Following the signing of the African Continental Free Trade Agreement (AfCFTA) by the Nigerian Government on July 7, 2019, economic experts and business leaders have called for policy change to unify exchange rates between the Central Bank of Nigeria and the open market to provide a resolution to the problems associated with the country’s multiple exchange rates. The call was made at the Special Policy Dialogue Colloquium, entitled “Policy Change – The Enabler of Sustainable Growth” and organised by the Financial Derivatives Company.
The Colloquium presented a rare opportunity for key decision makers across different industries in Nigeria, including the Presidency, to engage in constructive and interactive sessions encouraging the use of the AfCFTA provisions to fix the country’s exchange rate problems. The session urged stakeholders to advocate for greater market determination and use of a single exchange rate for the Naira.
In his opening remarks, Bismarck J. Rewane, Managing Director/Chief Executive Officer of Financial Derivatives Company (FDC) said, “Greater trade can trigger deep structural change by increasing production efficiency and spreading knowledge and technologies across countries. In this case, Nigeria needs complementary structural reforms that can boost efficiency in sectors where we have competitive advantage.” Rewane also made a strong case for a unified exchange rate regime to jump start the economy. He said, “Unifying the exchange rate will impact the Nigerian economy more positively than the current multiple exchange rate regime does, which creates opportunity for arbitrage.”
Nigeria currently operates a multiple exchange rate system with seven different rates. Attempts to unify these rates have, to date, been futile. The difference between the extreme bands has, however, narrowed in the last five years. Nonetheless, continued foreign exchange restrictions are among the factors dampening long-term foreign and domestic investment and keeping the economy reliant on volatile oil prices.
Also speaking at the event, Amine Mati, Senior Resident Representative and Mission Chief for the International Monetary Fund (IMF) Nigeria emphasised that exchange rate unification should be a policy-driven decision that the government must make. “Multiple exchange rates have different implications across different countries in the world. We have analysed the situation in Sub Saharan Africa and have noticed that each country is able to succeed as a result of the policies that have been put in place to counter challenges. The IMF’s policy has been consistent on this issue, such that, we advise for the unification of exchange rates and the Central Bank of Nigeria and Economic Recovery and Growth Plan are already working in this direction to ensure that the country has a unified exchange rate.”
According to Charles Robertson, Global Chief Economist at Renaissance Capital, 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 increasingly hard to manage, citing Venezuela and Ghana as examples. However, he does not expect Nigeria to repeat that mistake as the elimination of exchange rate restrictions and multiple-currency practices would remove distortions and help economic diversification.
It is instructive and auspicious to leverage AfCFTA as it 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.
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