Weighing economic effect of multiple exchange ratesAugust 4, 2019
In this piece , IFEANYI ONUBA examines the current foreign exchange policy of the Central Bank of Nigeria and writes that there is a need for an exchange rate regime that will guarantee investment inflows to various sectors while building the country ’ s external reserves
Like every other country , Nigeria needs strong foreign reserves to meet international payment obligations timely , boost the country ’ s creditworthiness , provide a buffer against external shocks as well as maintain a stable exchange rate. Of all these , safeguarding the value of the naira is the overarching objective .
According to data obtained from the CBN website , Nigeria ’ s external reserves comprise three components namely , the federation, the federal government and the Central Bank of Nigeria ’ s portions . The federation’ s component consists of sterilised funds (unmonetised ) held in the excess crude and Petroleum Profit Tax /Royalty accounts at the CBN belonging to the three tiers of government .
The Federal Government ’ s component consists of funds belonging to some government agencies such as the Nigerian National Petroleum Corporation , Power Holding Company of Nigeria and the Ministry of Defence for Letters of Credit opened on their behalf , among others . The considerable CBN portion consists of funds that have been monetised and shared from which the Bank conducts its monetary policy and defends the value of the naira .
Statistics obtained from the CBN showed that in 2018 alone, the apex bank injected about $39 . 9bn to defend the nation ’ s currency in the foreign exchange market
The $39 . 9 bn was arrived at by our correspondent based on analysis of the foreign exchange injection into the economy as contained in the fourth quarter economic report of the apex bank . The CBN usually intervenes in the foreign exchange market by injecting liquidity about three times a week .
The intervention is provided to authorised dealers in the wholesale segment of the market , as well as other sectors of the economy such as agriculture , manufacturing and Small and Medium Enterprises segment . Customers that required foreign exchange for invisibles such as tuition fees , medical payments and Basic Travel Allowance, among others , are also allocated funds from the intervention .
However , experts said the apex bank should re – evaluate the foreign exchange policy as the multiple exchange rates system being practiced was stiffling growth and encouraging corruption .
Just last Monday , the International Monetary Fund ’ s Senior Resident Representative and Mission Chief for Nigeria , Amine Mati , and CBN ’ s Director , Monetary Policy Department, Moses Tule , disagreed on the impact of the multiple exchange rates policy on inflation , trade and the economy’ s growth .
While Mati had insisted that the CBN policy was crippling growth and spiking inflation , Tule had argued that the apex bank did no wrong with the introduction of multiple rates , based on local economic realities .
The IMF chief had said : “ Countries with multiple exchange rate have lower growth and higher inflation . A more flexible exchange rate in a reform scenario in Nigeria could boost the 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 and wholesale SMIS and these sniffle growth and raise inflation . ”
But speaking on the development , the Managing Director , Afrinvest Securities Limited , Mr Ayodeji Ebo , described the effect of the multiple exchange rates on the economy as negative
Ebo said , “ The multiple exchange rates will always confuse investors , especially Foreign Direct Investors , as they will be confused as to what rate to use .
“ There ’ s already a window for the capital market . Whether we have multiple or not , foreign investors are coming into the money market through the I & E window . ”
“ For FDIs that are trying to do business , sometimes , they get confused on which of the rates to use . Most times , when you have multiple exchange rates , the situation doesn ’ t send a positive signal to investors and it reduces the amount of investment that flows into the economy because they will feel that some people are getting subsidised foreign exchange . ”
Ebo noted that there were other major issues in the economy that were making investors not to buy into equities as most of the listed companies were even struggling with their second quarter results .
In his comments on the development , an economist , Odilim Enwagbara , said the multiple exchange rates were fuelling corruption and encouraging round – ripping .
He said , “ I agree with the IMF on the issue of multiple exchange rates because the situation has created a lot of corruption because it allows people to access money from the cheap window and take it to the most expensive windows.
“ The CBN should shut all multiple foreign exchange windows because if Nigeria wants to be a modern economy , then this thing must stop .
“ What we need to do is to allow people to bring in forex and take them away unrestricted . If you allow that , more forex will enter the country than leaving the country .
“ When you restrict access to forex for importation of a certain products , they go to the black market to access forex and we know that these people from the black market get forex from the cheapest windows and this causes problems in the forex market . ”
But the Chairman of Chartered Institute of Bankers of Nigeria , Abuja Branch , Prof Uche Uwaleke , advised the CBN not to listen to suggestions in some quarters to allow the Naira to freely float in the foreign exchange market .
He said with the current foreign exchange reserves with the CBN , allowing the forces of demand and supply to totally determine the price in the foreign exchange market would not achieve the needed results as canvassed by some people .
The apex bank , which is currently using the managed – float foreign exchange management system , has been under pressure from both local and international players to allow the Naira to be determined by market forces without any form of intervention .
He urged the apex bank not to succumb to the pressure noting that Egypt , which succumbed to the pressure to freely float its currency , had seen its currency depreciate more than envisaged .
Uwaleke noted that the import- dependent structure of the Nigerian economy had led to depressed growth and created unemployment .
The present situation of the Nigerian economy, he added , provided an opportunity to look inward in a bid to trigger economic growth and development .
He said , “ In order to boost the economy, the current demand management which involves forex access restrictions of items that can be produced locally , should be sustained.
“ Egypt was advised not to float the currency until they got to $ 25bn reserve but because Egypt was pressured and in a hurry to get $ 12 bn IMF loan , they did the currency float much earlier and they have now seen the outcome . So when people say Nigeria should float , why don ’ t we look at what happened elsewhere . ”
The National President , Association of Agricultural and Industrial Entrprenuers of Nigeria , Chuku Wachuku, said there was the need for strong policy coordination between the key aspects of economic policymaking space .
This include ﬁscal , monetary , exchange and trade policies, which must be targeted at protecting farmers , companies and industries with a view to enhancing domestic production , conserving scarce foreign exchange and promoting economic growth and development .
He said , “ The current foreign exchange policy has not been too friendly on businesses . The restriction of foreign exchange by the Central Bank of Nigeria on 41 items is a protectionist policy because it would make a little bit of sense in the short term if we are a producing country
“ But if you are going to restrict foreign exchange to these items , you have to consider the fact that people will still continue to demand these products . And so , if there are no substitute , then the spiral effect will be inflation and that means that the Federal Government is only creating inflation artificially .
“ So the government should be addressing how to create a good regime for Small and Medium Enterprises to grow and not just restrict forex for some items in isolation.
“ The policy makers are really not consulting the experts in its drive to boost SME development . A developing economy is always dependent on the SMEs and informal sector and some of the policy of this country is like snuffing out SMEs totally .
“ The foreign exchange is not within the reach of small scale industrialists and industrialists are the engine of growth in the economy. So there need to be a rethink and a refocus on what would actually be produced and what we are able to consume. ”
The CBN Governor , Mr Godwin Emefiele , had on June 24 while unveiling his economic blueprint for the next five years , said the apex bank would continue to operate a managed float exchange rate regime in order to reduce the impact which continuous volatility in the exchange rate could have on the economy.