Financial market leaders and real sector operators have called for uniform exchange rate regime in line with the Economic Recovery and Growth Plan (ERGP) demand. They insist that multiple exchange rate stalls growth and development, writes COLLINS NWEZE
The Federal Government Economic Recovery and Growth Plan’s (ERGP’s) medium-term plan of 2017 to 2020 was designed to improve implementation of flexible foreign exchange (forex) rate regime.
After three years, experts have assessed where the country is in its quest to full exchange rate unification as against the multiple exchange rate.
The Lagos Chamber of Commerce and Industry advised the Central Bank of Nigeria (CBN) to discontinue the official exchange rate of N305 to $1.
According to LCCI Director-General, Muda Yusuf, “The current multiplicity of rates is inimical to sustainable economic diversification. The official rate of N305 to the dollar should be discontinued. It gives a negative signal effect on investors. This would reduce the need and frequency of the CBN intervention in the forex market and inspire more confidence among the investing community. Current efforts at the unification of rates should be heightened.”
Also, the International Monetary Fund (IMF) Nigeria Senior Resident Representative and Mission Chief, Amine Mati, insisted that in line with the ERGP, removal of forex restrictions and a full exchange rate unification would help keep the parallel market premium in a sustained manner. This would, ultimately, help Nigeria move towards a more diversified economy.
For the Fund, the experience of other global economies demonstrates that countries with multiple exchange rates struggle to see their economic growth recover and unable to track economic progress following a recession. On average, countries with multiple exchange rates also experience higher inflation. With lowering inflation and boosting economic growth being the ERGP’s central points, unification of the exchange rate is necessary to bring major improvements.
Also, Fitch Ratings had in its report entitled: “Nigeria’s Unconventional Policies Aggravate External Vulnerability”, stated that the CBN’s attempt to boost economic activity, through the provision of incentives to banks’lending, has clashed with the goal of maintaining a stable exchange rate.
The report argues that this is not good for the economy. Fitch said: “Tight management of domestic liquidity has been the key pillar of Nigeria’s exchange-rate policy in recent years. However, several recent measures to boost lending have contributed to a temporary loosening of domestic financing conditions. This has combined with falling oil prices and deteriorating investor sentiment towards emerging markets to put pressure on the naira.”
Fitch noted that misaligned economic policy management was not good for the country. The moves to reconcile competing goals through unconventional macroeconomic management, with weaknesses in policy settings raising medium-term vulnerabilities to shocks. It is evident that the CBN and other key players in the financial sector need to urgently rethink their policies on Nigeria’s foreign exchange system.
Multiple rate regimes are expected to be a stopgap towards the reversion of a stable unified exchange rate regime. Many financial analysts believe that monetary authorities in Nigeria have become too comfortable with the multiple exchange rate regime and subsequently have shown little enthusiasm towards unifying the multiple exchange rates.
The Federal Government has plans for operational, regulatory and legislative interventions to move the country to the top 100 on the ease of doing business ranking.
The IMF remains unyielding in its position that multiple currency practices are virtually non-existent in advanced economies and have been on a declining trend globally. Is it conceivable that practices which are non-existent in progressive economics globally should be driving Africa’s biggest economy? The IMF’s view is that Nigeria’s long-term economic potential will improve significantly with exchange rate unification as it removes distortions, provides greater clarity to economic operators and a more level playing field.
It is evident that multiple stakeholders in the financial sector are seeking an immediate policy action towards a unified foreign exchange rate. It is believed that this will be most effective for Nigeria in the context of a comprehensive policy reform agenda.
Besides, there is the need for policy change to unify exchange rates between the CBN and the open market to provide a resolution to the problems of multiple exchange rates. Also, the country can use the AfCFTA provisions to fix its exchange rate problems.
“There is need for greater market determination and adoption of a single exchange rate for the naira. A unified exchange rate for Nigeria will impact its economy more positively than the multiple exchange rate regime does,” Mati said.
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The IMF’s policy has been consistent on this issue, such that, we advise for the unification of exchange rates and the CBN and ERGP are already working in this direction to ensure that the country has a unified exchange rate.
In the past, other countries have waited too long to reunify dual exchange rates, only to find that the delay has resulted in the divergence between rates becoming hard to manage, with Venezuela and Ghana as examples.
The The African Continental Free Trade Agreement (AfCTA) has created a window of opportunity for Nigeria to end the multiple exchange-rate system. This should help promote international commerce and lift barriers to investment flows. Finally, it would most likely deepen international trade relations and improve Nigeria’s chance of reaching its growth rate potential.
Countries with multiple exchange rate have lower growth and higher inflation. A more flexible exchange rate in a reform scenario in Nigeria could boost Gross Domestic Product in the medium term. Nigeria has Investors’ and Exporters Forex Window, CBN official rate, parallel market rate, Retail Secondary Market Intervention Sales (SMIS) and wholesale SMIS and these sniffle growth and raise inflation”.
The AfCTA will benefit the country more if the Central Bank of Nigeria (CBN) adopts a single exchange rate for the naira, analysts have said.
Former Executive Director, Keystone Bank Limited, Richard Obire said the multiple exchange rate regime in Nigeria has created price transparency challenge for the country.
He said an opaque pricing regime challenges trade as businesses get foreign exchange at various rates and that gives some people competitive edge over others.
According to him, there is the need for the apex bank to review the multiple exchange rate regime and give all players equal opportunity to thrive.
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