The Institute of Chartered Accountants of Nigeria (ICAN) has applauded the unification policy of the foreign exchange rate by the federal government, saying that the new policy is expected generally to bring about a short-term pains that will yield long-term gains.
According to the press release from ICAN, the 59th President of the institute DR. Innocent Okwuosa, FCA
listed high inflation, slow economic growth, low investment into Nigeria and high debt burden as some of the challenges of the dual exchange rate policy with various negative impacts on the Nigerian economy and businesses. He explained that Nigeria is a highly import dependent nation.”majority of the demand for foreign exchange used to pay for most imports are sourced from the parallel markets. Hence it is no surprise that the country has a high inflation rate of 22.41% as at May 2023 with food inflation a lot higher, based on recent reports from the Nigerian Bureau of Statistics.”
“The Nigerian economy has grown an average of less than 2% over the past 8 years which is below the population growth estimated at 3% and the annual growth rate required to create jobs and alleviate poverty. The new administration has targeted an annual growth rate of 6%.
The instability and uncertainty around the policy led foreign investors to shy away from investing in Nigeria. Rather they invest in other emerging economies with a more stable macro-economic environment.
This policy increased the burden of obtaining foreign debt for the government and local private companies particularly during the pre-pandemic low interest environment. In the public sector, additional debt was required to achieve a desired local currency amount thereby leading to additional debt service costs. For the private sector, companies were exposed to high volatility in their performance through foreign exchange losses/gains. In other situations, the foreign exchange risk was priced into the interest rate thereby increasing the cost of finance.
Due to the high exchange rate premium, the foreign exchange market was exposed to corrupt practices exploiting the arbitrage. This led to artificial demand for foreign exchange thereby widening the foreign exchange premium, increasing the cost of raw material, driving up inflation, complicating the ease of doing business etc.”
Okwuosa further explained some of the implications of the new Central Bank of Nigeria’s (CBN) foreign exchange rate unification policy as follows, said, “It is expected that the unified exchange rate will serve as a catalyst for investment flows into the country which will boost our foreign exchange reserve, grow the economy, create employment, and improve the quality of life. Foreign portfolio investors are expected in the near term whilst foreign direct investors that require more investment appraisal time will come in subsequently.
The inflow of capital from foreign portfolio investors into the Nigerian Capital Market will help grow the market and allow companies to raise capital efficiently to finance their growth ambitions. Government’s revenue will increase in naira terms resulting in a higher tax/revenue to GDP ratio. Corporate tax collection may however decline as many businesses crystallize foreign exchange losses due to the higher exchange rate.
The service cost of the Government’s external debt which are denominated in foreign currency i.e., $42billion will increase by N12 trillion. The total debt to Gross Domestic Product ratio will also increase by 5% due to the total debt rising to N90 trillion. On the other hand, there should be some cost savings as government discontinues with the various foreign exchange interventions e.g., Naira4Dollar, RT200 etc. which cost tens of billions of naira. Finally, the National Budget will need to be evaluated with the new foreign exchange rate. The likely impact is a possible reduction in budget deficit if government’s foreign exchange revenue exceeds foreign exchange obligations, an increase in budget deficit will arise if otherwise
Removal of subsidy on premium motor spirit which could rise to the price levels of automotive gas oil (AGO/Diesel). There should be negligible impact on the general prices of goods and services as products already factored in parallel market rates to a large extent.”
ICAN president however recommended a timely appointment of a new CBN governor who will provide a credible long-term direction for this policy, effective and consistent implementation of the policy, a review of the prohibited list of goods to ensure demand is not segmented, a review and amendment of certain tax laws that require taxes to be paid in foreign currency thereby creating artificial demand for foreign exchange, complementing this policy with fiscal reforms and discipline i.e., removal of the petrol subsidy (which was recently executed), reduction in the cost of governance, harmonization of multiple tax laws etc.; and bench marking the Nigerian foreign exchange market with emerging international foreign exchange markets such as Malaysia, Mexico, South Africa, Brazil and Colombia including learning lessons to achieve macroeconomic stability and integration into global value chains.
