Experts Speak On Tinubu’s Plan For Exchange Rates, Subsidy

 

-•Unified rate will support growth, says Rewane
•‘Local refineries must work’

MULTIPLE exchange rates and the retention of petrol subsidy payment are unhelpful to the economy, finance and economic experts said yesterday.

They called for urgent policy reforms and redirection of key monetary and fiscal policies to halt economic decline and boost productivity.

The experts agreed with the presidential candidate of the All Progressives Congress (APC), Asiwaju Bola Tinubu’s position that multiple exchange rates and petrol subsidy must go for the economy to grow.

The experts called for proper foreign exchange (forex) management and removal of subsidy on Premium Motor Spirit (PMS) as major economic issues that
need to be addressed.

They also prioritized forex and oil subsidy as main levers for other socio-economic reforms.

The naira depreciated further by 1.1 per cent to close at N456.50 per dollar at the official Investors and Exporters (I & E) Window.

At the parallel market, the naira closed at N758 per dollar. Decline in forex inflows have seen the country’s external reserves dropping to almost 10-year average at $36.95 billion at the weekend.

With about N5 trillion estimated as subsidy for PMS, otherwise known as petrol, in 2022 and expected to rise to some N7 trillion in 2023, queues were longer yesterday as the grueling petrol scarcity bite harder.

Motorists were forced by the queues at the major petrol stations dispensing at the official range of between N169 to N170 per litre, to the independent marketers and black market, where prices ranged between N250 to N270 per litre.

Experts pointed out that the forex crisis has two major dimensions-sharp depreciation in the exchange rate and volatility of the rate and illiquidity in the forex market.

Managing Director, Financial Derivatives Company (FDC) Limited, Bismarck Rewane, said a unified exchange rate regime supports economic development.

According to him, a unified exchange rate will impact the economy positively more than the current multiple exchange rates regime, which creates opportunity for arbitrage and a trigger for hyperinflati on, as experienced by Venezuela.

He noted that the number of countries maintaining multiple exchange rates has been declining since 1990s because of the inherent gains in unified exchange rates.
Citing current data, Rewane said the more administrative controls in the forex market, the more the parallel market premium increases, ultimately leading to diversion of investment flows away from the market.

“In 2023, exchange rate adjustment is inevitable,” Rewane said.

Chief Executive Officer, Centre for the Promotion of Private Enterprise, (CPPE ), Mr. Muda Yusuf described a fixed exchange rate regime and administrativeallocation of forex as “very dysfunctional”.

According to him, such policy stand has created a huge enterprise around forex- round tripping, speculation, over invoicing and capital flight among others.

“Evidently, the CBN does not believe in the market mechanism. But the truth is that market systems are time-tested frameworks for efficient resource allocation in most economies around the world. The course of market failures are recognised in economics and these are exceptions that can be identified and mitigated.
“But attempting to suppress the market as the CBN has been doing is like swimming against the tide. The current forex policy regime has created a flourishing subsidy enterprise. Managing a subsidy regime is typically a herculean task. We have seen this happened with fertiliser and petrol subsidy regimes. The story cannot be different with foreign exchange,” Yusuf said.

Suggesting the way out of forex conundrum, he said there was need to allow market-driven forex environment as well as de-emphasize demand management and focus on strategies to stimulate forex inflows.

According to him, a fixed exchange rate regime is a major disincentive to forex inflows and creates enormous pressure of demand for forex.

“A market driven forex framework will restore calmness and stability to the foreign exchange market and also boost forex supply. Although there may be a momentary spike in exchange rate, stability and gradual appreciation of the rate would follow soon after,” Yusuf said.

He lamented that the current approach would continue to deepen distortions in the economy, perpetuate round tripping, fuel speculation, suppress forex supply and boost underground economy.

He said the second fundamental issue to be dealt with is the structural constraint to productivity, urging policy makers to create an environment that incentivise exports as well as strengthen import substitution capacity.

“In normal circumstances, we have no business spending billions of dollars annually on importation of refined petroleum products, petrochemicals, fertiliser, iron and steel and food. We are sufficiently endowed to be self- sufficient in the production of these products. But for these to happen, there must be significant improvements in productivity and competitiveness. This would require significant investment in infrastructure and right policy choices.

We also need to deal firmly and sustainably with the challenges of oil theft and the impunity associated with it,” Yusuf said.

Economic analyst and Professor at Nasarawa State University, Prof Uche Uwaleke agreed with Tinubu on the decision to do away with multiple exchange rates and fuel subsidy, if elected.

In a chat with The Nation, Uwaleke described multiple exchange rates and fuel subsidy as “undesirable and need to be phased out. It goes without saying that multiple exchange rates and fuel subsidy have created room for corruption”.

Uwaleke said “it encourages round tripping and sharp practices in the forex market while in the case of the fuel subsidy, it has fueled opacity in the operations of the National oil company, the NNPC as well as contributed significantly to worsening government fiscal position through increased borrowing”.

“The 2023 federal budget has already made provision for ending the fuel subsidy by June next year.

To this end, scrapping fuel subsidy on assumption of office by any new administration would be in line with the budget implementation.

“The immediate impact of the twin measures of floating the naira in pursuit of a single official exchange rate and removing subsidy on petroleum products would be a spike in inflation rate and poverty levels especially given the fact that market-determined exchange rate is not envisaged in the 2023 budget proposal now before the National Assembly.

“Against this backdrop, while I support that fuel subsidy should go next year after the government must have made provision for compensation schemes to mitigate its negative impact on the economy, I suggest that the CBN should have a plan to gradually unify multiple rates across all forex windows in a manner that will not cause significant distortions in the economy,” Uwaleke said.[/b]

Chief Executive Officer, Marble Capital, Mr. Akeem Oyewale, underscored the need to as much as possible, prevent the dollarisation of the economy.

“The need to have a market-determined, single exchange rate and prevent or minimise arbitrage would be expedient. The implementation of the PIA and efforts to encourage enhanced investments in the upstream sector would be important. Blocking leakages and removing subsidy on petrol is also critical as it is a massive drain pipe to the economy stability of the country. All of the above would require significant political will to ensure implement ation. There will be resistance and some wouldn’t go smoothly but they’re critical policy decisions we need to make in the near term for the longer term vibrancy of our economy,” Oyewale said, when asked to outline policy priorities as economic adviser to a new government.

Director General, Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Olusola Obadimu, decried disparity in forex rates, where government’s preferential forex window is not even available to manufacturers with export potential, but available “people going on pilgrimages; people that are not paying taxes, people that are not employing anybody.”

He also outlined that infrastructure and security are critical issues confronting private sector operators which the incoming government must tackle as soon as it hits the ground running.