“The more things change, the more they stay the same.”
-Jean-Baptiste Alphonse Karr.
A lot has changed in Nigeria’s fiscal space since it got a new president. From ditching fuel subsidies to enacting student loans and reforming the forex market via a naira float, the country has had plenty to unpack.
The decision to unify the exchange rates has been one of the most controversial moves by the current administration. It came on the heels of CBN governor Godwin Emefiele’s suspension. Although the CBN—the country’s sole monetary authority—made this move, President Tinubu’s actions were consequential to the exchange rate reforms. His remarks about unifying the foreign exchange windows during his inaugural speech signalled that he favoured it. We can’t ignore that the federal government’s interference inspired it—which impedes the CBN’s independence. But that’s not the topic.
It’s now slightly over one month since the naira float decision. And Nigeria is already in the middle of a triad of good, bad, and ‘ugly’ outcomes.
The good: payments are back
Exactly one month (last week) after the CBN floated the naira, Wema Bank announced that it was increasing its dollar rate limit for all users of its ALAT card—its naira debit card— to $500. Guaranty Trust Bank has done the same, and United Bank for Africa (UBA) will allow customers with FX accounts to borrow in naira against the FX in their dollar or British pound accounts.
Before the float, dollars were so scarce in banks that they cut down international transactions to a meagre $20. Some, like Standard Chartered, completely cancelled international spending via naira cards, asking people who needed the greenback to open dollar accounts. As a result, people struggled to pay for Netflix, Apple or Facebook services, not to mention importing goods through Amazon or AliExpress. But now, Nigerians are bracing to put that chapter behind them. Last Tuesday, Flutterwave launched Tuition, a product for Africans to pay for international school fees with their currencies. Access Bank has also partnered with Remitly, an American remittance company, to let its customers receive dollars in their Access Bank accounts.
Also, on July 10th, the Central Bank announced that Nigerians can now receive their diaspora remittance payouts in naira. The apex bank also directed institutions to use the rates on the Investors and Exporters (I&E) window for these transactions. It was hard to do this under the previous Forex regime when there were different exchange rates.
The bad: the naira is weakening
When the CBN floated the exchange rates, Nigeria’s official exchange rate dropped to N600 against the dollar, a 23 per cent drop from a day earlier and the steepest single-session decline since 2016. And since then, it has been on a downtrend. At the close of Monday’s trading, the naira exchanged at N795.28/$ at the official market.
A combination of shrinking oil revenues and low non-oil exports made dollars hard to come by. Then Nigeria’s Central bank made it worse. In the last eight years, the government has banned, increased import duties or denied foreign exchange for importing several items, including staple food products like rice, maize and poultry. The idea was that, by banning items, the country could save its forex and spur local supply to meet demand.
But the opposite happened. Local supply failed to come remotely close to matching demand, and demand for imported food shot up. The result (plus poor monetary policy) was a significant gap between official exchange rates and what was more freely obtainable in the parallel market. By the end of 2022, spreads between the official exchange rate of the naira and the dollar were as high as 61%. Most of the market’s volatility in the past month has been an attempt to close this gap. Many speculated that the naira would regain strength once the rate gaps closed, but that’s not happening.
The ‘ugly’: uncertainty is the new order
When dollars were scarce for the average Nigerian, fintechs rose to the challenge and built businesses around this problem. Most of them benefited from netting a smaller percentage of the arbitrage opportunity from meeting that need. But now that the CBN has swung its board the other way, it leaves many in the dilemma of sitting still or pivoting quickly.
Fintechs are not alone on this. The entire finance space, from the government to the banks, has to deal with one uncertain variable or the other. Banks, for example, are clinging to hope that foreign investors will become impressed by the forex reforms. So far, it’s been local investors driving their winning run. As for foreign investors, they have to bear the risk of a volatile currency in a high-inflation economy and a government that is unwilling to increase how much they can pay for medium-to-long-term bonds. And the longer foreign investment stays away, the harder it will be to justify the FX reforms.
