May 17, 2021


NIGERIA: Scrapping official FX rate may signal return to Eurobond market

BY Malte Liewerscheidt

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The Central Bank of Nigeria (CBN) has tacitly removed from its website information quoting the official exchange rate at NGN 379 per USD, indicating that the CBN may have finally abandoned the official rate. This would be in line with views expressed by Finance Minister Zainab Ahmed on 22 March, which were, however, contradicted by CBN Governor Godwin Emefiele at the time. The CBN’s belated move suggests that Nigeria is preparing for a return to the Eurobond market. However, merely scrapping an ‘official’ rate that very few entities were able to access anyway does little to resolve the persistent liquidity problems in the Nigerian Autonomous Foreign Exchange (NAFEX) market. In the short term, the move will further increase the pressure to scrap the costly fuel subsidy, as fuel used to be imported at the ‘official rate’. This would have knock-on effects on inflation and may trigger bouts of social unrest.

Operating different exchange rates used to be an integral part of Emefiele’s way of having his cake and eating it, too: converting crude oil proceeds at the NAFEX exchange rate (around NGN 411 per USD) would boost government revenues, while the state-owned Nigerian National Petroleum Corporation (NNPC) could access dollars at the discounted official rate (NGN 379), lowering the costs of fuel imports. Ostensibly abolishing this dual system and thus falling in line with the minister of finance may serve to signal to markets that a less opaque FX policy is in the offing, as the government is apparently planning a return to the Eurobond market soon.

However, the CBN is the dominant player in the NAFEX market, which may now be the only game in town, apart from the black market. As such, it will maintain a high degree of control over FX liquidity as well as future exchange rate movements. Yet to overcome the liquidity crunch in the NAFEX market, the CBN would need to shake off its long-standing propensity to conserve FX reserves and/or engage in another devaluation. As neither appears particularly likely, the liquidity impasse is likely to persist.

In the short term, the most notable effect of scrapping the official FX rate may be the surging costs of the fuel subsidy to a point where the government may be forced to abandon it. In fact, press reports indicate that NNPC may already not be able to transfer any revenue to the government’s accounts in May due to the ever-rising costs of fuel imports on its books. Government-regulated pump prices have not moved since December, despite a 78% rise in global crude prices since. Yet organized labor has already advised the government against removing the subsidy. Against the backdrop of a grim macroeconomic picture and growing discontent around the deteriorating security situation, this time around – unlike in 2016, when it was grudgingly accepted amid an overall less precarious context – a major fuel price hike may indeed trigger social unrest in major cities nationwide.

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