First a rant, then some suggestions.
Changing the Nigerian exchange rate regime from a managed rate to a floating rate was never meant to solve all of Nigeria’s economic problems, i.e. the proverbial silver bullet. It was one of many steps along the process of getting the economy on the right path to progress.
Nigeria suffers both a structural and a perception problem. And as @Chxta is quick to say, ‘Perception is often greater than reality’. There’s always a tendency that the same issue is being viewed differently by different stakeholders. While one party believes ‘after all we have floated the currency like you foreign investors wanted so come and buy my bonds’, another party is asking ‘how come no one can still get dollars at the interbank rate and the gap between interbank and black market is growing farther apart?’
Is it possible we have different definitions of floating?
I believe when a currency is fully floated, it should be available to anyone that seeks to buy or sell it at a market determined price. The moment it is not available for purchase at my price, then it means I have to price higher, because it means sellers are unwilling to sell at my price.
My neighbour gave me an earful over the weekend. She has two sons abroad schooling and had to buy dollars at N353 to pay their school fees. She had queued for weeks for dollars from two banks to no avail. She submitted N280 and N285, none was successful. I spoke to my friend who is in charge of kerosene and diesel imports in his petroleum marketing firm (one of the larger ones). They’re also looking for dollars to import fuel into the country (at interbank rate of course). However, when I call Ahmed at the nearby BDC, he’s ready to jump on a bike with dollars and head to my office at N360 to a dollar, meaning he has supply.
So I ask, if the naira is floating, how come we can’t get dollars at even interbank plus charges, say N310? How come the easiest way we can get foreign currency is still via the BDCs?
This FX issue is both a structural and a perception issue. On one hand, we have an economy that depends almost 90% (now) on oil for foreign exchange (dollars) but on the other hand, foreign investors are suspecting we actually don’t have $26.4bn in our foreign reserves because we’ve sold some of it on forwards. Others believe we have some backlog that once we clear our foreign reserves will drop further (Have we finished clearing the backlog? Don’t know). The most important issue is if you need to get dollars today, where are you most likely to get dollars with the greatest ease?
I am not certain that we can attract new investments until the two rates converge or the gap narrows considerably. Considering our current challenges with the Niger Delta Avengers, I’m not certain we can maintain this two/three rate economy for too long. The arbitrage will grow and result in worse inflation figures. Can we just fix this issue, once and for all?
I’m of the opinion that Nigeria still represents a great investment destination. There’s hardly any need for a roadshow to convince any serious investor of the opportunities in Nigeria. The only thing the investors are asking is how serious we are to attract these investments by making it easy for them to bring in their money and take it out. Floating the currency was more about the dollars being readily available and less about the rate. The market will set the rate. However we’ve become so concerned about the rate, trying to achieve N250 when we’ve not even tackled the structural issues or allowed the market to have its footing.
As an investor once I understand the market mechanism, I can pinpoint the factors that affect the decision making process of market participants and forecast naira exchange rates for the duration of my investment. I can make my investment, hedge my position and monitor like anyone else. So imagine the frustration when the floating doesn’t really make the dollars available (the sad frustration of Panadol not curing headache because its fake). Availability is tied to the rate. Once its not right, there won’t be any flows.
We also need to develop other sources of foreign currency. Since we went down this road, we’re seeing imports of foods from other countries into Nigeria increasing. How do we clear up the ports and allow goods and services move easily through the ports? How can we revamp the old Export Expansion Grant to reduce rent-seeking opportunities and reward real exports? How do we make it easy for investors to come into Nigeria and set up shop? Nigeria is still ranked 139 on ease of starting a business. Apart from accessing credit where we are ranked 59th and protecting minority investors we are ranked 20th, that’s our third highest ranking.