Giving Credit where credit is due
In the last couple of days, the Central Bank of Nigeria (CBN) has released two separate directives, that are not just welcome, but should get a mention for their likely positive impact on the financial sector, and the man on the street.
The two directives are on ( i) “Operation of Domilciliary Accounts”, and ( ii) “Amendment to Procedures for the receipt of Diaspora Remittances”.
Perhaps we can now ay that the CBN has wholeheartedly decided to begin to allow market forces confront and determine the outcome of the challenges facing Nigeria’s economy and in particular the Forex regime.
There are some clear and immediately evident advantages to these new policies.
They keep Forex in the hands of the people who own it, and this allows them to do what they want with the money. Two basic things we are unable to take for granted in Nigeria.
So, when “Mama Folake” receives remittances from “Folake in New York”, she can receive the money in US Dollars.
Very simply, the average person like “Mama Folake” who receives remittances from abroad, has no wish to keep hold of the Forex, since she needs to utilise the Naira proceeds immediately.
Therefore ( all things being equal), she should sell her Forex to the person who will give her the best rate.
Obviously, this will not be the Central Bank of Nigeria, but commercial counterparties, who require her Dollars.
The most obvious consequence of these actions is that, if properly implemented, these polic y interventions should bring extra US Dollar liquidity to the streets, and should stabilise, the exchange rate (depending on the level of remittances).
The value of remittances to Nigeria is consistently higher than FDI inflows into the country and if remittances return to their pre- Covid levels, this should take a significant amount of pressure off the CBN to fund the local requirement for U$ D, and the currency should stabilise.
The next obvious step by the Central Bank of Nigeria, would be to liberalise the FX regime and let the currency float freely.
The Governor of the CBN has clearly decided to make some bold moves in order to facilitate liquidity.
The Central Bank has decided to let people be free to set the prices at which they want to sell their Dollars, and let the supply and demand forces of the Market, determine how people choose to act.
The CBN has certainly made a calculated bet, which if successful, should have a very beneficial effect on not just the average Nigerian, but on the markets in general.
The policy direction is clearly taking a deregulatory perspective, and that bodes well for potential FDI, the growth of the economy, and ultimately, the economic development that benefits the common man on the street.
It can never be overemphasised that the purpose of Macro Policy, and Macroeconomic Stability, is to allow the people of a nation peacefully go about their lives, pay their taxes, and engage legitimately in productive economic activity, without the uncertainty of short term dislocations continually disrupting their lives.
The logical endpoint of this current CBN narrative is quite straightforward: If Nigerians make the rational choice of selling their surplus Dollars freely, and there is sufficient liquidity, we do not need any longer, an “official rate”.
The rate at which the market determines or prices the dollar, becomes the De facto “official rate”.
The CBN can then keep its dollars, not having to fund the markets. This way, the spread between the “official” and parallel rates should shrink, and everyone will have access to a single harmonised rate.
If we are headed in this direction, it is undoubtedly the right choice by the CBN, and the right choice for Nigeria too.