Exchange rate instability behind naira fall, says Johnson Chukwu

Johnson Chukwu, the Group Chief Executive Officer of Cowry Assets Management, has expressed concern over the lack of stability in Nigeria’s currency exchange rate system, attributing it to the fall in the value of the Nigerian currency, the naira.

Chukwu emphasised the importance of stability in the exchange rate, as it plays a vital role in boosting people’s confidence. When the exchange rate is unstable, it creates uncertainty, leading to a loss of confidence among investors and even causing panic, he said.

During a presentation at the Lagos Business School on Thursday, Chukwu highlighted that achieving some level of stability in the exchange rate is crucial for economic agents.

Many individuals and businesses are less concerned about the specific rate, but they value the ability to rely on a stable exchange rate. The current instability has resulted in uncertainties, contributing to a loss of confidence in the currency.

“The fact is that the exchange rate has not been able to achieve some level of stability,” Chukwu said. “Because for economic agents, it doesn’t really matter what the rate is for many of them; what matters most is that it must be able to create some level of stability.

“Because if you have that level of instability, you will create uncertainties, and because of those uncertainties, we are leading to a loss of confidence or panic that has actually set in.”

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Chukwu pointed out that increasing the supply of major international currencies like the US dollar would have helped harmonise the exchange rate system, reducing the gap between official and parallel market rates. This harmonisation would have benefited the country by bringing the parallel market rate closer to the official exchange rate. However, due to a supply deficiency, the exchange rate has worsened, with the official rate moving closer to the parallel market rate.

He also identified round-tripping as one of the major factors that weaken the strength of the local currency, especially as many speculators who had access to a large chunk of the foreign exchange at the official market bought at a low and sold at a high on the parallel market.

Efforts by the Central Bank of Nigeria to curb this illicit practise of round-tripping faced challenges, mainly due to a lack of adequate preparation, especially regarding the harmonisation of exchange rates.

The Cowry Asset CEO said, “When you harmonise the exchange rate above the official window, investors and business entities who had dollar exposure and were in naira positions had to lock in imminent exchange losses.”