The Foreign Exchange Dilemma; to Float or Gloat?

Wednesday, December 01,
2021 / 02:39 PM / by CSL Research / Header Image
Credit: Econlib

The Nigerian Foreign Exchange market has generated far
reaching attention in recent years. This reality can be seen in the series of
adjustments made on the Naira in recent years. Given that imported items
constitute in excess of 10.0% of its Consumer Price Index, the need to properly
manage its FX position is very important in actualizing the country’s overall
economic goals. The CBN has in the past, used various administrative measures
to ensure exchange rate stability. For example, in June 2015, the Central Bank
in a bid to sustain foreign exchange market stability and ensure efficient
utilisation of scarce foreign exchange, excluded importers of 41 items which
included rice, cement, margarine, meat etc. from accessing Forex from the
official foreign exchange window. The number of these items have grown over the
years.

The dip in crude-oil (a significant export commodity)
price to an all-time low of US$19.33 per barrel led to a significant decline in
the country’s revenue. Despite the price recovery seen so far, Nigeria has yet
to even-out the effect of the pandemic on its FX reserve. The Central Bank of
Nigeria (CBN) has been torn between supporting economic growth and ensuring
exchange rate stability. In one of the most recent moves to manage the situation,
the CBN suspended intervention to Bureau De Changes (BDCs). In reality, these
decisions have failed to yield the desired result. Consequently, the premium
between the parallel market rate and the rate at the Investors & Exporters
(I&E) window widened considerably following the announcement. In 2016, when
the CBN took a similar action, it yielded limited results, as the parallel
market premium was estimated at 61% as of year-end.

According to the Nigeria Development Update of the
World Bank, the country’s exchange rate system `has encumbered in recent times
the inflow of foreign capital, a reality that is evident from the dwindled
level of Foreign Direct Investment and Foreign Portfolio Investments. Over
time, it has been said that the current managed float system has cost Nigeria
some years of development as floating the Naira would have made the country’s
hard earned green back available for promoting growth. In the month of October
and early November, the Naira appreciated at both the official and unofficial
windows due to a sudden surge in intervention in the month of October which
averaged US$205m. As the intervention waned to about N158m in November, the
gains were reversed.

Moving forward, we hold that there is a need to combat
the obvious vulnerabilities in the Nigerian FX Market by promoting a lasting
solution. We reiterate our agelong clamour for economic managers to adequately
diversify the country’s export earnings particularly exploring opportunities in
mining and agriculture. Furthermore, investments and business…