AACS Fortnightly
(Mondays)
5th June 2023

From the Chairman’s Desk,

AACS Fortnightly – Realignment of the Exchange Rate

The third issue on the AACS’s economic agenda setting https://lnkd.in/eiRE9A6S is the realignment in the exchange rate. At the moment, multiple official rates for diverse transactions exist alongside the parallel market with differentials close to ₦300 or about 40% in excess of the rate from the Central bank. Managing currencies is a subtle economic tool that countries adopt to protect its economy, but it cannot be at a grand scale of defending the currency with humongous scarce funds. The biggest problem with discouraging the free market is that it decreases foreign business investments in the country, as they can’t guarantee the repatriation of funds or profit. It was a principal reason why some airlines led by Emirates suspended their Nigerian routes as they could not repatriate their sales. Similarly, OTAs like Booking.com and other foreign companies insist on dollar payments for their services in Nigeria, when our currency is naira.

There are multiple undesirable consequences of adopting this exchange rate regime. These include scaring foreign businesses away, and breeding huge arbitraging & racketeering, as the differential is too wide. Also, it has limited benefit to the bulk of the people as the subsidised rates are not priced into the cost of goods sold within the economy from imported raw materials, so the rate differential is just a subsidy to most people that get official allocations. A lot of genuine business people are denied, as arbitraging breeds delays and sharp practices that these businesses may not be able to cope with. According to the World Bank, Nigeria’s FDI net inflows in 2011 was $8.8bn, reducing to $3.3bn in 2021 and $468m last year. Foreign participation in the stock market was 54% of the market in 2015, while it is at 8.3% today. It tells a story of business and investment losses across the last decade, arising from loss of confidence in our business climate.

A realignment will in the short run lead to increased official rate, but will ultimately crash the parallel market. All entities hoarding foreign currency will be forced to significantly offload, out of fear of crashing parallel market value which invariably improves supply and dips the price. The official and parallel rates will eventually converge or keep an insignificant difference.

It is essential to eliminate the multiple rates regime and allow for transparency, which is key for investors confidence and facilitates efficiency arising from market determined rates. It’s time to bring stability and predictability to the system that would boost businesses and growth of the GDP.

Falil Ayo Abina

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