Experts have differed on the recent liberalisation of the foreign exchange (forex) market by the Central Bank of Nigeria (CBN).

The CBN had two days ago announced measures to liberalise the market including the elimination of multiple exchange rates, and freedom for banks to buy and sell foreign exchange at any rate based on a willing buyer and willing seller arrangement.

Reacting to this development Dr Muda Yusuf, Chief Executive Officer, the Centre for the Promotion of Private Enterprise (CPPE), said that the liberalization of the foreign exchange (forex) market would unlock huge potential for investment and boost government revenue by N4 trillion through additional remittance of exchange rate surplus to the federation account by CBN.

But in his reaction, Taiwo Oyedele, Africa Tax Leader, PricewaterhouseCoopers PwC, slidely disagreed, saying though the development is a positive one that can lead to improvement in the sovereign rating of the country, it will lead to rise in government debt and cost of servicing the debt.

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Dr Yusuf said on the CBN policy: “The liberalization of the foreign exchange (forex) market would unlock the huge potentials for investment, jobs and capital flows. Investors’ confidence would be positively impacted.

“Meanwhile, it should be clarified that this is not a devaluation policy, but a pricing mechanism that reflects the demand and supply fundamentals in the forex market.

“It is a framework which allows for flexible rate adjustments as and when necessary. It is a model that is predictable, equitable, transparent and sustainable. It is a policy regime that would reduce uncertainty and inspire the confidence of investors. It would minimize discretion and arbitrage in the forex allocation mechanism.

“Rate unification does not imply that rates will be exactly the same in all segments of the market. The objective is to ensure that the differentials are very minimal, possibly between 5-10%.

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“A unified exchange rate regime offers the following benefits for the economy: It enhances liquidity in the forex market; reduces uncertainty in the market and therefore enhances the confidence of investors; more transparent as a mechanism for forex allocation; minimizes discretion in the allocation of forex and reduces corruption vulnerabilities; and reduces opportunities for round tripping and other sharp practices.”

Other benefits he listed are: “It would increase disclosures with respect to export proceeds and compliance with non-oil export declarations, especially the non-oil export documentation; boost government revenue by a minimum of N4 trillion through additional remittance of exchange rate surplus to the federation account by CBN; use of naira cards for limited international transactions would be restored in the short to medium term; would facilitate the mopping up of naira liquidity in the economy in the short to medium term. This would impact positively on inflation outlook; and deepen the autonomous forex market through the liberalization of inflows from Export Proceeds, Diaspora Remittances, Multinational oil companies, diplomatic missions etc.

“In the short term, we expect a depreciation of the currency in the official window because of the huge demand backlog. But as the market conditions normalize and move towards equilibrium, the rate would moderate. We also expect the new policy regime to boost inflows and strengthen the supply side amidst elevated investors’ confidence. The component of forex demand driven by arbitrage, rent seekers, speculators and other economic parasites would also fizzle out, thus restoring stability to the forex market.

“However, CBN should position itself for periodic intervention in the forex market, as and when necessary, to stabilize the exchange rate and prevent volatility. This should happen not by fixing rate, but by boosting supply to the extent that the reserves can support.”

But Oyedele reacted: “The major impacts will include: a significant rise in government debt in naira terms by about N12 trillion to N90 trillion i.e. external debt of $42 billion will increase by the difference between the old and new rates.

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“As a result of the above, the debt to GDP ratio will increase by about 5%, There will be a corresponding increase in debt service cost with respect to foreign debt service.

“Government’s revenue will increase in naira terms resulting in a higher tax/revenue to GDP ratio. Corporate tax collection may however decline as many businesses crystallise forex losses due to the higher exchange rate.

“Possible reduction in budget deficit if government’s forex revenue exceeds foreign currency obligations, an increase in budget deficit will arise if otherwise”.

Oyedele however sounded a note of caution, saying: “Government needs to manage the dynamics to restore confidence. The backlog of forex demands needs to be addressed and the government should be ready to supply forex to stabilise the exchange rate in the short term.

“Also relax capital control and administrative bottlenecks including unbanning the list of items prohibited for FX (and complement with higher import duties), remove the need for a certificate of capital importation etc to prevent the parallel market rate from simply moving further away from the official market rate.

“The aggregate demand for FX across markets should reduce as round-tripping incentives are removed, for instance people who fake foreign travels just to get FX at discounted rates. “Also, Nigeria’s sovereign credit rating should improve if this is complemented with the right fiscal and monetary policies thereby attracting more FX inflows and lowering the cost of borrowing.”