Scrapping Multiple Rates May Weaken Naira — Moody’s

International credit rating agency, Moody’s Investors Service, has said merging the Naira’s various rates any sooner may force the Federal Government to weaken the currency and raise fuel prices, which will accelerate inflation. Nigeria will probably maintain its system of multiple exchange rates, which the International Monetary Fund has long urged it to scrap, until at least early 2020, according to the ratings company.

The monetary and fiscal authorities are likely to wait until investments in Oil refineries and fertilizer plants, including by billionaire Aliko Dangote, reduce the country’s imports of petroleum products. While that may take another two years, it will put the Government in a better position to stabilise fuel prices, which it caps at a level based on the Central Bank’s official Naira rate, Moody’s said.

Aurelien Mali, a sovereign analyst with Moody’s, said in an interview with Bloomberg in Lagos on Wednesday, “If the Government merges the exchange rates, “they won’t be able to provide discounted Dollars to Oil marketers. “It means that either they have to increase pump prices or give subsidies to marketers, which would impact public finances. Neither option is credible at the moment.”

Despite being a member of the Organisation of Petroleum Exporting Countries and Africa’s biggest Oil producer, Nigeria imports nearly all its fuel because of the decrepit state of its refineries. It caps petrol price at N145 per litre, which analysts say is below market costs. The Governor, Central Bank of Nigeria, Mr. Godwin Emefiele, introduced the current system in response to a severe shortage of Foreign Exchange after the 2014 crash in Oil prices.

While the official exchange rate hasn’t changed from N305 per Dollar since a devaluation in mid-2016, a new one for importers, exporters and investors was introduced in April last year, in which the Naira was allowed to weaken. Known as the NAFEX rate, it’s been steady at around N360 against the greenback, almost 20 per cent weaker than the official rate.

There’s also the Nigeria Interbank Foreign Exchange rate, which the CBN uses as a guide to sell Dollars to Banks during weekly auctions, and other windows that companies can access depending on the sector they are in. The IMF has said the existence of multiple exchange rates creates distortions in the economy and discourages foreign investment. Inflation has slowed to 13.3 per cent from a high of almost 20 per cent in early 2017, thanks to an improving economy and tight monetary policy.

President Muhammadu Buhari has been keen to bring it down further before elections scheduled for February, when he plans to run for a second term. He is loath to raise petrol prices, given that many Nigerians see cheap fuel as one of the few benefits they get from the Government.

Increasing pump prices now will “destroy all the efforts” of the Central Bank on inflation, said Mali, adding, “The moment you have a strong structural trade surplus and when the usage of dollars decreases is when we think they will align the exchange rate windows; for example, when the new refineries or fertilizer plants are online.”

Dangote, Africa’s richest man, is building a 650,000-barrel-a-day oil refinery and fertilizer plant in Lagos. It’s unclear how the Central Bank will try to unify the Naira, said Mali. But he expects that monetary officials will continue to manage instead of float it. “The jury’s out on whether it will be 305 or 360. For the real economy, the rate is already 360. That’s what many exporters, importers and manufacturers have to use. It’s the de-facto exchange rate,” he added.

The CBN’s strategy of imposing capital controls, including through import restrictions, should ensure that Nigeria’s foreign reserves keep rising, Mali said. Already up by 55 per cent in the past 12 months to $48Bn as Oil prices and portfolio inflows have increased, he sees them at $55Bn by the end of the year.

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