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RenCap: multiple exchange rate stays despite who leads CBN

RenCap: multiple exchange rate stays despite who leads CBN

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The Central Bank of Nigeria (CBN) will retain its multiple exchange rate policy, whether the apex bank Governor, Godwin Emefiele’s tenure is renewed or a new Governor emerges, Renaissance Capital (RenCap), an investment and research firm, has said.

RenCap’s Global Chief Economist, Charles Robertson, said that in the immediate term, ahead of the CBN governor’s term expiring on June 2, fixed income investors are probably assuming short-term currency stability.

This, he said, is based on decent forex reserves figures over $40 billion, a current account in small surplus and high domestic interest rates.  “Our base case is that whoever the governor is, the currency will end-2019 at N395/$. We have no reason to believe that if there is a change of CBN governor, we will see an end to the multiple exchange rate regime,” he said.

Robertson said to double Nigeria’s investment climate, the country needs to remove the implicit fuel subsidy which costs about 0.5 per cent of Gross Domestic Product, adding that such policy supports consumption and not investment.  He said that Morocco after 2012, Egypt since 2014 and even the Gulf countries are cutting fuel subsidies.

Robertson said there is need to encourage foreign direct investment, which in 2018 fell to $2.2 billion according to United Nations Conference on Trade and Development (UNCTAD).

He said that Ghana got $3 billion and that to match Ghana (per capita), Nigeria should be getting $24 billion a year.

“A change of approach to MTN, the oil majors and others may be required. Boost domestic savings and bring down interest rates which will probably require a smaller budget deficit and higher taxes. Allow the currency to trade closer to fair value which we estimate today at N440/$, N470 by year-end and N670 by end-2023.   Note that in the immediate term, ahead of the CBN governor’s term expiring on 2 June, fixed income investors are probably assuming short-term currency stability, based on decent FX reserves figures (over $40 billion), a current account in small surplus and high domestic interest rates.”

The good news is that President Muhammad Buhari has already declared his second term will be “tough” – so perhaps he will take his four million vote victory margin to push through difficult reforms. The cabinet should be in place soon after the new presidential term starts on  May 29  – unlike 2015 where it took six months. There should be less of a learning curve than we saw in 2015 to 2017″.

“The precedent of 2015 to 2019 tells us equity investors will not assume rapid, deep reforms. Even if nationwide progress is hard to achieve, we may see localised success stories, such as in Lagos – which has the biggest adult population of any state in Nigeria, high adult literacy (over 80 per cent) and is now planning to get 3GW of electricity over the next few years (total nationwide distribution is around 4GW”.

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