The current naira crisis, which has seen the Nigerian currency fall to a record low, urgently needs a huge inflow of US dollars, says Agora Policy, a Nigerian think tank and non-profit organisation committed to finding practical solutions to urgent national challenges.
The naira free fall has raised serious concern from policymakers, monetary authorities, the organised private sector, foreign investors, and the general Nigerian public, especially as its N955/$ at the parallel market mounts pressure on the already worsening cost of living.
According to its recent policy findings and advice report titled “Steadying Nigeria’s Fledgling Foreign Exchange Reform,” published on Friday, Agora Policy said that “to stabilise the present spiral, Nigeria needs a big stash of dollars and fast!”
It added that “Policymakers must look to strike the iron while it is hot to avoid reform fatigue by seeking out sources of large USD liquidity on concessional terms by exploring the option of a standby arrangement from multilateral agencies of significant scale ($5–10 billion) with the objective of acquiring credibility.”
The think tank organisation, though it admired the fact that the country decided to collapse the multiple exchange window created by the suspended Central Bank of Nigeria (CBN) governor, Godwin Emefiele, however, questioned the rationale behind its timing to float the currency.
It argued that the country didn’t provide concrete steps to bolster dollar supply, a situation that has pressured the poorly FX-supplied official segment of the market. It backed its claims by saying “daily trading has averaged $106 million versus $110 million prior to unification, amid signs of fresh weakness at the parallel market.
Agora warnings resonate with many economic policy think tanks, such as the Economic Intelligence Unit (EIU), which in the month of July predicted a return to the old ways of managing FX in the country.
It said, “Without direct attempts to stem the tide, the temptation to return to the old ways of managing things might look attractive, which might blow away the current opportunity.”
Apparently, the think tank had suggested ways to make the return to a flexible exchange rate system a more productive option for the country.
It stated that “forex and monetary policies should be part of a comprehensive economic plan where the exchange rate serves as a tool for export diversification and for attracting capital flows to foster overall development.”
It was also advised that to help non-oil exports compete well, exchange rate policies should make export prices cheaper, benefiting local industries.
Furthermore, the policy researcher advised that the country’s currency policy should aim for a stable exchange rate that helps non-oil exports compete and maintains a good balance between inflation and people’s well-being.
It cited Singapore as a good example of a country where the central bank is required to publish annually how it goes about balancing FX policy within the twin objectives of trade competitiveness and low inflation. A perfect example for our economic managers to follow if the country is to achieve balance.
However, it mentioned that the economic handlers should update the CBN Act to clearly say that the Central Bank needs to show how it’s making sure the exchange rate is fair and prices stay steady. A report on this should be published every six months.
It added, “In creating a workable FX market architecture, Nigerian policymakers must envision a distinct set of supply forces, i.e., multiple FX sources, which can be attained by removing all forced sale rights on oil exports presently held by the CBN.
“Rather, the CBN should purchase its USD like every market participant to manage Naira liquidity at a level consistent with its own money supply objectives.”
It also advised that the CBN needs to switch from focusing solely on exchange rates and instead adopt a clear plan for controlling inflation. This plan should have specific goals for inflation each year and in between.
The apex bank should share these goals publicly and explain every year how its policies are helping to meet them.
To avoid relying too much on just one measure, they can use different ways to measure inflation, like looking at prices for consumers, producers, and wages, it argued.
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Agora emphasised the need to separate the central bank’s control over certain banks that support development. These banks should have money to help sectors that need more credit.
It was also advised that the apex bank should share more information about FX market trends to improve pricing. Like Singapore, laws should demand regular data publication and analysis, penalising non-compliance.
It was argued that hedging mechanisms without restrictive rules are vital to managing volatility. Collaboration with exporters and banks for importer FX risk hedging is needed.