Nigeria signals intention to retain multiple exchange rate regime in 2018
Nigeria will not move for full unification of its current multiple exchange rates regime, going by the decision to peg the naira/dollar exchange rate at the official Central Bank of Nigeria rate of N305 to the US$ in the proposed 2018 budget.
Given that the Federal Government’s blueprint for economic growth- the Economic Recovery and Growth Plan (ERGP) is hinged on a shift from a de-facto currency peg, to a market-determined exchange rate, the worry is when the government plans to usher in the said reforms, as the clock ticks towards the 2019 elections.
Full liberalisation is not a straight forward step if exchange rate unification across the board implies higher fuel prices and ballooning inflation according to Tajudeen Ibrahim, head of research at Lagos-based investment bank, Chapel Hill Denham. Despite slowing for the eighth successive month in September to 15.98 percent, inflation is well above the CBN’s preferred band of between 6 percent to 9 percent.
“It speaks to the CBN’s expectation of a stable exchange rate, as it also indicates that the government is unlikely to resort to currency devaluation in the near term,” said Ibrahim.
“The CBN will probably want a convergence at around N306 rather than take the rate to the level at the I&E (Investors’ and Exporters) window,” Ibrahim added.
CBN spokesman, Isaac Okarafor, was not immediately available to comment.
In addition to the N305 per dollar CBN rate, which is used to provide cheap dollars for some government transactions, as well as fuel importers, Abuja introduced a second exchange rate (Investors and Exporters window) earlier this year, as a way of wooing back foreign investors without officially devaluing the naira.
The N305 per USD budget rate is merely a nominal rate, according to Bismarck Rewane, CEO of Lagos-based financial advisory firm, Financial Derivatives Company.
“The effective rate is usually much higher, meaning that the N360 per USD rate at the I & E window is the effective rate and the most important one to investors,” Rewane said by phone.
The naira closed at N360.30 per US dollar at the Investors and Exporters window Friday, according to data by trading platform, FMDQ.
At the black market, the currency was quoted at N363 per US dollar, according to data provided by traders in that segment. Only in February, the black market rate was as high as N520 per US dollar before the CBN’s introduction of the I&E window and increased interventions in the FX market reversed the trend.
Even though there are effectively a minimum of three exchange rates in the country, the I&E window has grown in popularity among investors who hitherto fled Nigeria on the basis of acute dollar shortages brought on by the oil price rout and Abuja’s resistance to allow the naira weaken in line with thinning petrodollars.
The window has handled some $14.6 billion since inception in April, according to data compiled by BusinessDay and sourced from the FMDQ, signalling rising investor confidence in that segment; with the CBN accounting for less than 20 percent of supply.
Global funds like Allan Gray and other portfolio investors are pouring money into stocks and bonds, on the back of the I & E window, leading stocks to a two-year high, while bond yields have cooled, according to data by the NSE.
“Investors would rather plan with the I & E rate because it is market reflective and to maintain stability in the segment, the multiple rate practice would continue in the short term at least until we see sustainability in the liquidity levels in the I & E window,” Ibrahim of Chapel Hill Denham said.
Meanwhile, the Debt Management Office (DMO) has clarified plans of the Federal Government to source some $5.5 billion in Eurobonds this year.
The proposed US$ 5.5 billion comprises of two components: US$ 2.5 billion new borrowing and US$ 3 billion for refinancing of existing domestic debt.
The first component of USD2.5 billion, represents new external borrowing that will go into critical road and rail projects from the construction of a second runway at the international airport to rail projects including Lagos-Kano, Calabar-Lagos, Kano-Kaduna, Ajaokuta-Itakpe-Warri, Kaduna-Idu; and the Bodo-Bonny Road with a Bridge across the Opobo Channel. This is in line with the 2017 Appropriation Act.
The second component of USD3 billion will be used to refinance existing domestic debt which stood at N12 trillion (78 percent of the total debt stock) as at June 30, 2017.
By converting some portion to external debt, the tenor will be extended by at least 5 years while the interest cost will be significantly lower.
The savings in debt service from refinancing a portion of the domestic debt with a USD3 billion borrowing is estimated at over N90 billion per annum, according to the DMO.
“The USD3 billion which is to be used to redeem some short term domestic debt is one of the strategies for reducing debt service costs since US Dollar interest rates are much lower than naira interest rates,” Patience Oniha said in an email to BusinessDay.
Nigeria raised $1.5 billion in Eurobonds at around 7 percent this year, while domestic debt attracts a lofty 18 percent.
“This US$ 3 billion is not new money for spending by the government and will not add to the debt stock or increase the debt to GDP ratio, it rather seeks to reduce the Debt Service and create more space for borrowing by the private sector in the domestic market amongst others,” Oniha added.
Given that external borrowing comes at a lower cost than domestic debt, the planned $3 billion Eurobond would help reduce the government’s debt service costs which hit 62 percent as at June 2017, according to DMO data.
It would also increase stability in the debt stock by extending the tenor profile of the debt stock as longer-dated external debt is used to replace short term domestic debt.
Another upside is that it would ease the crowding out effect of government borrowing on the private sector, freeing up more funds for the real sector.
Nigeria’s public debt as a percentage of GDP is low when compared with the Sub-Saharan African average of 45 percent, but it has seen a strong increase in recent years. Since 2014 it has risen by 7 percentage points of GDP to 16.4 percent of GDP in June 2017, according to data compiled by BusinessDay.
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