First of all, let us be very clear, nobody ever floats their currency willingly—you are always forced into it. An example was ‘Black Wednesday’ which forced the UK to float the Pound in 1992. It was painful and embarrassing but you won’t find anyone who wants to go back to pre-1992 here anymore.
Now that the CBN has been forced into a floating exchange rate, these are the immediate and future implications

This is good for governors and states. For April, the 3 tiers of governments hared a total of N281.5bn. We know that this money was changed from dollars at around N199 so working backward, this gives us $1.4bn that was available to share (some of the money is VAT which is in naira but let’s keep it simple). States and LGs got N144.2bn of that money or $725m if we work back to dollars. Now we know that the ‘real’ rate was around N350 at the time. But let’s say the interbank market settles at N310 when it opens, this means that the states and LGs would have gotten N225bn instead of N144.2bn they got. This is a big difference given that these states have been running around begging for money.

That said, a lot of these states are owing money in foreign currency for the foreign loans they have taken. To repay those loans, they have been converting their naira at the official N199 rate. Now they will also have to pay the interbank rate of N310 to buy their dollars. A state that has a lot of foreign currency loans will not see much of a difference from the new rate. But if you notice that your governor starts ‘carrying shoulder’ it might mean that your state doesn’t have too many foreign loans and is now ‘liquid’ as Nigerians like to say.

How about Alhaji Putin? Unless you have not been reading my blog closely, you must have noticed that Alhaji Putin is my guy. As I’ve been saying, he has been getting roughly $15m per week at N199 for months now. That party is now over. He too will now be buying at the interbank rate like everyone else and there will no longer be a special rate. Glory be. At the post-MPC press conference where CBN trailed the new ‘flexible’ policy, Godwin Emefiele hinted that there would be a ‘critical’ rate for ‘critical’ people. No mention was made of that today. Thank God.

What of the federal budget? This will help the FG in the way it helps states above. If nothing else, it will be easier for it to pay salaries now and spend money on anything else that does not require imports. Last week, the government announced the Home Grown School Feeding Programme. An initial N93bn has been budgeted for the programme. Given that this is a priority programme for the government and most of the costs are in naira (if not all), there should be more funds available for the government to pursue programmes like these.

Petrol nko? When the N145 price was announced last month, it was said to have been calculated using a rate of N285 to $1. This is Nigeria’s biggest forex expense so it will be sensitive to whatever the exchange rate is. So what if the interbank rate goes above that? It’s an interesting question. But, until foreign investors return from their holding formation outside Nigeria, CBN will still be the biggest source of dollars in the market. I suspect (this is just my guess) that the CBN will keep one eye on the fuel price when selling its dollars to those FXPD creatures. At any rate, a few days ago, the petrol marketers cabal were wailing in the papers that petrol demand has dropped by 40%. There is only so much Nigerians can take so any further price increase will be met by reduced demand by Nigerians. I imagine that everyone is now watching their petrol usage more closely. Very good. The business of smuggling petrol across the border to Cameroun and Benin Republic is also now dead as the dodo bird. As long as the government holds its nerves and minds its business, Nigerians should be able to deal with the marketers themselves.

Quite a number of Nigerian companies (mostly oil and gas) borrowed from Nigerian banks in foreign currency. It is one thing to borrow money when oil is $100/barrel, it is quite another thing to repay that same money when oil is $50/barrel. At the end of 2015, CBN said the total amount of bad loans in the banking system?—?where the borrower is not making repayments?—?was N650bn. A few days ago, CBN released updated figures up to the end of April 2016. The bad loans in the system are now a shocking N1.38trn. If CBN is openly confessing to N1.38trn, do you think the actual number is higher or lower? Don’t forget that banks have already written off some of these bad loans. First Bank reported an 82% drop in profits for 2015 mainly because it had to put N119bn worth of loans on standby to go bad. It has promised to sack 1,000 workers to balance the books. Some of these bank debtors with foreign currency loans were still managing to get dollars at N199. Now that they will have to pay market rate, the bad loans in the system can only rise. Which means more job losses at banks. You have to feel sorry for people who will lose their jobs. But some of these banks need to learn a hard lesson and there is no other way to do it than this way.

And inflation? Latest numbers from the Nigerian Stats agency shows that inflation is running at 15.6%. If the exchange rate goes up officially, surely this can only mean prices of things will go up further stoking inflation right? Well, it’s not that straightforward. The truth is that hardly anyone was getting dollars at the N199 rate anyway. Most imported goods are already priced at the black market rate. My hunch is that the dollar will settle at a lower rate than it currently is so this new rate might even lead to slightly lower prices. Nigeria is also a poor country so you can’t keep increasing prices and expect people to take it. At some point, people will find alternatives or just eliminate that demand. I will stick my neck out and say inflation will go down from here.

There is a huge backlog of forex demand that remains unmet. This amount has been growing for a while now and some say it is now between $6bn?—?$9bn. The most ‘popular’ group in this constituency are the foreign airlines who now have around $600m trapped in Nigeria. Once the market opens next week, it will be like opening prison doors for prisoners?—?these guys will inundate the market and increase pressure on the naira. Unless CBN has some special plan to meet this likely demand head on (sauces tell me they have), the exchange rate may spike before it settles later. Keep calm. Once the mess is cleared, things should settle down.

Even though CBN will be in VIP section selling dollars to the FXPD creatures, from time to time, it will wander out into the main club and sell dollars if it feels the rate is doing wan kain. What is a Nigerian forex policy without a new acronym? We now have something the CBN calls Secondary Market Intervention Sales (SMIS). That is, it will sell dollars directly to the main market where FXPDs and Non-FXPDs trade just to keep things stable.

If you need dollars, just go to your bank. If you want PTA or BTA or whatever you call it, just go there with your ticket and ask for it. If you need to pay school fees, just fill whatever form you need to fill. Those 41 items are still banned so if you want to import them, you will need to buy from the black market. But the days of dollar scarcity where you wanted PTA and couldn’t get it should be over. Whatever the supply of dollars is, the price will now reflect it. You will also see that export proceeds will ‘shoot up’. Those exporters who have been avoiding bringing back their export proceeds will now do so. So those export proceeds that have supposedly been collapsing, according to CBN, will be mysteriously revived now.

I’m Warning You

I’ve been telling a friend that President Buhari’s second coming to power was for him to learn economics and how markets work. One by one his shibboleths are tumbling down. Fuel subsidy has been forced out of his hands and now his beloved N199 to $1 has been taken away from him, too. The sad part is that this his education is quite expensive and Nigerians are the ones footing the bill.

We have now had 1 year of experiencing what government can do when it claims to have powers to control prices. We have seen what its like when one person is picking and choosing who should get dollars and who should not. President Buhari travelled the world speaking to the price of oil to rise. The price ignored him. Some of us ‘market fundamentalists’ have been calling for the government to let markets do their magic not because markets are perfect but because they are the best system we have to allocate resources fairly.

But some people never learn. So if and when exchange rates start to spike, you will start hearing these people making noise asking for government to come and ‘intervene’ to ‘control’ or keep market forces ‘in check’. The government has no such power and as such, it can only make a mess of things. You have my permission to issue such people a good and proper slap when they start calling on government. Let the slap ring and leave your hand on their face for good effect. Nigeria is marching towards a serious market economy. Anyone who looks back will turn to salt.

There are also those people who have turned twitter and facebook into a ‘live’ bureau de change?—?all they do is ask for the exchange rate everyday. You also have my permission to slap these people if they continue talking about the exchange rate everyday. I am not in Nigeria or else I would have done it myself. All those lies of ‘someone I know just changed money outside Iga Iduganran in Lagos for N400 to $1’ need to stop. You should now be able to see rates on your bank’s website or FMDQ’s website. Anyone who is worried about what the rate will be on 29th of August, is free to invest in a derivative to put their mind at rest.

All of this means that the government can now spend its time worrying about other problems aside the fx rate. Buhari’s ear problems should subside as well. You too have now been freed from spending your whole day watching exchange rates. You’re not a bureau de change. Face your work. What will be the price of the dollar next week when the market opens? I don’t know. The price will be the price. It will be what the market says it is.
http://abusidiqu.com/price-club-new-nigerian-naira-feyi-fawehinmi/

Wow, thanks for explaining all these in a simplified way. Many people out there do not know the implications of what the government does and the judge blindly. Information is power.

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