How FG’s new forex regime will impact investment, petrol pump price

The Central Bank of Nigeria (CBN) on Wednesday announced the unification of all segments of the Nigerian forex market.

The bank, in a statement, announced the collapse of all windows into the Investors & Exporters (I&E) window.

This move is part of the Nigerian government’s efforts to improve liquidity and stability in the market and attract foreign investors into the Nigerian economy.

According to the press statement signed by the Director of Financial Markets, Angela Sere-Ejembi, the bank abolished the segmentation of the FX market into different windows.

“All transactions will now be done through the Investors and Exporters (I&E) window, where the exchange rate will be determined by market forces. Applications for medicals, school fees, BTA/PTA, and SMEs would continue to be processed through deposit money banks,” it said.

Speaking on the latest development with PREMIUM TIMES on Thursday, Muda Yusuf, director of the Centre for the Promotion of Private Enterprise (CPPE), noted that the new policy may affect the pump price of petroleum possibly in the short run.

“You know the pump price is not just a function of our exchange rate; it is also a function of the crude oil price. Especially now that we are still importing petroleum products,” he said.

Mr Yusuf explained that whatever happens to the exchange rate will affect the importation of petroleum products.

“So it depends. We need to know the exchange rate at which the Nigerian National Petroleum Company Limited (NNPCL) was importing petroleum. Because what we are using now was imported by the NNPCL. And they were doing a lot of swaps. They were using crude to bring in petroleum products.

“So until we see all the numbers, we see where the exchange rate will settle, and we are looking at maybe N650 -N670 there about, we look at the crude oil price, landing cost, we need to see the numbers before we can determine whether the pump price will be high or not,” he said.

But the CPPE boss warned that at this stage, the government has a role in moderating prices.

“Because you cannot subject the citizens to further shocks. I’m not saying that we should return to the regime of subsidy, but there should be a framework to ensure that there is some stabilisation beyond the particular threshold.

“So, if we have to use fiscal policy, taxes, or whatever we have to use, we have to use it to ensure we create some stability around both the FX under the floating regime and even the petroleum motor spirit (PMS) under the deregulated regime,” he added.

He explained that if the country has the refineries working, the situation will be easier to manage, but volatility concerns may arise, particularly from the increase in crude oil price.

“The government has a role to play to ensure that we minimise the volatility both in FX and in the PMS,” he said.

Meanwhile, the president of the Independent Petroleum Marketer Association of Nigeria (IPMAN), Chinedu Okoronkwo, said the policy would impact the petroleum industry.

“It will be okay because the real figure will appear now. Not having two windows; one for people with connection and the other one for people without connection.

“Those who want to do business can not do business because, in the same market, you can’t compete with them, but with this single window now, it will give opportunities for entrepreneurs to sell their market.

“I think that is what is going to happen and gradually, the exchange rate. If it works well, everything will begin to go down. You know will depend on imported fuel; when we have a stronger Naira chasing dollars, it will also transcend.

“The impact is that it will give opportunities for those who want to come into the sector with their money to compete well now. And you know that healthy competition will also bring out the best in any system,” he said.

Kelvin Emmanuel, chief executive officer of Dairy Hills, noted that the current stock of petrol in Nigeria would not last beyond the end of July.

“If Dangote doesn’t start delivering through distributors by the first week in August, Petrol prices will go up to at least N750,” he tweeted.

He said exchange rate unification means that the Central Bank has collapsed all the windows, and revenues to the federal government from Government Owned Enterprises (GoE) will rise by at least 39 per cent.

“Take 35 per cent of dividends and taxes that Nigeria Liquefied Natural Gas (NLNG) historically pays to the federal government as a 49 per cent shareholder as an example.

“The deregulation of PMS in line with sections 205(1) of PIA & floating of the naira means that NNPCL will start remitting royalties to FAAC at floating rates (39 per cent increment),” he said.

Investment Potential

Meanwhile, Mr Yusuf added that the new development would attract foreign investors, who have been cautious about Nigeria’s forex policies in the past.
“It reduces uncertainty in the foreign exchange market and therefore enhances the confidence of investors,” he said, adding that the move would boost government revenue by a minimum of N4 trillion through additional remittance of exchange rate surplus to the federation account by the CBN.

He noted that such a system would enhance liquidity in the foreign exchange market, promote transparency in forex allocation, minimise corruption vulnerabilities, and reduce opportunities for sharp practices like round-tripping.

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The former LCCI boss also suggested that a unified rate would increase disclosures and compliance with export procedures, especially for non-oil exports.

On his part, Mr Emmanuel, the CEO of Dairy hills, said the policy makes it easy for both participants in the derivative market and foreign Investors to find a forward curve, which helps to price the risk of providing counter-party liquidity to lock in position for future settlement.

“A single exchange rate provides a platform for the CBN to ask the Senate to amend section 24, which seeks to enable a pivot of a portion of Nigeria’s foreign reserves to PBoC.

“Wouldn’t it be nice to have liquidity of the Yuan with swap lines open to Chinese Banks for settlements, so you don’t need USD to trade in China?” he notes in a tweet.

Mr Emmanuel added the float would put an end to arbitrage and round-tripping, just as it will also trigger a review of Nigeria’s foreign currency issuer rating by Fitch & Moody’s.

He said that expectations of a tick-up back from Caa1 to B2 on issuer default rating improvement in sovereign credit rating will lead to an adjustment in the country risk premium for Nigeria.

It will also “(Open) the international Eurobonds market for Nigerian companies to source for capital amidst the squeeze with high-interest rate environments and also help the govt source for credit from the Eurobonds market that it so desperately needs to fund its budget,” he said.