A Nigerian conglomerate needed $75 million for expansion. The conglomerate recently shut down two of its subsidiaries for lack of forex to import raw materials and power infrastructure. The company approached British investors and by 2015 they agreed to fund the expansion.
However, the foreign investors contended that the exchange rate of the naira should be between N290 and N300 to the dollar, rather than the N197 pegged by the Central Bank of Nigeria (CBN).
For that reason the investors withheld their money and told their counterparts in Nigeria that the fund would be released the moment the CBN allows market forces of demand and supply to determine the exchange rate of the naira.
Last month when the CBN announced plans for a flexible exchange rate, the British investors alerted the Nigerian conglomerate that the fund would be released the moment the CBN released the guidelines for the flexible exchange rate. When the guidelines were announced last week the foreign investors told the conglomerate that they were ready to invest since the exchange rate of the naira would now be determined by market forces.
The British had held back the funds for more than one year because they were convinced that the CBN lacked the reserves to defend the naira at an exchange rate of N197 to the dollar. They knew that the apex bank had no option than to bow to the dictates of market forces if the supply bottleneck in the country’s foreign exchange market had to be cleared.
That was what eventually happened last week, thus instantly opening the way for the Nigerian conglomerate to access $75 million that it could not raise from the parallel market even at the bloated rate of N371 to the dollar.
The conglomerate in question is just one of the hundreds of firms and individuals that would benefit from the inflow of hard currency from their foreign counterparts as a result of the flexible exchange rate of the naira.
If the British investors had brought in $75 million at the fixed exchange rate of N197 to the dollar, their investment in the Nigerian company would be worth just N14.775 billion. Under the new arrangement, market forces might take the exchange rate of the naira to N290 to the dollar thus raising their investment in the Nigerian company to N21.75 billion.
Last week the Nigerian capital market responded to the release of the guidelines for the flexible exchange rate of the naira by the apex bank with unprecedented share price hikes.
The bulls took over the market that had been under the merciless grip of the bears after the brief excitement that greeted the announcement of plans for flexible exchange rate in May.
The market capitalization of the Nigerian Stock Exchange (NSE) surged by N691 billion in three days to N10.004 trillion. The NSE All Shares Index (ASI) accelerated to 29, 247.27 points up from 27, 232.62 the previous week.
Foreign portfolio investors were eyeing the NSE as share prices tumbled to record lows. Stocks like First Bank had plunged to calamitously low rate of N4 as foreign investors flee the market for fear of the tumbling value of the naira. Even high flyers like GTBank which leisurely crossed the N30 mark two years ago, suddenly plunged to N15 during the disastrous days of the NSE.
The foreign portfolio investors, like the British investors in the Nigerian conglomerate mentioned earlier would not bring in their money when the exchange rate of the naira could not reflect its real purchasing power. Any amount in dollars brought in at that time would buy fewer shares in the NSE.
With the naira at about N300 to the dollar, $1 million could buy close to 200 million shares of First Bank. As the demand for shares rises with the return of foreign portfolio investors, share prices in the market would rise and give Nigerian investors value for their money.
The flexible exchange rate would remove the supply bottleneck in the foreign exchange market and allow a free flow of hard currencies into the economy.
The policy is however replete with temporary discomfort especially for the 70 per cent of the population living in poverty imposed by previous governments. For an import based economy, the inflation rate which crossed the 15 per cent mark last month could sail perilously close to 25 per cent. Many more would be pushed below the poverty line in the interim. But the hard times ahead could be cushioned by significant improvement in employment generation to be engendered by the new exchange rate policy.
However, the decision to keep the 41 unbanned items out of the reach of importation with funds from the flexible exchange rate window could create problems for the CBN. The policy inadvertently recognizes the parallel market as a rival of the flexible rate window, but it has no way of monitoring developments in the market. The situation could create a dichotomy which could be abused by importers.
The CBN could avoid the dichotomy by placing high tariff on the 41 items and allowing them to be imported with funds from the flexible exchange rate window. That would encourage local production of the items.
