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Peter Obi Campaign manifesto states plan to “simplify” and “liberalize” Nigeria’s forex market

The presidential aspirant of the Labour Party, Peter Obi, and his vice presidential candidate, Yusuf Datti Baba-Ahmed released their 2023 campaign manifesto on Saturday, December 3rd, 2022.

The manifesto includes a 7-point strategic set of priorities that the campaign plans to implement should it win the 2023 elections.

Included in the manifesto are its plans to fix Nigeria’s foreign exchange market which has faced several criticisms.

Nigeria’s forex market under the management of Godwin Emefiele-led central bank is associated with a multiple exchange rate regime, a largely fixed official price, and a disparity between the official and parallel market rates that range between 65-85%.

In a nutshell: The Obi/Datti campaign wants to “simplify” and “liberalize” the forex market and “dismantle” the multiple exchange rate regimes currently in place.

  • It also wants to remove “unaffordable subsidies” and stop the central bank’s funding of the government via ways.
  • Read further to see details of their plan as well as our take on each plan.

Obi-Datti Understanding of the issue: The campaign manifesto laid out its understanding of the challenges with Nigeria’s current foreign exchange market policies as implemented by the central bank.  It posits that the central bank has conflicting policies that have resulted in an unstable exchange rate regime. It claims the policies are in conflict with the apex bank’s core mandate of controlling inflation.

  • “The pursuit of multiple objectives by CBN, some of which appeared to be in conflict with the Bank’s core mandate of controlling inflation and its declared objective of achieving a measure of exchange rate stability”
  • “The loss of fiscal viability by the Federal Government, as revenues are now consumed entirely by debt service, whilst the cost of the inflated petrol subsidy has risen to a level where it also threatens to consume the entire FG revenue”
  • “The financing of excessive fiscal deficits through Ways and Means Advances in excess of N22 trillion as at August, 2022 i.e. a level well beyond the statutory limits set in the CBN Act, has helped fuel the spike in the inflation rate to close to 20 per cent per annum.”
  • “Exchange rate stability has also become a mirage, as foreign exchange can only be accessed at the artificial official exchange rate by a handful of privileged persons and businesses, whilst the generality of Nigerians can only access forex via a parallel market in which the US Dollar now attracts a 75- 80% premium over the official rate. The multiple exchange rate regime that is in place therefore presents a huge arbitrage opportunity for a few privileged persons;”
  • “The prevalence of repatriation risks and other supply-side constraints have significantly dented investor confidence, whilst also encouraging capital flight.”

How Obi Campaign plans to fix forex: After laying out the issue, the campaign provided details of its own plans to fix Nigeria’s forex challenges.

Firstly, it claims it will “simplify” the exchange rate regime and focus on stimulating the supply side rather than demand side management which the current central bank has mostly focussed on. It also claims it will discourage “unaffordable subsidies” which we think they believe will free up revenue for the government and less reliance on the central bank for Ways and Means funding.

  • “Against this backdrop, the priority of our administration will be to quickly restore fiscal viability by discontinuing unaffordable subsidies which have left a black- hole in the government’s finances. We will also seek a simplification of the exchange rate regime, whilst seeking to also boost the supply side, rather than continuing to concentrate exclusively on demand management.”

It is not clear how it plans to “simplify” the foreign exchange market as stated.

Secondly, it plans to create trade policies that will stimulate investments and growth. It also suggests the policies will enable a level playing field which we assume might be targeted at companies used to getting favours from the government. And then, it also suggests it will address the issue of oil theft by “holding persons in positions of authority fully accountable.”

  • “Our administration will only support measures which ensure a level playing field and are in line with global best practices. If the competitiveness of a sector is to be boosted then that will be done via the enactment of transparent and specially targeted fiscal and trade policies designed to stimulate investment and growth. Revenue shortfalls and leakages such as oil theft will be dealt with decisively by holding persons in positions of authority fully accountable.”

The current government has also promised to hold the perpetrators of oil theft accountable but it is yet to stop it completely and no notable person has been fully prosecuted.

Finally, the Obi/Datti campaign states it will “dismantle” the multiple exchange rate regime and “demand” the “transparent liberalization of the foreign exchange market” which may or may not be a full float of the foreign exchange market.

  • “Fiscal and monetary policy will therefore be properly coordinated with each deploying conventional tools transparently instead of distorting markets to favour a few privileged persons. For the avoidance of doubt, we will demand the transparent liberalization of the foreign exchange market and the dismantling of the opaque multiple exchange rate regime which effectively subsidises a few privileged persons, whilst depriving government of badly needed revenues. When unaffordable subsidies are removed, some carefully calibrated transfers will be used to cushion any adverse impact on the economically weak.”

Details provided to simplify and liberalize the forex market appear scanty in this document especially when you consider the enormity of the challenges. It is also unclear if the campaign intends to support a free float of the currency or pursue a managed float that allows for frequent adjustment of the exchange rate.

Interesting to note that Peter Obi carefully used the phrase “we will demand” suggesting they understand the central bank has autonomy in determining its forex policies.

  • This is obviously not what exists today as most analysts believe President Buhari influences policies at the apex bank.
  • We also note that the Obi/Datti campaign did not categorically state that they will allow a free float of the exchange rate.

What you should know: Nigeria’s foreign exchange has been liberalized since 1995 and has since then gone through several changes and updates.

  • The most recent is the introduction of the Investor and Exporter window in 2017 which allows for the buying and selling of forex at market-determined rates.
  • However, forex scarcity created mostly by the outflow of foreign investments from the country due to covid-19 and the global economic challenges has forced the central bank to enforce capital control thus stifling the forex market.
  • Today, rates are determined by the central bank, being the largest supplier of forex in the market. This has forced, exporters to sell their forex in the black market at much higher rates.
  • The central bank then introduced the RT 200 policy which is aimed at incentivizing exporters to repatriate the forex via the official market in exchange for rebates from the central bank.

Thought Bubble: Nigeria’s forex challenges are deep-rooted and stem from our inability to earn significant export proceeds as we rely mostly on oil. Ghana, for example, has a free float of its currency but that has not stopped its exchange rate from depreciating by over 50%.

  • This means forex liberalization that is backed by a free float of the naira is not a silver bullet.

 

 

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