign Exchange (FX) strains with the exchange rate premiums in the parallel market staying in the 35-40% range since October 2021.
Nonetheless, Emefiele has maintained his defence of the apex bank’s managed-float exchange rate system, stressing that it was adopted to address the peculiar challenges the country faces.
The CBN Governor said, “Both the IMF and World Bank are our prime development banks, and we have received support from them at different times in resolving some of our economic challenges, particularly bothering on finance. Nigeria’s situation is very peculiar and that is why we have continued to engage the IMF and World Bank to show understanding of our local problems. And they are indeed showing understanding.”
He added, “Yes they want us to freely float the exchange rate and you do know that this will have some impact on the exchange rate itself in the sense that when you allow that to happen, you will have some uncontrollable spiral in the country’s exchange rate.”
Nonetheless, the world bank has questioned the stability of the official market window saying that “The CBN took steps to unify multiple exchange rates by adopting the IEF window rate as its official exchange rate in May 2021. However, different windows still exist, and the parallel rate premium continues to climb, reaching 39% over the official IEFX rate in March 2022,” the Bank added
The CBN, according to the World Bank, continues to supply FX to at least four windows, sometimes at varying rates: (i) the I&E window; (ii) the secondary market intervention sales retail window; (iii) the small and medium-sized enterprises (SME) window; and (iv) the window for invisibles.