Ensuring foreign exchange stability in Nigeria
The many inconsistencies of the Central Bank of Nigeria (CBN) as to its management of the country’s foreign exchange policy over the last two years, once again came into focus when the bank announced the new floating exchange rate regime based on a two-way quote.
Observers were then tempted to wonder if the policy was well-thought-out and if it would not be reversed after a while, as was the case with the policies of dollar deposits and withdrawals as well as overseas dollar spending limits, among others.
In spite of the attractiveness of the new policy, analysts are somewhat sceptical about its ability to facilitate the determination of the actual value of the naira.
Some of the analysts insist that Nigeria is not yet ripe for such a policy, as its economy would be negatively affected by the policy in the short run, while others say that other measures should be put in place if the policy is to achieve its aims.
Specifically, Prof. Akpan Ekpo, the Director, General, West African Institute of Financial and Economic Management, says that the recent foreign exchange framework, which was announced by the CBN, is not surprising.
He says the apex bank gave the hint about the introduction of the new policy when it canvassed the need for greater flexibility in the foreign exchange market.
According to him, the policy now allows the market to determine the value of the naira.
Ekpo says the practical analysis partially fits into neo-liberal economic doctrine but notes that the fundamental issue is the scarcity of foreign exchange.
“It is not that the country’s currency, the naira, is not convertible, when a commodity like forex (foreign exchange) is scare; it has to be allocated efficiently (not rationing),’’ he says.
The director general says that CBN has decided to float the naira with short-term, medium-term and long-term consequences for the national economy.
He emphasises that in the short-term, the naira will further depreciate, thus implying that more local currency would be needed to buy foreign currency.
This, he adds, will result in price increases, further raising the inflation rate because of uncertainty and speculation.
Ekpo says that it is impossible to wipe out speculation in a market-driven capitalist economy which is essentially a gambler-driven system.
He insists that the higher rates of inflation will affect the welfare of the poor and average Nigerian, adding, however, that the affluent citizens can always draw on savings to continue to maintain their consumption patterns.
According to him, the new foreign exchange regime is assuming that the Nigerian economy is productive, manufacturing or adding value to the production chain.
He adds that based on that assumption, the exportation of the produced commodities would be able to earn foreign exchange, which would then be ploughed back into the economy.
Ekpo, however, says the Nigerian economy is not sophisticated enough to accommodate the implementation of the type of foreign exchange market mechanism enunciated by the bank.
“If the economy is productive and manufactures goods for exports; then, the forex market would operate like any other market in the economy, but this is not the case,’’ he says.
He concludes that it is important to create an environment that favours goods production and manufacture for exports before allowing market forces to take control of the foreign exchange market.
Nevertheless, financial experts say that the intervention fund of the CBN, aimed at boosting exports, is to create such an enabling environment.
However, the experts often ask certain questions: What is the track record of the CBN fund? Has it been implemented?
On the issue of the market, Ekpo claims that certain pundits believe that the market does everything, including the evolution of stability.
“But they have never answered the question: stability in whose interest? The CBN seems to be aware of this scenario and as a regulator, it is moderating the market,’’ he says.
Akpo reiterates that the apex bank should be a major player in the foreign exchange market, saying: “The CBN should buy and sell forex and in so doing, it will still influence the direction of the market.’’
All the same, Mr Ayo Teriba, Chief Executive Officer, Economic Associates, urges the Federal Government to seek other measures to solve critical foreign exchange issues besides the new guidelines it just introduced.
He says that the new policy is inevitable, insisting, however, that it is only a response to the current crisis and not entirely the solution.
He recalls that the government resisted the policy for more than a year until it got to the point where it had to change gear and face the reality.
Teriba agrees that Nigeria truly ought to come up with an innovative strategy to deal with the foreign exchange crisis, adding, however, that the country cannot respond to the crisis just by allowing market forces to determine the exchange rate of its currency.
He underscores the need for the Federal Government to put in place certain policies that will facilitate Nigeria’s efforts to generate appreciable foreign exchange from alternative sources other than oil exports.
He, however, maintains that the situation is not hopeless for Nigeria, as the new arrangement could be useful in efforts to bridge the gap between the official exchange rate and the parallel market exchange rate of the naira.
“If devaluing the official rate closes the gap between the two and if by devaluing the official rate, the autonomous rate appreciates; we will benefit.
“If the official rate is devalued as a result of the flexibility, the autonomous rate might indeed appreciate and the value of one U.S. can drop below N300, which means that is a benefit for the common man and everybody else.’’
On the other hand, Dr Ogho Okiti, the President, Times Economics Ltd., says that the new foreign exchange measures are long overdue.
He says that some of the innovations introduced in the foreign exchange market will not only ensure liquidity and access to foreign exchange but will also deepen the Nigerian financial market.
“Without doubt, the policy will remove uncertainty and lure back the inflow of foreign investments into the Nigerian economy.
“Even though it could take several months, we anticipate the gradual erosion of the huge backlog of unmet foreign exchange demands.
“Once the newly established single market is in full operation, we also anticipate that much of the foreign exchange demands, currently lined up in the parallel market, will be pushed back into the inter-bank market which will markedly reduce the significance of Bureaux de-Change.’’
Besides, Okiti says that the new measures are in line with the expectations of the market.
He notes that for a long time, the market has required a more flexible exchange rate mechanism.
“The expectations are that it would attract foreign exchange inflows and improve liquidity, ease restrictions on access, while providing a basis for a market-determined rate.’’
All in all, the consensus of opinion is that pragmatic efforts should be made to ensure foreign exchange stability in the country via purposeful implementation of the new policy.
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