The recent decision by the Tinubu administration to unify and deregulate the foreign exchange market in Nigeria is a significant policy measure that has garnered attention from global stakeholders and investment players.
According to Dr. Kazeem Bello, a Global Development Economist, in a detailed document and analysis of the implications of the Forex deregulation policy, stated that while it is commendable that Nigeria is finally heeding the calls of international financial institutions to reform its Forex market, there’s the need for caution in approach and the need to understand the implications of this deregulation.
In his words, “With the deregulation of the Forex market, we can expect a progression towards price hikes in the short term due to a shortage of commodities. However, what will attract investors to the market is not the price hikes, but the predictability and stability of the market.”
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He further stated, “The initial rush to meet the huge outstanding requirements for forex demand will lead to a surge in demand and an increase in the exchange rate. However, once the market can satisfy these demands, we should see a stabilization of prices.”
He opined that the deregulation of the Forex market will likely result in higher interest rates, impacting both manufacturing and industrial sectors and consumers. “The challenge lies in whether consumers will respond positively by increasing their demand for goods at potentially exorbitant prices, considering their falling disposable income. Manufacturers and importers must conduct thorough investigations before investing, taking into account the potential impact on consumer demand,” he remarked.
Regarding the federal revenue base, Dr. Bello emphasizes, “The deregulation of the Forex market will increase the federal government’s internally generated revenue, particularly through exports such as oil and gas. However, it is important for the government to use this additional revenue wisely. By increasing the purchasing power of citizens, we can stimulate demand for goods, support production, and generate economic growth.”
He adds, “Ploughing the funds back into fiscal expenditure may result in over bloated budgets and misallocation of resources. In addition to empowering consumers, the government must adopt strategies to reflate the economy. This entails putting extra income in the hands of consumers and the industrial and commercial sectors.”
He believes that addressing the labour market dynamics and lowering the interest rate is essential for resolving the paradigm shift syndrome and distorted price levels. He explains, “Lowering the interest rate in Nigeria is another tool that can be utilized to tackle the paradigm shift issue. A lower and robust interest rate regime would increase credit to the system, particularly to the private sector, and enhance consumer credit overall.”
He also highlights the importance of monitoring the forex market dynamics to prevent collusive damages. “It is crucial for the FGN to task the CBN with focusing on control mechanisms, monitoring, compliance, oversight, and investing in risk mitigation infrastructures and architectures to combat potential threats from global infiltrating gangs.”
He affirmed that the deregulation of the foreign exchange market in Nigeria holds both potential benefits and challenges for the capital market. While it is expected to attract foreign investors and increase market potential, there may also be a slowdown in market capitalization due to the hike in exchange rates. To fully capitalize on the advantages, the FGN must combine deregulation with effective monetary policies, fiscal discipline, and an improved investment climate.
The finance and private equity expert, however, warned on the need for strategic oversight, “it is crucial to closely monitor the forex market to combat illegal activities and protect the market from global infiltrating gangs. By doing so, Nigeria can foster a thriving capital market and ensure a stable and transparent foreign exchange market.”
On the impact on the Black Market and commercial banks in Nigeria, Dr Bello noted, “The sudden influx of individuals into the labour market, coupled with the already existing unemployment challenges, could exacerbate the situation. It is important for the government to implement appropriate measures to address unemployment and ensure that job opportunities are created to accommodate the potential influx of labour.
Furthermore, commercial banks may face challenges in managing the increased demand for foreign currency transactions. They will need to adapt their operations and systems to handle the surge in transactions and provide efficient services to customers. The Central Bank of Nigeria (CBN) should collaborate closely with commercial banks to ensure smooth operations and adequate liquidity in the market.
It is essential for the government to communicate the goals and strategies of the forex deregulation to the public and provide clear guidance on how it will benefit various sectors of the economy. This will help manage expectations and minimize potential disruptions during the transition period.
Additionally, the CBN should focus on strengthening its regulatory frameworks and enforcement mechanisms to prevent market manipulation and ensure fair practices. This includes robust monitoring of market activities, stringent compliance measures, and the development of risk mitigation strategies to combat potential threats.
While the deregulation of the forex market presents opportunities for economic growth and attracting foreign investments, it is crucial to exercise caution and ensure that the necessary safeguards are in place. This includes effective fiscal policies, prudent management of revenues generated from the market, and measures to protect consumers from price shocks and inflationary pressures.
Dr. KAZEEM BELLO is PRINCIPAL PARTNER/CEO: AFRIQUE CAPITAL & EQUITY FUNDS ( New York & Abuja, Nigeria). He is a Global Development Economist; Corporate Banker; Finance & Private Equity Expert; Risk Manager; Financial Advisors; AML Specialist, and Project Manager.
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